Lighter Capital is a small business lender that provides revenue-based financing to early-stage tech companies. Founded by Andy Sack in 2010, their mission is to “…revolutionize the business of startup finance and help founders maintain control of their companies — and their destinies.”
As I talked with Silver, it became apparent that Lighter Capital is focused not only on providing financing but also partnering with entrepreneurs to help fulfill their visions.
Lighter Capital got its start when entrepreneur and investor Andy Sack decided to take on an obstacle he'd faced himself as a founder of an early-stage tech company: access to capital for growth.
After Sack encountered this challenge several times, according to Silver, “The lightbulb for the idea of Lighter Capital went off. It’s very difficult to raise bank debt as an early stage company. It’s also extremely tough to raise equity, and it’s not fun to sell part of your ownership.”
After tinkering with a couple of different financing models early on, Lighter began to scale its revenue-based financing model in 2012. Their purpose? “To serve entrepreneurs and provide innovative solutions so that they can grow their companies.” Revenue-based financing, or RBF, has been Lighter’s primary offering for the past five years.
When asked about their focus on providing funding to tech companies, Silver noted, “That’s where Andy and BJ, our current CEO, started and it’s what we truly care about. Our unique revenue-based financing product is a great fit for tech companies with sticky revenue streams, high gross margins, and a steady growth trajectory.”
Silver discussed some of the difficulties early-stage tech companies often face when seeking growth capital. “They can’t get bank debt because they’re very asset-light… they might not have a track record so they couldn’t go their local bank, or [the loan] might even have a personal guarantee, which they might not like.”
According to Silver, the narrative around financing and angel investors infusing major amounts of cash into a start-up destined for greatness is usually a false one. “We always hear these romantic stories around startups raising equity,” he said, “But that’s really, really hard; only .001% of entrepreneurs can do it.”
Revenue-based financing is based on a company’s performance which, especially for start-ups, can vary widely. With RBF, a company agrees to share a percentage of future revenue with an investor in exchange for capital up front. The loan payments are tied to monthly revenue, going up for strong-revenue months and down for low-revenue months. This allows companies to make small payments as they start out and larger payments as their businesses grow.
“This [RBF] was the product from the get-go,” said Silver. “As a royalty agreement structure, we have flexible payments. Companies repay us based on a pre-determined amount, say 3% or 5% [of monthly inflows], it fluctuates with their revenue. That type of flexibility is what we feel truly aligns us with entrepreneurs.”
“We’re in this together. We know the risk we’re taking and we can price our offerings accordingly. If the company grows very quickly we get repaid sooner, great. And if they’re slugging it out, we’re right there with them, too. They don’t owe us any more than they would have [on a traditional term loan].”
Lighter Capital has successfully completed 300+ financings for nearly 200 companies and continues to grow, in large part due to something Silver calls the company’s “secret sauce” – the unique modeling of a company’s growth path.
“We model out their future revenue over the life of the proposed loan,” he said. “We determine what a company’s future growth is going to look like and that’s how we figure out what percent of monthly revenue we need to be fully repaid.”
To raise equity, many of the entrepreneurs running tech startup companies would otherwise have to give up controlling shares of their own businesses to VCs or other investors. Lighter Capital provides another, more flexible option to help tech startups scale.
“The best scenario for us is when the company can achieve their growth goals and run the business the way they want to run it,” noted Silver. Lighter Capital stands with small businesses.
For Lighter Capital, developing the RBF model was not without its own challenges. Determining the APR for a credit product with a flexible repayment schedule can be complex. The company discloses APR to potential borrowers similar to a traditional term loan offering assuming a set monthly repayment. In this way, borrowers have a side-by-side comparison with other lending products. The company also provides a range of possible APRs depending on the speed of repayment.
Lighter Capital’s team has decades of tech startup, underwriting, and financial industry experience, so they’re able to provide mentorship and community to benefit their clients. The company has been interested in the Small Business Borrower’s Bill of Rights (BBoR) for a long time. When Lighter Capital Investor and BBoR leader Community Investment Management (CIM) asked if they would become signatories, they immediately said yes.
“It just makes sense,” said Silver. “Transparency, clear pricing … we were already doing all of those things, so this [signing the BBoR] was a no-brainer. This is how our business is built.”
Lighter Capital provides innovative financing for innovative companies. It does this with honesty, transparency, and a firm belief that entrepreneurs should run their businesses the way they want.
Thanks to Lighter Capital for taking time to talk with us about their business model and the importance of the Small Business Borrower’s Bill of Rights in the small business lending industry.
If you are interested in learning more about the Small Business Borrower’s Bill of Rights, please email email@example.com.
If your organization is currently a signatory or endorser of the Small Business Borrower’s Bill of Rights and would like to be featured in our blog, please contact Gabriel at Gabriel@opportunityfund.org.