This week, marketing technology company Zeta Global announced the close of a $222.5 million loan facility in new debt financing. The company is no stranger to raising debt, a previously raised Series F combined $115M in funding with $25M in debt; this latest round is reported to be a combination of a Term Loan A and Revolving Credit Facility. The move greatly reduces Zeta Global’s borrowing costs, given low rate environments, and will expand on their liquidity, helping the company to “pursue new initiatives”.
Why this transaction?
The York IE team chose this as our transaction of the week to discuss the idea of SaaS companies raising revenue-based financing, which is essentially a fancy way of saying debt, as opposed to equity financing. This alternative route to raising capital especially makes sense for SaaS companies, given their inherent recurring and predictable revenue streams. Previously, Zeta Global has used debt to acquire other martech companies for their book of business and/or technology; most recently, the company announced a strategic partnership with IgnitionOne.
Through responsible debt financing, companies can improve their overall capital structure and extend runway while avoiding the dilutive nature of equity financing. As mentioned above, SaaS companies are inherently recurring in revenue which provides them with a high level of certainty in regard to revenue looking out 12-18 months. This dilution-free capital can provide companies with extra cash, allowing them the freedom to make accretive investments or even one-off hires; again, it is important to note that debt financing works uniquely well for SaaS companies given the level of certainty related to extended revenue streams.
Debt or Equity?
In general, SaaS companies have favorable economics that makes them a good fit for debt financing. Through debt financing, companies can manage dilution and oftentimes achieve higher valuations between funding rounds. Additionally, SaaS companies have low credit risks given predictability in revenue streams and low variable costs; if necessary, they can easily cut back on expenses in order to make payments on debt. Since valuations are set during equity fundraising rounds, making significant progress between rounds allows companies to reach loftier valuations for future rounds. Oftentimes, companies face short-term cash flow restraints which can affect their ability to “make significant progress” between funding rounds. Raising debt between rounds can provide companies with the runway needed to make progress to achieve those higher valuations during later equity rounds through one-off hires, acquisitions, etc. For example, Zeta Global has been using debt financing as a non-dilutive means of acquiring martech competitors to bolster their product offerings and book of business.
