Founderpath Case Study: Using Revenue-Based Financing to Scale Up Customer Acquisition

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Today we have a new case study on how we took a revenue-based financing loan from Founderpath to invest more aggressively in sales and marketing, resulting in substantially increased MRR.

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Case Study: Using Revenue-Based Financing to Scale Up Customer Acquisition
By Ryan Allis, CEO & Founder of SaasRise

On May 2, SaasRise, took a $170,000 revenue-based finance (RBF) loan from Founderpath in order to invest in scaling up our own customer acquisition.

So far, it’s working, and we added a record 62 new members last month into our SaaS CEO/Founder community.

Founderpath provides 2-3 year loans for up to 50% of your ARR. So if you have $2M in ARR you could get approved for up to a $1M loan, for example – a great alternative or addition to a Series A round – especially if you’ve figured out your business model and are now ready to really scale up customer acquisition.

This type of growth capital can be very helpful if you’ve figured out your Lifetime Value (LTV) and Customer Acquisition Cost (CAC) and are seeing a 6:1 LTV:CAC ratio or better, which means you’re getting a good payback for your sales and marketing investments and are ready to go bigger.

To explore getting an RBF loan for your company, create a Founderpath account and sync your billing system (Stripe, Chargebee, csv file, etc.) to see all your key SaaS metrics and how much capital they’ll provide. They work with all types of recurring revenue companies all over the world, as long as you have at least $50k in ARR.

The Process of Working With FounderPath

From start to finish it was a very quick 96 hour process working with FounderPath from application to capital receipt. 

We first applied on Monday April 29. Because FounderPath already was connected to our Stripe, all we had to do was upload a CSV of our non-stripe transactions, upload our P&L and Balance sheet for the prior 12 months, and create an org chart.

We were approved two-days later on Wednesday May 1. The capital was wired and arrived on Thursday May 2. 

Below you can see the actual emails received from FounderPath.

Then 48 hours later, presto we were approved.

When to Take The Money and When Not To

If your LTV:CAC ratio is strong, it will likely increase your enterprise value to take on capital to invest more in sales and marketing. Here’s a payback calculation sheet we used to show that we expected to grow our Enterprise Value by $1.5M over time by taking the $170k loan and putting the capital into our growth engine.

Our Rationale for Taking the Financing

Why did we take the money? It was simple. We wanted to grow faster and had determined mathematically through careful testing that we could scale customer acquisition faster by investing more in advertising.

In short, our unit economics were positive and we wanted to invest more money in positive ROI sales & marketing without taking on any equity dilution.

We are acquiring customers for about $500 each (CAC = $500) that are worth on average $8500 in lifetime revenue to us (LTV= $8500) – so it’s a no-brainer for us to invest as much as we can in sales and marketing if we want to scale our revenue and enterprise value.

This 17:1 LTV:CAC ratio was a no-brainer to scale up (anything above 6:1 is good, anything above 12:1 is great!).

Our customer LTV is $8698 and our CAC is $504, so it was an absolute no brainer to take the money to put fuel into the engine. Here’s our actual lifetime value chart from BareMetrics. 

The average LTV of a customer is estimated by taking our ARPA ($946/month per customer) and multiplying it by the average lifespan of a customer (9.17 months), which is calculated in Baremetrics with the formula of Lifespan = (1/Monthly Account Churn Rate).

Since we have a 10.9% monthly account churn rate, for us the math is Lifespan = 1/.109 = 9.17 months.

This means an average SaasRise community member stays 9.17 months before canceling. So $946x9.17 months = a lifetime value of $8698. Kaboom… now you understand the LTV formula.

So now that we know how much a customer is worth to us ($8698 in revenue), how much does it cost to acquire an incremental customer in upfront sales and marketing costs?

Once we know LTV and CAC, we can determine if it makes sense to scale up investments in customer acquisition – and even take a loan to do that.

As long as CAC is lower than 1/6th of LTV, you generally want to ramp up customer acquisition investments. 

