Capital Efficiency - Why Even the Largest App Developers Use AR Financing

Any app or mobile gaming company has a range of options when it comes to raising capital to fund growth, which mainly comes down to increasing spend on paid user acquisition (UA).

Increasingly, founders are becoming smarter about financing strategies and structures to enable them to ramp their UA spend that does not involve them going back to their investors to raise more equity funding.

As the concept of Capital Efficiency becomes better understood in earlier stage companies, savvy founders and their finance teams are using accounts receivable (AR) financing as an important tool in their financing armory, helping reduce the impediment of payment delays of up to 60+ days from the app stores and ad networks.

AR financing is available to companies large and small. Whilst many start-ups are only now waking up to the benefits, many of the larger app and gaming companies have been using AR as part of their capital mix for years.

There is a tendency to think that cash-rich companies have no need to think about cash flow and managing their capital, but you’d be wrong. Having a CFO dedicated to optimizing the company’s finances with a solid understanding of how UA works is key.

Financing UA Spend at Scale

In any successful larger company, say with revenues of $1-2MM/month or more, the challenges of user acquisition are largely the same - at least in terms of making sure that the UA spend is demonstrably ROI positive - but the headline numbers are a lot larger.

Larger companies typically have large credit lines with ad networks for their UA, but these are not unlimited, and even if they were, the breakeven ROAS and ultimate LTV recovery horizons are still (at least for most genres of app or games) longer than the credit terms of the ad networks, giving rise to a funding gap.

Depending on the size of the company, and especially in a public company or one which is a subsidiary of a foreign parent, there are many challenges around setting budgets far in advance to make it fit into the overall company’s financial plans.

Typically budgets are set months, if not a financial year in advance to enable CFOs to plan and report against these numbers to investors - this is not consistent with a scenario where the opportunity to spend big on UA can be opportunistic or seasonal in nature.

AR facilities and specifically off-balance-sheet financing structures can be a great way for marketing teams and UA managers to take advantage of these opportunities without upsetting the CFO’s budgeting/planning process.

Cash is king

Even if a company is very cash generative, most CFO’s prefer to keep cash in the bank as liquid reserves, in case of M&A opportunities or any unforeseen downturn in their fortunes. Where possible they prefer not to tie up their cash reserves in user acquisition cycles, particularly if the unit economics are well understood.

Given well understood UA costs and predictable LTV recovery cycles, CFOs will look into the various funding options for financing their UA spend (the Capital Stack) and figure out the smartest approach, often using AR financing.

There is a simple calculation to make to inform the right decision which is basically an analysis of the Cost of Capital vs ROAS across the same time period (typically using a 30 day period as the benchmark). If UA can be funded effectively via receivables and ad network credit lines, there may be little or no need to eat into cash reserves.

Banks and AR financing in the digital era

Banks have provided AR financing to tech companies for the last few decades. Their philosophy of how this is ported to the digital space is based on tried and trusted thinking and established principles of how these facilities have operated in a largely analog world.

Across the board, banks have found it hard to keep up with the times, and AR is not a glamorous business for them to be in. Banks prefer to focus on higher-margin products such as venture debt, working alongside VCs with longer-term growth capital and providing leverage around VC equity rounds. This allows them to participate in the equity upside of the business via equity warrants.

The manual verification cost of AR lines has long been a thorn in the side of the banks, whose systems were never really designed for a digital world. The high cost of verification is forcing the entry-level AR financing volumes to be raised (typically now at least $1MM per month if not higher), which is forcing smaller developers who want to fund their companies using the same capital-efficient principles to look for alternatives better suited to grow their businesses.