Spanish HR platform Factorial has signed a deal with US VC firm General Catalyst (GC), which will see the investor pump €80m into the business.
Factorial founder and CEO, Jordi Romero, is keen to stress that he’s not calling this injection of capital a “funding round,” describing it instead as a “go-to-market investment”. What this means in practice is that GC is putting money into Factorial via what Romero calls a “contained” form of debt, meaning that the funds can only be used for new customer acquisition, and the investor only gets paid back from the revenue from those new customers.
“We don't put our assets or the rest of the business at risk,” he explains. “We pay a little bit more interest than with your typical venture debt. But on the other hand, we don't mortgage anything. It's a very isolated agreement.”
Why pay for expensive debt?
Romero says that he would rather use this kind of limited liability debt to fund customer acquisition than equity financing. Factorial still has around €100m in the bank, after raising €120m in a 2022 Series C round, but he says this money will be preserved for “strategic opportunities” meaning “buying other companies, new products and so on”.
“I'd rather pay a small financial cost without the dilution,” he says. “Dilution kind of goes one way, it's hard to pay back dilution, but cash we can pay back. We get to have the optionality of always having money in the bank to do strategically important projects like M&A without having to get more diluted. We will never need an equity round again.”
Romero says this form of low-risk — albeit more expensive — debt is something that only suits SaaS companies, or other subscription-based business models, that can prove strong customer retention and efficient customer acquisition costs.
“GC has a very high confidence in our ability to pay them back,” he says. “If they believe that, then it's a no-brainer for them. It's free money.”
Romero says that a big reason for GC’s confidence in Factorial’s ability to pay its debts is that the firm took interest in investing in the company’s previous round, meaning that it saw all of the financial figures around customer acquisition and retention (without investing in the round).
A new era for growth funding
The Factorial CEO says that, while this form of debt financing has been used by GC before to help its own portfolio companies, it’s still a relatively new idea, and even more so in Europe.
“I've been talking to my investors as well as other investors in the last few months seeing how people understand it,” says Romero.
“VCs usually say, ‘No, no, take my equity instead, let me fund you. I'll give you €100m and you give me equity.’ And then they understand it and it’s like, ‘That's much smarter, because there's a high certainty of repayments.’”
Romero predicts that this kind of funding is going to become “way more prevalent in the growth stage” and that we’ll see fewer large growth rounds, as later-stage VCs cotton onto a new way to deploy their LPs capital without having to make risky bets.
“There is a gap where you do not need venture capital, you don't need high risk, high multiples capital, but you need cash,” he says.
Romero says Factorial is targeting positive cashflow by the end of the year and that the business could hit profitability next year, depending on how much it grows its customer base.
Previous investors in the company include Tiger Global, Atomico, Creandum and Point Nine.
