How Founders Can Use Data to Fund Startups
It’s odd when you consider it: Venture capital as currently understood in the United States has only been around for about 50 years. And yet VC has become so much part of the mythology of multibillion-dollar company creation that many American entrepreneurs find it hard to conceive of other ways to fund their startups.
From the founders’ perspective, that’s a pity. Depending on terms and how early a company accepts venture capital funding, it may give up as much as half of its value over time.
Increasingly, however, both founders and funders are realizing that it doesn’t have to be this way. VC firms get their investment capital primarily from large institutional investors and nonprofits—such as universities and pension funds—and some of those investors are putting money directly into startups and avoiding the fees paid to VC middlemen.
Even more striking is that a new generation of investment platforms is offering founders data-powered funding options that don’t necessarily involve massive dilution of ownership. One leader in this space is the Tel Aviv-based Liquidity Group, founded in 2018. Liquidity specializes in debt financing and has built a proprietary AI-driven platform for conducting due diligence and optimizing lending deals.
Liquidity CEO Ron Daniel says the benefits of debt financing are becoming clearer to founders. “In late-stage investment, the company doesn’t really need this type of very, very expensive capital—they can take less expensive capital. And I think the market is getting mature to understand that over time, especially in the last few years,” Daniel says.
Certainly, activity in the sector points to increasing awareness; Liquidity provided over a billion dollars to tech companies in 2021. In December, MUFG—the second largest bank in the world—announced it is launching a $300 million joint venture fund for late-stage tech startups that will rely on Liquidity Group’s patented AI-driven credit modeling system. Liquidity projects 600 percent growth in 2022 in assets under management, loans to clients and revenues.
There are some limitations: Liquidity doesn’t get involved with companies at the earliest stages. It wants 18 months of revenue and a minimum of $3 million annual revenue rate.
A similar company is the Austin-based Hum Capital, which came out of stealth mode in May 2021. Hum positions itself as the “Kayak of startup funding.” If a company agrees to give Hum access to its financials—these days, most startups keep banking and payroll data in the cloud—then Hum’s algorithms can match it within hours to a funding package that might include debt financing, investment from VC or private equity, or traditional bank loans.
Hum CEO Blair Silverberg, himself a former venture capitalist, is very attuned to the hidden costs founders can face when taking funding. “If you raise the wrong kind of capital for your company, you can have an overhang that keeps people from putting money in in the future; you can have secret terms you didn’t realize when you signed the deal and now you lose your company to your lender,” Silverbeg says. “It is like the absolute Wild West you’re having to navigate.”