# The State of Startup Funding in 2023

> A NachoTuesday interview — the C-Suite Insights series from NachoNacho, the B2B SaaS and AI
> marketplace. In conversation with Leah Edwards, Investment Director, Lighter Capital.

- **Page:** https://nachonacho.com/nachotuesday/video/The-State-of-Startup-Funding-in-2023
- **Guest:** Leah Edwards, Investment Director, Lighter Capital
- **Guest on LinkedIn:** https://www.linkedin.com/in/leahedwards/
- **Recorded:** 2023-07-18
- **Watch:** https://www.youtube.com/watch?v=m_2C7i0eN0o

## Summary

In this NachoTuesday, Andy Karuza interviews Leah Edwards, Investment Director at Lighter Capital. In this interview, they covered startup funding trends in 2023. They also discussed in detail how to land startup funding in a tough economic environment, startup funding trends in 2023, and how to pitch investors and land the deal.

## Full transcript

Good afternoon, everyone. This is Andy Karuza with NachoNacho, and today we have Leah Edwards from Lighter Capital. Without further ado, we’d love to dive into non-dilutive funding and hear from her about her extensive experience on the subject. Thank you, Andy. It’s wonderful to be here and to help make more people aware that non-dilutive funding is a viable option for scaling startups. We provide non-dilutive funding that is extremely founder-friendly. We offer up to three-year terms, which are the most common. This structure ensures that monthly repayments are modest and adjust with your cash receipts, helping you optimize your cash flow. We do not require founder guarantees or any warrants, so founders maintain full control and have the option to choose equity financing in the future or scale while retaining all equity within the founding team. As an entrepreneur myself, I appreciate hearing about options where you don't have to give away significant equity, especially in the early stages of a company. Cash flow is crucial, and holding onto as much equity as possible while de-risking the company is important. What can an entrepreneur expect when seeking non-dilutive funding? What are the typical requirements for bringing them on board? The process is quite straightforward. We primarily look at the financial performance of a company. We can fund companies that have been incorporated for less than a year, provided they have six months of revenue history. This is a minimal requirement to get started. We also evaluate the company’s setup, looking for at least a 50 percent gross margin. If your company has high margins, is growing, has low churn, and is reducing customer concentration, we can fund you. For many SaaS companies in our community, this sounds like a great fit. What would be the minimum requirements? For example, if a founder in our community asks if they qualify, what should they expect? We can extend a term sheet to companies with around $180K ARR. I encourage early-stage founders to reach out so we can discuss when funding might be possible for them. We assess each situation on a case-by-case basis, focusing on financials and the company’s structure to ensure it is set up to scale. While venture capital has its place, especially for companies still finding their product-market fit, non-dilutive funding is ideal for those needing working capital. If you need funds for marketing or additional sales staff, equity financing might be too costly. Equity financing can equate to a significant cost that becomes apparent only at the exit, which is why non-dilutive funding is a better option for working capital. Given the tough fundraising environment, non-dilutive funding provides an alternative. We help companies bridge the gap by providing extra cash, allowing them to demonstrate high revenue velocity before pursuing equity rounds. This approach helps manage your cap table and optimize cash flow with minimal dilution over time. What inspired you to start your career in this field? You mentioned having a background in VC. How does that compare with what you do now? I started as a co-founder and joined my first venture-backed team in 1997. I have been in Silicon Valley ever since. I had two business degrees at that time but found my passion in founding teams. The experience was incredibly rewarding and creative. Since then, I’ve stayed involved in the ecosystem, advising accelerator programs, teaching at UC Berkeley, directing the Center for Entrepreneurial Studies at Stanford, and being an angel investor. When I learned about Lighter Capital, I was surprised by the concept of revenue-based financing. After meeting Melissa Widner, Lighter’s CEO, I joined the company because I am passionate about helping founders access cash quickly and efficiently. At Lighter, we can say yes to companies based in the U.S., Canada, and Australia that have a 50 percent gross margin and strong financials. This quick and supportive approach contrasts with venture capital, where you often have to say no. I’m enjoying the opportunity to help companies grow and thrive. Non-dilutive financing is an option that more entrepreneurs should explore. While venture capital is well-known, many are still unaware of non-dilutive financing options. This approach can help companies reach the next stage and secure terms that better suit their needs at the right time and place. The most important thing for a startup founder is to ensure they do not run out of money. Unfortunately, even great companies with excellent teams, products, and customer demand can face cash shortages. This situation is particularly unfortunate because there was significant value