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“Protect Your Dilution” – Justin Floyd

Posted on Thursday, Jun 21st 2007

The phone rang this morning, just as I put the last piece of peach in my mouth. It was a scheduled call with Justin Floyd, Founder of SmartFundit. Rene Bonvanie mentioned the company during our recent interview.

What followed was a hilarious conversation that started with a very “British” guy, introducing himself, and my saying, “Oh, I didn’t realize you were British!” “Should I begin by apologizing for that?” he responded. “I guess, since I am Indian by origin.”

Anyway, Justin has done 6 companies. “All but one succeeded. The one that failed – I had involved VCs in!” So, now, Justin’s mission is to help entrepreneurs bootstrap without venture financing. Or at least, delay a round of expensive capital infusion.

SmartFundit is a financial services company that brings together an “exchange” of lenders who are willing to finance contracts, receivables, and such, to help entrepreneurs gain runway. With Software-As-A-Service becoming mainstream, when a company books a 1-year contract, the cashflow comes on a monthly or quarterly basis. SmartFundit lenders would, under such circumstances, fund the entire contract, and bridge the cashflow needs of the company at a 4% per annum interest.

“It’s a great value proposition,” I said. “Yes, it’s tragically good,” Justin agrees apologetically.

SmartFundit has 6000 customers, and has processed transactions worth $500 Million last year. 4-5% of these are SaaS vendors, while the rest are enterprise technology vendors. For example, they have a lot of SAP solution partners in the mix. Many of the who’s who of SaaS are their customers – Salesforce.com, Netsuite, Omniture – but also, many little ones.

“We have an uneasy alliance with VCs,” Justin laughs. “When we’re in a deal with VCs, we’re loved, because we make their money stretch longer, and delay dilution. At the same time, VCs, being the smart folks they are, realize, that in the next deal, we may stretch the entrepreneurs’ runway, and delay their entry.”

Ofcourse, me being me, I ask, “So what’s your business model?” “We’re like a dating service, except we get paid as a % of the transaction when a marriage happens.” To net it out, Justin’s company makes 0.5%-1% of every transaction.

Well, it looks to me, as though, if you are a software entrepreneur, you absolutely need to look into SmartFundit. With due apologies to my numerous VC friends, I have to say, this is a no-brainer piece of financial engineering that entrepreneurs MUST take advantage of, or you’re leaving precious money on the table, and taking unnecessary dilution. Also, this model does nothing for consumer internet entrepreneurs, so you guys can keep plugging away. I will alert you if I find something equally compelling for you in due course!

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Do they fund seed rounds? ( as angels or such) for SaaS based SW?

Thanks,
Benjy

benjy Wednesday, December 12, 2007 at 6:14 AM PT

If you have contracts, they will finance it. Sure.

Sramana Mitra Wednesday, December 12, 2007 at 6:41 PM PT

Good read, thank you.

Kai Waldon Thursday, March 27, 2008 at 4:45 AM PT