VC investments have declined significantly in recent weeks and months. New and established fintechs alike must now get creative and rethink their funding mix. Many are also looking for alternative growth capital in the process. Paul Becker founded the fintech re:cap in 2021. The Berlin-based company enables financing for digital companies with recurring revenues, for example with subscription models. With this business case, re:cap is following a US model – Pipe.
After founding and growing in Germany, Becker and his team are now expanding to the Netherlands. With this move, Becker aims to become the leading pan-European financing solution for the subscription economy. Continental European countries still have a lot of catching up to do compared with the UK and the USA, and competitive pressure in Europe is still relatively low among revenue-based financing providers.
Company valuations were recently completely inflated
We talk to Paul Becker about the revenue-based financing model, hype topics like BNPL, and completely overblown company valuations. Are the golden days of funding for fintechs over?
The re:cap founder is also a guest at this year’s Banking Exchange on the topic of customer interfaces and new mysterious (data) sources as an opportunity for embedded finance, buy now pay later and revenue based financing?
The euphoria of the last two years seems to be over. Layoffs, lower valuations …. Not easy times for businesses, are they?
I personally see this more under the star “back to the roots”. After all, at the end of the day, no one can seriously claim that company valuations exceeding a hundred times current annual sales is a permanently healthy level. And yet: Many companies and founders are currently experiencing a rude awakening.
Have companies relied on the flow of capital from VCs for too long?
It is true that, compared to the USA, alternative forms of financing still play a minor role in Germany and Europe. But I don’t think it’s entirely fair to attribute that to the companies alone, because after all, many of them simply don’t get any other capital – and in many cases not from venture capitalists either. I see the current turbulence in the market as a real opportunity: many companies are now realizing that alternatives to venture capital are important, and technology is now also making it possible to provide suitable, innovative offerings, such as re:cap.
How do you rate the current time? Crisis Mood or Consolidation?
One does not exclude the other, both apply. It is not surprising that after such a long bull market, a normalization will occur at some point – and that this will ultimately be healthy for all involved. I am generally not a fan of excessive pessimism. It is important to understand what is currently happening and draw one’s conclusions and act quickly. After all, burying your head in the sand will get you nowhere.
What alternatives do companies have to raise money now that investors are tightening their belts?
The discourse in the media and the recommendations of numerous opinion leaders revolve in particular around operational (re)focusing and cost savings. Both are certainly important measures. However, I think that a capital structure tailored to the company’s requirements can also have a high added value. When you don’t have to rely on just one funder or exclusively one type of funding, you simply have more options for getting money. It is also worth taking a closer look at cash flow to find out whether there is potential for optimization here. Many companies are surprised when they see how much capital they have tied up unnecessarily.
What is the advantage of alternative financing options?
In practice, the term alternative financing covers a wide range of different instruments. What they all have in common is that because they are not equity, no company shares, voting rights and so on have to be surrendered in order to obtain financing. Instead, the capital provided is repaid over a defined period. In the case of new providers such as re:cap, technology also plays a central role, enabling companies to obtain financing with significantly less time and capacity and much greater flexibility. In contrast to venture capital, alternative forms of financing are therefore particularly suitable for investments with a plannable ROI (for example, in marketing or M&A) or for cash flow optimization (for example, reducing tied-up liquidity or offsetting one-off effects).
But what is also the disadvantage?
For most forms, companies are expected to have a certain level of maturity. For example, you can’t get funding from re:cap if you don’t have any sales yet. Early-stage VC investors can be more flexible. Moreover, of course, alternative financing is not the solution to all problems, but rather one tool among many that is suitable for certain use cases and not for others.
re:cap also wants to make capital available to companies quickly. What is your risk assessment process?
Registration on the re:cap platform only takes a few minutes for companies. As part of this process, companies provide business accounts and accounting data, for example, or connect them via interfaces. Based on this data, re:cap then determines the company’s financial viability.
This involves the automated calculation of a scorecard with various VC-typical metrics such as the payback period for customer acquisition costs (CAC Payback Period), new sales with existing customers per month (Expansion MRR) or churn metrics such as Net Dollar Retention (NDR).
For each key figure, re:cap has a benchmark available that matches the company and is fed by data from comparable companies. The financing conditions are then derived from the overall score. The entire process currently takes about 24-48 hours – without any further effort on the part of the companies. Subsequently, the company can flexibly obtain its financing via the platform.
Alternative forms of financing are not interesting for everyone
For which companies is alternative financing interesting at all?
Basically, for all companies that depend on external financing for better implementation of their measures. Alternative financing is not the one true solution to all problems. We believe that with our current product we can offer the better alternative to venture capital, especially to companies with cash flow problems and companies that have measures with plannable ROI.
What advantage do institutional investors see in the alternative form of financing?
Investors can achieve an attractive fixed rate of interest on the financing of optimally plannable sales, while at the same time having a very short capital commitment and term. Although interest rates are currently changing, the choice of fixed-income investment products is still very limited. In combination with the runtime, there are no comparable offers.
Now there is already a role model in the USA in the form of Pipe. What competition do you expect in the coming months against the backdrop of embedded finance, BNPL and revenue-based financing?
The increasing availability of enterprise data and interfaces is fueling a whole range of business models. From various perspectives, they aim to provide capital to companies and eliminate existing inefficiencies. In principle, this is an excellent development to begin with. After all, apart from the payment sector, innovation in traditional corporate and investment banking has been very limited in recent years. I don’t believe it will come down to an “embedded finance vs. BNPL vs. RBF” situation, but rather that these solutions will co-exist and cover different use cases. In the long term, I think the important questions will be who achieves the highest possible market penetration within these models. At the same time, how sustainable the respective margin structure and unit economics of these models are in comparison.
re:cap is now expanding into the Netherlands. How popular are alternative forms of financing already in other European countries and what competition awaits you there?
In general, it can be said that all continental European countries still have a lot of catching up to do compared with the UK and the USA, and that competitive pressure in Europe is still relatively low. Nevertheless, according to official information, providers of revenue-based financing are already on the market in the Netherlands and, unlike in Germany, we will therefore have to compete directly with comparable offerings there.
How successful these providers already are in the Netherlands and what impact this will have for us remains to be seen. In general, however, I am very optimistic about this. First, sooner or later we will be in direct competition anyway. So there’s no point in running away, and secondly, we invested in our infrastructure and processes very early on so that we can offer the best possible experience for customers. Finally, we are actively developing our product offering beyond financing (including business insights, cash flow forecasting) to create sustainable differentiation.
Event Tip Banking Exchange:
Paul Becker will be a guest at this year’s Banking Exchange on June 23-24 in Frankfurt/Main. Together with Alina Deutsch (Mondu), Patrick Thelen (Procurus), Kevin Krüger (TLGG Consulting), Michael Luks (Atruvia) and Stefan Schmidt (ProNoblis Group) he discusses the topic: Customer interfaces and new mysterious (data) sources as an opportunity for Embedded Finance, Buy Now Pay Later and Revenue Based Financing?