potential. One of the things I really enjoy is talking to startup founders and educating them about accounting and forecasting. My goal is to help them strengthen these areas of their business so they are not among those who run out of cash. I’ve seen this issue far too many times. In addition to running out of cash, what are some other pitfalls companies should be aware of when fundraising? For example, what should entrepreneurs be cautious about when raising money from VCs and avoiding giving up too much equity? One major pitfall is waiting too long to build relationships with potential investors. I often give presentations on raising venture capital and always encourage founders to create connections with the VCs they wish to be funded by. It is rare for a company to be funded after just one meeting unless the founders have a successful track record from previous ventures. Most of the time, when investors meet a new team for the first time, there are many unknowns about the potential success of the company. Investors gain confidence by observing the team over time, seeing how they build their customer base, and how they make decisions. In contrast, with the kind of financing I do, which is debt financing, I don’t need to know the people over an extended period. Instead, I evaluate their accounting and use it to judge what their customers think about the business. This allows me to make a decision quickly, often within a week. I require a minimum of six months of revenue data and look for a minimum of $15K a month in revenue to validate that the team understands their market and product needs. The approach to fundraising can differ between equity and debt financing. Both methods aim to understand the overall business, not just the product. One common mistake in startup pitches is focusing solely on the product. Investors are customers of your overall business, so they need to understand how cash flows in, how long it takes to collect from customers, and the costs associated with acquiring customers. Investors are looking for companies that will not run out of cash. This advice is relevant for VC pitches as well. VCs, like other investors, want to see a business model that works and is well-timed in the market. They are interested in your team’s demonstrated success, your timing, and how well you tell your story in relation to their investment interests. For companies preparing for fundraising, one key tip is to understand basic accounting. Many startup founders, overwhelmed by their many responsibilities, might not be familiar with their financials. Knowing your numbers—such as gross margin, revenue per customer, and concentration ratios—is crucial. It not only helps in making informed decisions but also builds investor confidence. In entrepreneurship, it's important to learn all aspects of your business, not just your area of expertise. Understanding finance, legal aspects, and contract law is essential. Investors look for founders with strong financial acumen, even if finance is not their background. A good understanding of your financials and how money flows through your business is vital. One cost-effective way to gain financial expertise is by working with fractional CFOs. I have made numerous referrals to fractional CFOs in my role at Lighter Capital. These professionals can help you understand financing options, timing, and ensure you are properly set up to become profitable. They can provide insights early on, helping you avoid potential problems and plan for future capital raises, distinguishing between when debt or equity is appropriate and exploring various financing options. I highly recommend that, just as you would get an advisor to help with product-market fit, you should also consider getting a financial advisor. This could be a fractional controller or fractional CFO. The exact title is less important than finding someone who understands your needs and can provide valuable strategic advice. I have a friend, Andrew Klein, who runs a company called Z Counting. I often refer startup founders to him because many do not fully understand the financial aspects of their business. If you are going into fundraising, it is crucial to know your finances thoroughly. You should be competent in managing your company's finances before seeking investment. Otherwise, you risk burning through investor cash and damaging important relationships. Getting your finances in order from day one is essential. There are many people who can predict financial issues nine months ahead if they review your books. They can train you to recognize potential problems early. The best time to address these issues is when you have 12 to 9 months of cash available. If you're still in the early stages with limited cash, experts can help you avoid digging yourself into a significant financial hole. I've seen many founders come to me in a desperate situation, asking for funding because they are about to run out of cash. Unfortunately, once you're at that point, it's often too late for debt financing. At that stage, you're looking at equity funding, which involves convincing an angel investor or VC to believe in the long-term vision despite the immediate troubles. Debt investors focus on your current financial situation and how you are running your business now. We cannot rescue companies that are already out of cash. It's important to plan your next cash infusion well before you are at risk of running out of money. At Lighter Capital, we don't have an issue with companies that have a net burn, as long as there is a clear path