An interview with Jian Zhang, founder of robotics company Noah Medical
Noah Medical, which has developed a robotics system for detecting lung cancer, recently raised $150MRead more...
With so much money going into venture capital, the majority of startups still fund their ideas with savings, cash flow, friends and family support, or various forms of debt. Companies strive to grow in overly competitive markets and oftentimes their place depends on how fast they are moving. It can take several years to build and scale, and companies maintain their team from one funding round to another.
Before the pandemic, it was almost a rule that startups should be based in Silicon Valley, close to where all the best connections seem to take place. Now, after conducting deals led by the largest funds, investors are starting to realize they can strike a deal via Zoom. Even so, one of the main factors of traditional investing can still revolve around the personality of the founder.
Mark Loranger, the co-founder of Braavo, represents another model. Their on-demand finance platform aims to provide an alternative to traditional venture capital by empowering app founders to obtain non-dilutive funding. The model is based on analytics available through app stores and the company’s data, created specifically for growing mobile apps and games.
Founded in 2015, Braavo is headquartered in New York City. The company has raised nearly $80M in debt and equity from investors and has funded hundreds of companies.
When and how did you realize there is demand in the app market for Braavo?
It started with understanding the business model for apps. Thanks to standardized development frameworks and distribution networks such as app stores, it isn’t incredibly expensive or time-consuming to build and launch an app. However, once you start monetizing, it becomes hard to market your app and acquire users due to the intense competition in the market. My cofounder Sergei Kovalenko was an early equity investor in several app companies who experienced this first-hand: they built and launched a product, but then needed funds for marketing. At this point, most equity investors would say: raise more equity! But Sergei realized that equity wasn’t the right financial instrument to help these companies grow. As an engineer and data scientist, he recognized that there was enough predictive data in these companies’ measurement and analytics systems to provide them with more affordable, non-dilutive capital - without taking unreasonable risk as a lender.
We talked to the market and did our research. App businesses generate hundreds of billions in revenue per year between the app stores and mobile ad networks, representing a huge market opportunity. So we built some scrappy marketing automation technology and sent a lot of emails, asking founders whether they had considered raising capital for growth from non-traditional sources. Then we built the products they needed.
How has the coronavirus affected you? Have you received more applications since venture capitalists and businesses got even more cautious about investment, looking for sustainable companies?
Absolutely. We are a venture-backed company, and although we’ve been very conservative from an equity funding perspective, we will likely need to raise more equity in the future.
We rely on institutional credit partners to provide the debt capital that we use to fund our customers. When COVID-19 hit, VC investment dried up and the credit markets turned upside-down; in the context of both markets: you can’t price uncertainty. So we’ve needed to make planning adjustments: to our budget, capital raising & valuation expectations, debt pricing and availability, etc. It’s also forced us to reconsider what KPIs matter most for our business: shifting from a bias towards growth to a bias towards efficiency & profitability. Realistically, it’s been a healthy process and reminded us about why we started this business in the first place: we believe over-reliance on venture capital is fundamentally unhealthy for the technology ecosystem.
In much the same way we were forced to re-evaluate our strategy, our prospective customers have had to do the same thing. Out of respect to the millions of people worldwide whose lives have been fundamentally affected - or lost - due to this virus, I have trouble saying that anything “good” can come from it. However, it’s certainly not a bad thing if entrepreneurs are forced to educate themselves about alternative sources of funding and become more aware of the downside of over-reliance on venture capital.
One of the most rewarding things I’ve experienced in building Braavo is having the opportunity to see how apps can have a positive impact on everyday life, particularly over these past few months. From meditation & mindfulness apps to mobile games and kids’ education apps, our customers’ products have been playing a critical role in helping people survive and stay balanced during these challenging times.
With companies like yours, Clearbanc, Republic, and other alternatives to traditional venture capital, do you feel that the amount of traditional capital will be decreasing?
The venture capital industry has done a great job of marketing itself to founders over the years; I doubt the allure of raising a big VC round will be disappearing anytime soon. Maybe some of the lower-performing VC funds and investors will disappear, but in many cases, we’re seeing funds getting bigger and bigger. That said, it’s only a matter of time for non-dilutive or credit-based solutions to figure out how to more effectively measure risk as it relates to tech companies, and therefore become a more and more viable complement or replacement for the traditional equity-based sources. Not to mention, they will be addressing a much broader market, which includes the tens of thousands of tech companies who never raise venture in the first place.
How much capital has Braavo provided since its inception? Where is that money coming from?
Braavo has funded nearly half a billion dollars to our customers since launch, helping founders and their teams scale without giving away equity or control in the process. Along the way, we’ve been fortunate to source our capital from several institutional debt partners including Mark 2 Capital and Upper90, as well as a number of successful entrepreneurs and family offices. The founders of one of our most successful customers later became debt investors, as they understood first-hand the value of working with Braavo and the positive impact we can have on the industry.
Do companies provide you a fee of the amount advanced from their revenue share right away or overtime? Can you please explain the process of returning the money? By the way, do you call them investments or loans? (besides on-demand finance)
We offer two funding products depending on our customers’ needs and circumstances.
The first one is for working capital, where we provide early access to unpaid earnings, speeding up cash flows for fast-growing businesses. This is relatively short-term and each amount funded has a small fixed fee, around 2-3%, and clear repayment date. This type of funding is typically referred to as factoring in traditional banking.