So we want to invest more in S&M as long as our CAC is lower than $1400. Right now it’s at $504 so we’re scaling up.

Landing & Expanding: How We Grow Our ARPA Over Time

If our membership is $197/month, how exactly did we get our Average Revenue Per Account to $946 per month? That’s from our three upsell offerings including our group coaching, ads setup and scaling, and growth and exit consulting.

The above is a nice ascension model that takes the entry ARPA of the membership and “lands and expands” it over time to 5x the initial entry point on average, through trust building and add-on services. You can do the same for your software customers via your Account Management team.

What is your customer ascension model?

At iContact, we grew our monthly ARPA over time for our 70,000 paying customers from an average of $33 to an average of $56. And we could have probably done even more had I known what I know now about building community and offering managed services within a high-trust environment. 

Our first salesperson at SaasRise starts later this month, and their job will be to both follow-up with our approved applicants to convert them into members, and follow-up with our members to offer them additional packages, increasing ARPA and LTV – and increasing what we can profitably pay to acquire a new customer.

Using this customer ascension model, even though our account retention is only 89% per month, our revenue retention is 108% per month (meaning the growth in revenue from existing customers outweighs the loss in revenue from canceling members, a strong signal of company health).

Breaking Down Our CAC Calculation

Here’s a table of our actual customer acquisition cost (CAC) for March-May 2024. Our CAC has averaged $291 over the last 3 months, when we started doing paid advertising. This is ad spend divided by customers influenced by ads (either post-click or post-view within 24 hours), as tracked by our ad tracking platform Cometly.

Of course to look at the full-cost of customer acquisition, you’ll also want to add in any sales expenses. After adding in the cost of our single sales rep who follow-ups with leads (so far we have 1 outsourced SDR from RooCruit with 5 years of software sales experience for $2700/month), it averages out to $504 per customer.

This means that we have created a system that consistently is converting $500 in upfront S&M investment into $950 per month in revenue and $8500 in lifetime value. That’s a <1 month payback on S&M investment. And an impressive 17x LTV:CAC ratio!

Green light! Time to invest! ✅

In SaaS, anytime you’re getting your Sales & Marketing investments back in less than 6 months, it makes rational sense to SCALE UP your investments – even if it means taking on outside capital to do so.

So you can see why using non-dilutive revenue-based financing at a cost of 16-18% per year is actually a wise decision if you’re going to make $17 back in revenue for every $1 spent on sales and marketing – and if you don’t want to give up ownership.

And this is why we took the FounderPath capital – and will continue to do so as long as we keep getting fast payback periods and high LTV:CAC ratios. 

At iContact, we invested $500 in upfront customer acquisition costs to get $1848 in lifetime value ($56 ARPA x 33 average months of life). We were venture-backed, weren’t concerned with profitability in the short-term, and wanted to grow as much as possible, so we were fine with a 3.5:1 LTV to CAC ratio.

We ramped up our ad spend at iContact (the email marketing software company I co-founded in 2002 and led as CEO for ten years) to $2M/month by 2011 and were consistently acquiring 4000 new paying customers per month. The model worked, and in Q1 2012 we were acquired for $169 million by a public company. You can see the 42 slides I put together documenting how we did this.

The difference was at iContact we were funded by equity capital and by the time we sold we’d given up 55% of the equity of the firm to the investors. This time around, we’re scaling up using revenue-based financing capital rather than even more costly equity capital. 

The Types of Ads We’re Investing the Money Into

Where do we show our ads? We run digital ads across on five networks including: Meta, LinkedIn, Google Search, Bing Search, Google Display, and Adroll using these four different type of ads:

1. Search ads (Google/Bing) - Ads that show up based on the keywords a user types into a search engine
   

2. Lookalike ads (Meta) - Ads that show up on Facebook and Instagram to audiences that are very similar by location, interest, and job title as to your current list of paying customers.
   

