US lender Partners for Growth has had a unique front-row seat to the growth of Australia’s tech sector
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For Australian startups, it’s generally pretty hard to access debt funding in the scale-up phase of growth.
In fact, business lending as a whole is generally shunned by the dominant big four banks — unless the applicant puts up their real estate assets as collateral.
But that hasn’t stopped US-based debt financing company Partners for Growth (PfG) from building a successful niche in the local market.
Established in 2004, the fund started lending in partnership with Silicon Valley bank, the $US12 billion commercial lender which has helped finance more than 30,000 US tech startups.
And after doing two or three deals per year in the local market since 2007, PfG established a full-time presence in 2016 after noticing a consistent trend of growth in Australia’s tech ecosystem.
Speaking with Stockhead, PfG’s head of Austalian operations Jason Georgatos explained how debt funding can help add value for early-stage growth companies.
“We usually come on board when companies are starting to generate some revenue traction, with a proven product market fit,” he said.
“That’s where we can apply some of our metrics — non-traditional lending measures — and say, ‘Well, there might not be net cash flow or large assets, but there’s value here.'”
That differs slightly from venture capital, where companies are looking to raise seed funding at the concept stage.
“Venture capital is still really important,” Georgatos said, noting that it’s hard to effectively price early-stage debt risk.
“If someone has a pure startup with an idea, they’re probably going to have to finance that with straight equity.”
So providing venture debt doesn’t act as a replacement for venture capital, but it can often be used as a complement to achieve desired outcomes.
“Say someone is raising $5m, and we can augment that with $2.5m in debt — that lowers the cost of money dramatically,” he says.
“If they had to give away 20 per cent of the company, with an effective debt split that figure drops down to, say, 12 per cent.”
“So that dilution in savings is really valuable for existing investors and founders. Even if you could buy yourself 6-12 months, the valuation can change dramatically in that time, in which case founders can save a huge amount.”
Georgatos provided a good example of how that model worked in the local market with Prospa, the small-business lending platform which listed on the ASX earlier this year.
PfG came on board at the same time as leading VC firms Square Peg Capital and Airtree Ventures, to fund Prospa’s next stage of growth.
“We put $20m of debt at the same time as they put in $25m of equity, so instead of the company having to issue $45m of equity they were able to diversify their capital structure,” Georgatos said.
Having made its first Australian loan 12 years ago, PfG has had a front row seat to the growth of Australia’s VC and tech startup ecosystem.
That growth eventually provided the catalyst for the fund to set up an Australian office, but during that time it also noticed a stark difference in local lending practices.
“The lending culture here is much more conservative. There’s four banks that control the majority of the market, and they don’t really lend to small companies,” Georgatos said.
“There was no lending risk, unless it was backed by personal guarantees with real estate. So we thought there was a gap here, and maybe we could build some deal-flow.”
PfG is about to round out its sixth lending fund, which Georgatos said will close with just over $300m in investment. The fund will also take on around $100m of debt from Silicon Valley bank, leaving it with $US400m of capital to deploy.
About “30 per cent” of that total will be allocated towards the Asia-Pacific region, Georgatos said.
As a lender, PfG is largely focused a sector where the Australian market demonstrated some early strength — enterprise software (think Atlassian or SafetyCulture).
“That B2B enterprise software space is probably where the biggest chunk of our portfolio is. It typically has high margins with recurring revenue, and the products are often mission-critical so people don’t tend to rip it out,” Georgatos explained.
Another positive factor; those type of companies often get purchased for “huge multiples of revenue”.
“But the nice thing about other fintech platforms in Australia is that you can have a very good-size domestic business in fintech, whereas with enterprise software I really think you need to go global,” he said.