Fast-growing Australian companies will have the option of taking out loans, rather than selling equity in their companies to venture capital backers, after Leap Capital raised a $50 million fund targeted at backing firms as they look to scale up.
The debt funding model is well established in the US, where players like Silicon Valley Bank are well-known, but aside from nascent plans at Westpac Bank, and VC fund OneVentures, Australian company founders have needed to either self-fund or dilute their ownership through external investment.
Leap Capital is run by Guy Reypert, who was previously group director of digital ventures at Fairfax Media and a director at VC fund Netus, where he was a colleague of Airtree Ventures founders Daniel Petre and Craig Blair. His co-founders are former Goldman Sachs executive Steven Sher and Gavin Solsky, the co-founder of health tech company Healthshare.
Mr Sher and Mr Solsky also run fixed income and credit fund manager Global Credit Investments and have raised the $50 million Leap fund from high-net-worth individuals and family offices.
Mr Reypert told The Australian Financial Review the fund was looking to back “scale-up” rather than start-up companies, which have established themselves with a viable product, with reliable revenue and a “line of sight” to profitability.
He said that while most of these would likely be technology-based businesses, he was open-minded to companies from other sectors that could fit the same description.
“Early-stage start-ups can’t support debt, and it doesn’t make sense for them to take a loan, so you need the equity first, and then as the businesses grow, some of them can support a loan,” Mr Reypert said.
“The primary reason this will appeal to founders is to avoid dilution and maintain their ownership stake, and they may also have early-stage investors, who don’t like the idea of being diluted by later-stage investors.”
Leap is looking to write loans over a three-year term, with most falling in the $2 million to 10 million range. While the exact terms of the loans will differ between individual companies, Mr Reypert said they would normally have an interest rate of about 12 to 13 per cent.
He said the process of getting the loans had similarities with pitching to VCs, but was quicker as it didn’t involve worrying about equity stakes and company valuations.
Leap does plan to take a small amount of warrants or options in the companies it loans to, but nothing comparable to the kind of shareholding a venture backer would require.
“While that interest rate may sound high, I think the comparison is to think about the level of dilution that equity implies,” Mr Reypert said.
“Also equity is forever, so when you give up a percentage of your company, you know what that’s worth today, but you don’t know what that might be worth in five or 10 years’ time … and so the difference with us is that once the loan’s repaid, essentially we’re done.”
While it may appear that Leap is setting itself up as a rival to VC funds, Mr Reypert said he expected that companies would often look to combine a loan with a funding round to reduce the amount they needed to take from an equity backer.
“I’m already in touch with the VCs, and we’re discussing different opportunities to do things together, either with existing portfolio companies of theirs or even in new opportunities,” he said.
“I think mostly, they see us as complementary. If they are investing several million dollars into an exciting growth business, having a loan coming in alongside them, essentially means that they can extend the runway of that growth business further, without having to put more of their own capital in.”
While it has not finalised any deals yet, Mr Reypert said Leap had been talking to founders since the start of the year and was now ready to start writing cheques.
He said that, while the local market for debt funding was largely untested, he was confident that there would be plenty of demand.
“I think there is a growing cohort of companies that meet the criteria, and I would say definitely big enough for the fund to be very viable,” he said.
“We are thinking about this as fund one, and obviously we have to do a good job with it for our investors, and when we have done that we very much hope there will be a fund two and three.”