3. Retargeting ads (Google/Meta/LinkedIn/Adroll) - Ads that show up to anyone who has visited your website in the last 180 days.
   

4. Matched audience ads (Google/Meta/LinkedIn/Adroll) - Matched audience ads are where you upload a list of prospects either from your CRM tool or a lead prospecting platform like Apollo.io and show ads to exactly those people).

I recommend testing the CPL and CPA for all four types of ads, across all five networks, to see which work for you. I also suggest testing the CPL and CPA on the review sites (G2, Capterra, Software Advice, GetApp, etc.) and also from direct mail, outbound email, and postcards. Once you know what works, take the RBF financing to scale it up!

Rapidly Scaling Your SaaS Revenue Through CAC-Based Scientific Advertising

So what does all this mean for your business? And how can you apply this mathematical CAC-based model to scaling your revenue. 

There are three steps.

1. Run test spend across every major ad channel - First, do a test to determine the Cost Per Lead (CPL) and Customer Acquisition Cost (CAC) from every major ad channel including Facebook, Instagram, Google Search, Google Display, Adroll, Bing Search, G2, Capterra, SoftwareAdvice, GetApp, etc. Note that you should invest enough of a test budget to acquire at least 2-3 new customers per channel. If that isn’t possible due to budgetary constraints or sales cycle length, focus first on establishing the CPL and then later on the CAC.
   

2. Determine CPL & CPA for every channel - Second, after running the tests, calculate the CPL and CAC for every major type of paid advertising including: search ads, display ads, retargeting ads, matched audience ads, lookalike audience ads, review site ads, tradeshows, outbound, direct mail, podcast ads, affiliates, etc. Calculate for each channel and each type of advertising how long it takes to get your money back on the sales and marketing spend. Create a sheet like this to compare the channel ROI.
   

3. Scale Up Where LTV:CAC is 6:1 - Then, you ramp up investments in the channels paying back in <6 months, or where the LTV:CAC ratio is at least 6:1 or better, and focus on optimizing/scaling back any investments in channels where the payback window is more than 12 months. You can use a spreadsheet like this to review the results of your marketing channels and ramp up what works.

And that is how you rapidly scale up customer acquisition in a recurring revenue business (and how we grew iContact from $1M ARR to $50M ARR in six years).

Sources of Capital: Debt vs. Equity

In SaaS, you earn your revenue over time. Where are you supposed to get the money from to afford a 6-12 months of payback time?

Well you have two choices for capital of course: debt or equity.

The downside of equity (aka venture capital) of course is that it dilutes your stake in the firm and reduces your control. 

And traditional banks simply won’t provide loans to software companies where the payback is over time (at least until you are a large, established, and profitable firm with collateral). Most banks like SVB do "Venture Lending" or "Sponsor Lending" which means you have to raise VC to take debt from the bank. The bank is underwriting the cash from the Sponsor (VC investor), not your SaaS business.

So more and more recurring revenue software firms are turning to a new form of capital called revenue-based financing (RBF) where you give up a right to some of your future revenue in exchange for getting the capital you need now to scale up.

This is what FounderPath excels at. As mentioned earlier, they will finance recurring revenue software firms up to 50% of their current ARR (and are geography agnostic). Then you’ll pay this up to 6 months of revenue advance back over 24-36 months, with around 16-20% interest depending on your numbers (growth rate, churn rate, revenue concentration etc.). 

For our deal ($170k financing over 24 months, we’ll have to pay back $8480 per month to total $204k).

This is definitely NOT free capital. But it’s highly profitable for us because we have an engine in place that turns $1 in S&M spend into $17 in revenue over time. And it’s better than losing 20-40% of the company to venture capital firms.

Determining Whether It’s Profitable To Take a RBF Loan

Here is a simple payback model of the expected economics on my side from taking a $170k loan from them that I then use to invest in additional sales and marketing.