The second product is funding for user acquisition, which is based on a company’s ability to generate future cash flows. We rely on marketing and product analytics to qualify the customer, essentially rewarding high-performing apps with increasing amounts of cash at longer durations. Pricing is based on a fixed fee, but repayment is variable and depends on whether the customer’s revenue increases or decreases over time. The great part about this is that it’s a shared risk model: if a customer’s revenue goes down, their payments are lower - creating less of a burden on them from an overall cash flow perspective as compared to a fixed-payment model.
In both cases, the funding is repaid to us through the customers’ earnings through the app stores and ad networks. We’ve built a closed-loop system that is totally automated, meaning that the customer doesn’t have to worry about payments, reporting, or any of the typical time-consuming elements of traditional funding arrangements.
As for the wording, we avoid using “investment” or “loan”, because we think of these revenue-based funding products as unique in their own right.
One of the exciting points about your model for me is that you eliminate the personal factor; meaning the decision of whether you provide the money or not is data-driven and you don’t need to meet a person to make decisions. On the contrary, in venture capital, the personal factor is probably the most important one. Do you feel that this is going to change? Now in the pandemic investors started committing to deals without in-person pitching. They did this by talking with founders via videos, which is seen as a huge change in the mindset of investors.
As technical founders, we’ve built a completely automated and self-service platform - which means that there’s no human element required. This helps minimize transaction costs and enables us to work with the earliest-stage companies. However, one of the things that our clients rave about is actually how much personal, dedicated, and customized attention we provide. Funding is an emotional decision, and it’s important to establish trust. And it turns out, in spite of the automation, they really want to talk to us. We check in, talk about what they're planning, support them in their decision-making at the pace that they want to grow their businesses, and stay close to see how the funding is working for them.
What sets Braavo apart from VC is that getting funding is not dependent on who introduced you, what school you went to, how good your pitch deck is, or how charismatic you are when pitching. Realistically, even the most professional and objective investors have personal bias. Braavo, on the other hand, makes decisions starting from data. Human relationships are still relevant, but we don’t need to meet you to decide if we like you enough to fund you.
What are some results of the companies you have funded?
Verv, a weight loss fitness app, is a great example of an earlier stage company that grew to earn millions of dollars per month solely with Braavo’s financial support. Another one is Ten Percent Happier -- they made new hires and raised seed funding on their timing and on more favorable terms. Flipd is an earlier-stage company, became profitable and experimented in new marketing channels sooner than they would have otherwise. You can check out many of our case studies on the website.
What stage are the companies you normally fund on?
We work with both earlier-stage and later-stage companies, but we don’t think about investing in companies at a specific stage in the same way that a traditional investor thinks about early-stage vs. late-stage. Instead, we’re looking more closely at performance. For us, key performance indicators can include revenue at least 5-10K each month, and user growth metrics.
Whether you're an early-stage app developer or a multi-million dollar mobile gaming publisher, Braavo is your partner for flexible, affordable, and on-demand financing.
What are some of the challenges you believe app founders encounter that make your solution the most appealing for them?
Apps don’t get paid out for their earnings until anywhere from 30, 45, to 60 days out. This is a serious hamper on growth and isn’t easily solved with traditional funding sources.
It’s also hard for them to raise equity: it takes months, most fail, and for those who are successful, the dynamics of their business and the definition of success are fundamentally altered in a way that is not always aligned with the founder’s vision. Getting a traditional loan is not easy either: banks and other traditional financial institutions are slow and may not understand newer technologies, let alone highly nuanced or complex performance metrics.
Your website says that over 3000 apps are connected to your platform - are they your clients?
Yes, they are all using our products in one way or another. Keep in mind that we also offer free analytics tools for app companies that don’t necessarily want funding at the moment.
With all that data you collect, you might be one of the biggest retainers of data apps in the world. Do you provide consulting services for your companies? Do they see you as a strategic partner, rather than just a funding platform?
No - we are focused strictly on funding and analytics, we do not formally offer any type of fee-based consulting services. That said, given our years in the market and vertical focus on the app space, our customers definitely see us as a strategic partner. Working with Braavo is validating for them - we have a reputation of working with the best companies in the market, so they are proud to be customers.
Can you specify some insights that you can get out of the data?
It really depends on what we’re trying to understand. If you look at the data through a credit risk perspective, we can manage risk through a variety of signals and indicators that most financing companies can’t see.
From a market-level perspective, we can understand benchmarks and how a particular app fits within the norms, not to mention how external factors impact the market more broadly. This has been particularly interesting during the past few months, as the behavior of advertisers has been much different than in prior periods.
Perhaps most interestingly, we can predict the likelihood of an app’s future revenue based on the quality of the user experience: through retention, engagement and interaction - which is really powerful and cool.
Are there any similar companies in the market supporting apps? If not, do you think there can be replicants or your platform? Do you see them as competitors, or they more like partners since the market of alternative funding is nascent?
Yes, there are a handful of companies providing different types of funding services to mobile app and game companies. It’s a huge market, so competition is both healthy and validating - and ultimately good for the customer. Of course, there can always be copycats or new market entrants from different verticals, but we’ve invested five years and millions of dollars in building a powerful technology infrastructure and industry-specific expertise that we believe gives us a strong competitive advantage.
More broadly in the alternative funding market, I know that we share portfolio companies with Indie.vc, as an example. Because their model and approach are substantially different than ours, I would consider them a partner vs. possible future competitor.
Tech-enabled financing has definitely expanded over the past several years, because there are so many opportunities to improve situations where traditional “one-size-fits-all” finance or funding models don’t work. But of course, each new option brings with it a variance in quality, reliability, and risk. “Move fast and break things” is OK for some things, but probably not as OK for your financial health.
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