Supliful, a Latvian on-demand skincare, nutrition, and packaged food product fulfillment startup has recently secured a EUR 2M mezzanine loan – a hybrid debt-equity instrument, providing lenders with the right to convert their loan into equity in case the company is in distress.
While taking a loan isn’t quite the same as attracting VC funding, this was a strategic choice for Supliful.
2023 was a slow year for investments, both in Latvia and across Europe. To avoid the fate of many startups that had to face their demise due to a lack of VC funding, Supliful decided to act and look for alternative lending options.
We spoke to Supliful’s CEO & co-founder Mārtiņš Lasmanis about the reasons behind this decision and his advice for other startups who experience challenges obtaining VC funding.
Mezzanine loan is not a very popular type of financing among startups. How did Supliful arrive at a decision to take it?
2023 was overall a great year for our business. It really took off. But despite that, we struggled to raise VC investment. That’s when we started looking for other ways to obtain extra capital to support our growth. A loan was one of the options.
At first, we considered taking a loan in the US, where our business is based. However, I quickly learned that our options were limited due to us not having social security numbers and credit history there. Even if I managed to get a US visa and a social security number, getting a loan for the business would still be a long shot.
So, we started to look for what was available locally in Latvia. Our CFO approached several local alternative financing providers, and FlyCap – a growth capital fund – was one of them. They looked at our case and were interested in exploring it further.
Long story short, we ended up signing a deal for up to EUR 2 million mezzanine loan in December 2023. This means that we’ve already received 1 million and have another 1 million available upon request if we need it.
We want details – how exactly does it work? What are the requirements?
A mezzanine loan involves a fixed annual percentage and a success fee based on the revenue we generate.
The loan has three key elements:
One, a regular quarterly interest payment.
Two, a percentage payment.
And three, a capitalized payment, which gradually accumulates over time. This can be settled at the end of the loan term.
The total interest rate consists of 14%, of which one part is a fixed fee, and the other part is performance-based.
When do the lenders start to look at your revenue?
There’s a 24-month grace period, except for the percentage payment, which starts after we sign the contract. Additionally, specific conditions apply – for instance, upon securing additional funding, we have the flexibility to repay the amount instantly. Also, FlyCap acts as a long-term partner since the loan is provided for 4 years.
It does come with many liabilities and responsibilities, so it’s quite a strict contract. If we do some negligence, there are personal guarantees from me as a board member of the entity, emphasizing the seriousness of our commitment. While these personal liabilities are primarily reserved for extreme cases, it’s still a separate contract that we need to sign.
That’s quite a risk for you as a founder. Then why did you specifically choose this type of loan?
First of all, we weren’t able to get a loan from traditional banks due to the structure of our business. Meaning, our revenue streams directly into the US entity, and all client interactions occur solely within the US. But the company’s “brains” operate from Latvia – 90% of the team is here, including all the key functions, such as engineering, sales, marketing, etc. The absence of tangible assets in Latvia means banks don’t have anything to use as collateral.
Secondly, on a year-to-year basis, we’re still not a profitable business. That’s another risk factor for traditional lenders. As a result, we had to turn our attention to alternative business loan providers, such as FlyCap and Capitalia.
If other startups want to apply for a similar loan, what should they do? What’s the application process like?
In our case, the application process was pretty straightforward. The main document was our standard investor memo that already included most of the information and details asked. No specific forms were required.
It was a big plus that we already had extensive fundraising experience and had all the information prepared. It was also a great help that our CFO could provide us with detailed information on financial projections, as well as the finance plan. He spent half a month compiling the necessary documents for legal scrutiny and verification.
The application process included standard procedures such as legal due diligence, assessments of employment agreements, scrutiny of potential lawsuits, and the examination of past financial reports. But overall, there were no unexpected elements.
Altogether, it didn’t take too long. We started in late October 2023 and received the funds in the first week of January.
So, my advice to other founders is to start compiling all the company’s financial documents in time. And consult with an expert in startup finances when applying. Luckily, in our case, this expert was our CFO.
Can any company apply for such a loan?
Not really. It definitely can’t be a pre-revenue business. You need to have at least some sort of revenue to show that you can repay the loan.
Another thing they pay attention to is the team factor and the strengths of its individual members. High financial literacy can come into play significantly.
What kind of businesses might benefit from such a loan?
Now, I must add a disclaimer here. We are quite an extraordinary case for lenders like FlyCap. Their typical customer is a more traditional, asset-heavy business – often industrial companies. Such businesses could apply more easily, stating their assets as collateral.
With ICT companies, it can be more complicated as there’s not much to recover in terms of assets. So, for the lender, this makes everything much riskier. But it’s still possible if you’re able to demonstrate your company’s profitability. Or, at least, a clear path to profitability, laying out your financial plans in detail. If you’re unable to do this, there’s no point in applying.
Is there anything else you’d like to add that could be useful to founders looking at alternative loan possibilities?
Always keep in mind for whom you’re building your business. Sometimes, founders get caught in a vicious cycle where they need to prove to VCs that their business is valuable, and VC investments are the only thing that makes a business legitimate. But it can be useful to zoom out and look at other financing opportunities to help your business scale.
Supliful is now in a good place. Our runway was already good, and now with this loan we prolong it. In the end we can even receive a higher valuation and reduce our equity dilution.
So, I’m glad we opted for this loan now instead of waiting to reach a critical point, where we’d be forced to give up 30% of our company for a couple of million of euros.
So, my advice is to always look for alternative ways of funding if needed. There are various opportunities, as long as your operation is sound and you’re not burning hundreds of thousands of euros per month on a product that’s not yet in the market with zero clue about how it’s gonna get there.