You can see above that if we generate 5 incremental new customers per month over the next 24 months because of this $170,000 (for a total of 120 additional customers due to the additional capital), taking this capital will add $1.57M in enterprise value to our business assuming a 3x revenue multiple. 

The analysis is rather conservative as we’re acquiring customers for $504 per customer and the above chart assumes a $1416 CAC. We’re currently adding around 30-40 new customers per month, so I think we’ll be able to ramp up more than 5 new customers per month with this added capital. 

So why wouldn’t you take an RBF financing?

The only reason I could think of NOT to take financing like this is if you don’t have a productive place to put it to work, haven’t properly tested ads yet, or if you already have a big balance sheet. 

If you have a productive place to put capital to work (R&D or new customer acquisition) and have already completed the tests needed to determine how much capital it costs to acquire a new customer – then go get the capital, put it to work, ramp up slowly, reinvest, and then when needed go get more to ramp up even faster.

FounderPath’s Free SaaS Metrics Dashboard

FounderPath also provides free metrics dashboards for your SaaS company that look like this. You just sync your billing too and/or accounting platform, add in a custom CSV for any accounts that pay by wire, and a few hours later have some beautiful charts (I’m still helping them get the data exactly right, but it’s a good start and goes nicely along with Profitwell, Baremetrics, SaasGrid, or ChartMogul).

What Other Options Exist For Revenue Based Financing?

We like FounderPath because they are easy to work with, provide a quick 3-5 day process from start to finish, have free metrics dashboards, say yes to founders in many countries, and I’ve known their CEO Nathan for about 15 years, but if you want to look around at other options, see this article I wrote a few months ago comparing all the competition in the revenue-based financing space including CapChase, Pipe, and many others.

We hope you enjoyed this case study. If you want more killer SaaS scaling content like this – apply to join SaasRise, our community of software CEOs/Founders with $1M-$100M in ARR.

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About the Author: Ryan Allis is the founder of SaasRise, a community for SaaS CEOs with $1M to $100M in ARR. Ryan previously led iContact as CEO and Co-Founder to $50M ARR and a $169M exit, raised $47M in equity capital and $6M in venture debt, and earned an MBA from Harvard Business School. Today, Ryan advises B2B SaaS CEOs on scaling up and helping them prepare for nine figure exits.

P.S. - Below are six valuable SaaS growth resources we’ve put out. I hope they are useful to you!

Six Helpful Free SaaS Growth Resources from SaasRise

The most in-depth guide for scaling up SaaS companies from $0 to $50M in ARR. Including over 1,200 slides on every aspect of SaaS scaling.

How to determine whether to scale up or down your marketing channels

How to calculate ARPA, LTV, Churn, Lifespan, CPL, CAC, and Max CAC

A fourteen page in-depth PDF on we take each CEO client through a six-phase process designed to increase lead volume, customer acquisition, and revenue growth — and then scale up the sales team, executive team, and investor support as we help you prepare for future fundraising rounds (if needed) or an exit (if desired).

A twenty page in-depth PDF on how to scale a B2B SaaS Company from $1M to $50M ARR. Covering CAC-based customer acquisition, sales team scaling, venture capital markets, and preparing for the exit.

The SaaS Growth Formula was written to help SaaS CEOs who are focused on growing their company's sales - by implementing a simple formula called The Growth Formula. This formula is for companies that have already established product/market fit, already have paying customers, and are now ready to scale up through scientific and CAC-based digital marketing, inbound sales, and outbound sales.

Join Our Saas Growth Mastermind for CEOs and Founders With $1M+ in ARR

If you like the above resources and want more stuff like this, apply to join SaasRise, our mastermind community for SaaS CEOs and Founders with $1M+ in ARR who are focused on scaling up MRR. Every Wednesday we jump on an optional mastermind call to support each other and share what is working with scaling our companies – and we support each other throughout the week in our private community on Slack, WhatsApp, and our own custom platform.

About The Author

We’ll see you next time with more great SaaS growth and scaling content!