to reducing the burn and a strong customer base that justifies ongoing investment in marketing and sales. It's crucial to stay ahead of your financial needs and not wait until the last minute. If you approach investors when you're nearly out of cash, you might have to give up a significant portion of your company or face unfavorable terms. This can often be seen as a bailout situation, which is not ideal for either party. Always aim to be at least a year ahead of your financial needs to avoid these scenarios. I also want to emphasize that we are not a transactional company. While we do lend money, we genuinely aim to help founders understand their options and partner with them. I am open to discussing your situation at any time and providing honest advice about whether we can help or suggest other options. It's important to stay educated about financing well in advance and not only seek help out of desperation. Understanding your options now can prepare you for future challenges, especially in a competitive fundraising environment. Companies that validate their revenue models and business strategies will still find funding opportunities. There is capital available in VC funds, and investors need to deploy that money to be successful. However, there is a strong focus on sustainable business models right now. Regarding pitching to different types of investors, such as angels versus VCs, it's essential to tailor your approach. For debt investors, we focus heavily on financial data. While early-stage companies often have incomplete financials, we look for customer data and metrics such as reordering frequency and subscription durations. If you are seeking debt financing, be prepared to discuss existing debt and how you manage it. Understanding these nuances can help you better connect with the right type of investor and improve your chances of securing the funding you need. We do help companies refinance from unfortunate debt structures into better arrangements with longer payback periods. This allows for lower and more flexible payments that can adjust with cash flow. The key difference is that we focus on actual financials and place heavy emphasis on the most recent quarter. We do not base funding decisions on pitch decks alone; we cannot fund companies based solely on a story, no matter how compelling the vision might be. We are here to support the stage you are at now and need to see consistent monthly payments. Regarding investment trends for 2023 and beyond, I personally care a great deal about sustainability. I have noticed that companies in synthetic biology and renewable energies are receiving funding, which is encouraging. The SaaS market remains robust, with companies applying for funding having strong business models. We have not observed significant churn or canceled subscriptions among B2B companies providing valuable services to enterprise or SMB customers. This positivity extends to B2B software, hardware combined with software, and services plus software, as long as there is a gross margin of 50%. Embedded software continues to add value to businesses, regardless of the economic climate. The economy has shown surprising resilience, contrary to some expectations. Money appears to be flowing back into the markets, and there may be a slight improvement in the funding environment for entrepreneurs. Over the past few weeks, there seems to be a shift as people move out of a wait-and-see mode. It's crucial to keep running your business and investing in its growth. The signs suggest that the funding landscape is becoming more favorable. For those interested in further learning, one of my favorite books is "The 15 Commitments of Conscious Leadership." It’s a book I always return to because of its simplicity and profound impact on both personal and professional life. It offers excellent guidance on interpersonal dynamics and is beneficial for both business and personal relationships. The book, published by the Conscious Leadership Group, provides resources including videos on the 15 commitments. It draws from best practices in non-violent communication and other established concepts, offering a cohesive and practical approach. I often recommend it to people I coach, and some even purchase it for their entire teams. If you're considering funding options, it's important to remember that even though we offer three-year financing, we can refinance as soon as six months after the initial finance. Many companies have gone through multiple financing rounds with us, and we strive to be an ongoing source of capital. We have no application or underwriting fees, making it easy to secure additional working capital as your company scales. We view ourselves as partners in your growth, and maintaining a strong relationship with investors is crucial for future capital raises. Looking ahead, we recently expanded into Australia and are hopeful about entering other countries. Currently, we support companies based in the U.S., Canada, or Australia. Expanding our footprint is a goal, and we look forward to new opportunities. I appreciate you coming on today, Leah. I know many people are interested in funding and have learned about non-dilutive funding opportunities. For those interested, you can visit the B2B SaaS Marketplace where Lighter Capital is listed as a partner. I highly recommend checking them out and starting the process early, as funding can take time and preparation. Thank you again, Leah, for joining us today, and thanks to everyone who tuned in.

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