The Rise of Debt Financing for Startups

Currently, debt financing is gaining prominence as an alternative to equity funding. Founders are increasingly opting for debt products, such as revenue-based securities, to secure necessary capital. This approach allows them to avoid the dilution of ownership that often accompanies venture capital investments.

This trend has spurred significant growth, exemplified by companies like Pipe, valued at $2 billion, and CapChase. However, the proliferation of these new securities presents a challenge for investors.

Evaluating Debt Products and the Need for Securitization

A key difficulty arises in assessing the multitude of debt products offered by various companies. This issue extends beyond the startup ecosystem and impacts the broader private debt market, where companies borrow substantial sums annually. The solution lies in securitization and syndication – consolidating smaller debts into a unified, tradable security.

While a fundamental aspect of capital markets, these processes are often hampered by outdated practices.

Percent: A Technology Platform for Debt Securitization

Percent is developing a comprehensive technology platform designed to streamline debt securitization. It connects debt originators with a broader network of investors than traditional institutions, aiming to secure more favorable rates and accelerate transaction speeds.

Previously known as Cadence, the company had already processed $125 million in transactions and secured $4 million in funding when we last reported on its progress a year ago.

Series A Funding and Growth

Percent has now facilitated the structuring of over $400 million in debt, a remarkable achievement that has attracted further investment. Sep Alavi of White Star Capital and Karen Page of B Capital Group are leading a $12.5 million Series A funding round, with participation from existing investors Revel Partners and Recharge Capital.

Benefits for CFOs and Debt Originators

Percent’s platform offers CFOs access to a wider range of private debt buyers, potentially reducing the cost of capital. The traditional corporate debt market is often characterized by exclusivity, with limited access through investment banks.

This exclusivity can lead to higher fees and increased expenses. Percent aims to disrupt this system by opening the debt market to a more diverse group of investors.

Streamlining the Debt Offering Process

Furthermore, Percent functions as a deal origination and transaction platform. It simplifies the creation of debt offerings and manages information requests, eliminating cumbersome processes like emailing Excel spreadsheets or uploading files to cloud storage.

Percent’s Revenue Model

The company generates revenue by charging a percentage fee on the total amount of debt originated through its platform. An additional fee is applied if Percent acts as the underwriter, creating a recurring revenue stream tied to transaction volume.

Securitization of FAT Brands Debt

A significant milestone for Percent was the securitization of $144 million in debt for FAT Brands, the parent company of restaurant franchises like Fatburger and Johnny Rockets. Percent served as a co-lead bookrunner alongside Jefferies, and FAT Brands reported a lower cost of capital compared to previous securitizations.

However, accurately attributing this cost reduction solely to Percent’s technology is challenging, given the volatile economic conditions and shifts in the food service industry following the COVID-19 pandemic. A list of Percent’s other originators is publicly available.

Investor Focus and Expertise

Nelson Chu, Percent’s founder and CEO, emphasized the importance of attracting investors with expertise in capital markets and enterprise sales. He noted a trend of venture capitalists increasingly originating from product and growth backgrounds, potentially lacking deep knowledge of financial markets.

Alavi’s experience in financial services and blockchain, coupled with Page’s background at Apple and Box, aligns with this strategic focus.

Company Growth and Future Outlook

Headquartered in New York City and founded in 2018, Percent has doubled its team size over the past year, expanding its engineering and sales departments. This growth reflects the company’s commitment to scaling its platform and solidifying its position in the evolving debt financing landscape.