Mediafly, a 22-person start-up based in Chicago, sells on-demand software and apps to some of the biggest companies in the United States. Its customers typically pay yearly subscriptions, which means each invoice is a substantive amount of money-;upwards of $100,000. But those payments don't get filled immediately (some take as long as 60 days), which can be a significant pain point to the company's cash flow, especially as the company scales.
But Mediafly's CEO, Carson Conant, has found a solution. Rather than take on venture capital to stabilize the company's cash flow, he decided to sign up with Ariba, an online invoicing firm that offers dynamic discounting-;a service that has existed for years, but made much easier by smart use of the Web.
"Accelerating cash collection allows us to invest earlier in innovative new features," says Conant. "New features allow us to attract new customers faster, outpace competitors and expand [services] within current customers faster." Last year, the company grew about 300 percent, and expects similar growth for 2012.
Venture capital may seem like an attractive option for start-ups, but it's still an expensive-;not to mention pressure-chocked-;way to take money, especially if the start-up is merely looking to cure a cash flow issue. And Ariba is just one of several young firm to offer dyanmic discounting solutions. Taulia, for instance, a dynamic discount and self-service platform for corporations launched in 2009, recently raised $8.5 million.
It's not a new trend, per se-;old school receivable financing and factoring have been around for ages. Bringing the equivalent of bank factoring online amounts to a simple 2.0 refresh of an financial transaction that many entrepreneurs would prefer to not devote too much time to thinking about. "Technology makes it faster for suppliers to find cash," says Drew Hofler, senior manager of financial solutions at Ariba, which was founded in 1996 in Sunnyvale, California.
Ariba's dynamic discounting simple, but innovative. Buyers and suppliers are connected an online platform, similar to a social network. After an invoice is created, buyers can offer accelerated payment (with a small discount) and suppliers can accept the offer, reject it, or counter-offer. Using Ariba, Mediafly is able to receive payment from its biggest customer in 14 days, as opposed to a typical 30 to 60 days.
"Ariba, particularly dynamic discounting, hasn't just been an influential thing-;we think it's fundamental," says Conant, noting that although the company has raised $6 million in angel funding since launching in 2006, it has yet to take on venture funding.
According to Drew Hofler, as of last year Ariba's buyers were sitting on about $2 trillion worth of assets. Because interest rates remain low, offering a discount in exchange for a shorter payment period makes financial sense for some larger firms. Credit, too, remains tight. It's a scenario that Hofler believes is ripe for innovation.
"The funny thing about the new normal for banking is that, before Lehman, it was pretty much free credit," he says. "When that happened, banks clamped down. Banks are still loaning, but when they do, the loans are restrictive and it can be more expensive. When the credit market started thawing, those who really didn't need credit were able to get it, but the smaller companies, the entrepreneurial companies, were't able to get it. For a long time they found it almost impossible to get short-term credit, and are still finding it hard to get. What I see technology doing, it's basically a matter of simply giving visibility into the opportunity to all the parties involved, new forms of commerce spring up from that."
Jed Simon, founder and CEO of FastPay, a Los Angeles based firm that Simon describes as a "a tech-enabled receivable finance business," is addressing a similar cash flow problem. Specifically, Simon founded FastPay last year to provide near-instant financing for digital media businesses, who often need to lay out significant chunks of cash when doing an ad-buy. According to Simon, cash flow can cripple a business, especially if the company doesn't have enough liquidity to make a purchase.
"Just because a company is profitable, doesn't mean a company is generating enough cash," Simon says. "Even when companies are profitable and growing, they actually require even more cash."
"Just because a company is profitable, doesn't mean a company is generating enough cash."
-;Jed Simon, CEO of FastPay
For example, if a digital ad-ops firm is charged with making a $100,000 Facebook advertising buy, the vendor may be responsible for the initial outlay of the cash, and invoice the brand. But it may not get the money for up to 90-;or even 120 days. In the meantime, the company may struggle with a shortage of working capital.
"A client that needs to front the money-;if they don't have a large pool of capital to keep investing in media, they can't grow," Simon says. "They either grow slowly, or need to go raise a bunch of equity or other financing to keep doing campaigns. If you're looking to invest in human capital, you need even more money. Cash is king. The key to a growing company is having enough capital to win."
After a short application process, companies can enlist FastPay to essentially fund the receivables they owe for a small discount. FastPay looks to the credit of the receivables, more than the business itself.
Online content publishers are a perfect example of how FastPay's innovative approach to cash flow can help a young and growing company. Consider Destructoid.com, a video game site based in San Francisco. The company's CEO, Yanier Gonzalez, uses FastPay for this purpose.
"Our primary source of income is advertising and it took us a really long time to figure out how we were going to be able to sustain cash flow and continue to grow," Gonzalez writes in a statement. "I went to my banker. And the first time I walked in there to get a loan and had to explain what I did for a living, they were just like "What?" They didn't understand my business. Then I discovered FastPay. They got it from day one. They're like okay, now here's what we can do. And it was done in like two days. It was ridiculous. I mean it was literally 48 hours and we had our funding. They're like the best thing ever. I don't actually think I'd be in business if it wasn't for FastPay."