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Startup Loans For Marketing Money: A Threat To VC?

Venture capital greets a new wolf at the door every few years. There have been assaults in the past decade AngelList, fund-raising and of course the initial coin offerings (OIC). Recently, a number of the founders avoided venture capital funds and have chosen different paths for themselves and their companies.

And now, a new wolf has arrived on these shores: Clearbanc and “the advancement of marketing”.

It’s an interesting proposition for founders and CEOs: Clearbanc will lend you money for online marketing. Repay the loan in small installments linked to the income you receive over a few months. No equity involved and you funded your marketing budget through debt (or something like that).


Survey announcement

This new challenge is so new that the segment has not opted for a common vernacular. Clearbanc, a market leader from Canada, calls its product “working capital for online businesses”. UK competitor uncapped talks about “revenue based finance” while Capital only it offers, as the name suggests, “Capital only, not really a bank loan, a bit like VC, only better”. There are a number of other companies that are also looking to take advantage of their platform to offer similar products for working capital, such as Band, Shopify is Amazon.

Whatever we come to call it, and I will continue with “marketing advance”, it is a new challenge. If it is successful, I can see it brought much greater change than any of the other recent challengers. Why? The other challengers came from outside. The ones I mentioned above are, to a greater or lesser extent, substitutes for venture capital (VC). Revenue-based finance feeds on the heart of a VC investment.

Money for marketing

Any given investment that a startup intends to raise or venture capital can be roughly divided into some high-level blocks. There is a percentage that goes to technology, to operations, to the general manager and to sales and marketing.

The sales and marketing proportions obviously seem different for the different businesses. Sales and marketing in a business-to-business (B2B) company will often involve large, expensive human sales teams, for whom marketing advances are likely to be inappropriate. For consumer-oriented companies and those companies that seek to sell to individuals within companies or SMEs (small and medium-sized enterprises), marketing advances make a lot of sense as they will likely spend a lot on marketing digital performance. For these types of businesses the percentage of sales and marketing that a venture capital firm sees in a given launch deck usually includes 20-50% of the total amount of the collection.

43% of all venture capital investments go to Facebook or Google “

Stop and think about that interval for a second. 20-50% of many venture capital investments go to marketing. Clearbanc would like you to believe that exactly 43% of all venture capital investments go to Facebook or Google. If this is true (or almost) and marketing progress works, the impact on the VC sector could be nothing short of definable by the sector.

Let’s just say for the argument that the correct number is 30%. Clearly, founders don’t want to give up more equity in their businesses than they should. So, bringing this scenario to its conclusion, those founders will raise rounds that are 70% of the size they once were. What does this mean for VC? This means 30% less ownership in the companies in the portfolio. This means that the size of the funds is too large. This could mean that the ratings are too high. Marketing advances pose a challenge to the economy of venture capital firms that may be close, if not present.

Does this mean that VC funds are too large?

The VC fund is based on the support of some large companies, on obtaining good ownership shares and on following their money in the following rounds. If all of this gets a great haircut, a big change could precipitate. If you don’t get the mail you want and your money goes further, what choice would you have if you don’t “cut” and go later? Changing the investment periods of funds, strategies or fund sizes in the middle of the fund is not what VC investors sign up for but there are not many choices.

“Theoretically, you could separate multiple parts of the” VC package “”

There is also a “more frightening” possibility. What if marketing progress is a harbinger of a major trend: the separation of venture capital. Theoretically, you could separate multiple parts of the “VC package” provided that this did not lead to an increase in transaction costs, complexity or time. Perhaps it would be even better: the right type of financing and advice for the relative cost line. In theory, it looks good enough. You may see specialized products for technical team expenses, corporate marketing expenses or even software / stack package expenses.

One choice for venture capitalists is to get involved: perhaps the natural home for marketing advances could be within venture capital firms. There is a good precedent here. In the wider financial world, the “bundling” of financial products is on the agenda. When a company takes out a large loan with a bank, it is often forced to insure against interest rate fluctuations. This also happens to you and me when we take out a “fix” on a mortgage, which is actually the same thing.

Combining standard VC equity investments with marketing advances would not be without challenges. The economy of a risk fund would change. The funds are legally established to maximize their earnings from the increase in value of their portfolio companies. Adding “debt” revenue (marketing advances) would greatly complicate things, not least from a tax standpoint. Although it is probably less painful than the change in the average investment period of the strategy.

I can’t presume to know how this will end, but I’m confident that the advancement in marketing will produce a bigger bite from the VC than the wolves that came before.

Matthew Bradley is a partner of the UK-based venture capital firm, Forward Partners.

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