Scaleworks Spins Out Element SaaS Finance, a Debt Fund for Startup Financing

San Antonio-based venture equity firm Scaleworks announced Thursday it spun out a new $10 million debt fund that will provide an alternative source of financing for startups. Called Element SaaS Finance, it was first launched as the Scaleworks Venture Finance Fund in January 2018.

John Gallagher took over in January as Element’s CEO from Karl Pichler, a former chief financial officer at Rackspace who was a general partner at Scaleworks managing the venture finance fund. Gallagher oversaw venture finance for Scaleworks and has almost 15 years of experience in asset management and financing.

Element SaaS Finance aims to help business-to-business (B2B) software as a service (SaaS) startups secure loans to fuel growth. The debt fund looks for companies with a proven product and a stable customer base with recurring annual revenue typically ranging from $4 million to $10 million.

The debt fund has completed 16 loans to date averaging about $1 million each, Gallagher wrote in a company blog post.

“Until recently, debt financing wasn’t something that was on the radar of these [B2B SaaS] companies, mostly because banks aren’t keen to lend to companies who ‘only have code’ as an asset,” Gallagher wrote. “While they’re all quite different, one thing that they have in common is that they were actively looking for, and struggling with, new and better ways to finance their companies.”

In a blog post, Scaleworks co-founder and general partner Lew Moorman wrote how startups often lack tangible assets such as office buildings, product inventory, or other physical goods that can serve as collateral. That makes SaaS companies appear to traditional bank loan officers as a risky financing prospect.

“They do, however, have consistent recurring revenue streams, with high gross margins,” Moorman wrote. “We believe that is a bankable asset, banks don’t.”

Scaleworks capitalized on an opportunity to offer SaaS startups an alternate means of financing beyond Scaleworks’ current model of taking majority stakes in companies, said Ed Byrne, Scaleworks co-founder and general partner said.

Since launching its $10 million venture finance fund almost two years ago, Scaleworks has closed over a dozen deals. That success is what drove Scaleworks to spin out the fund as a separate entity, Byrne said. The new debt fund gives Scaleworks the option to extend loans to companies led by founders who want to retain equity and build the business independently, rather than as a company held in Scaleworks’ portfolio.