Tipalti Executives Comment on What Goes Into Making Debt Financing Deals

Fintech unicorn Tipalti recently announced an additional $150M in growth financing, bringing the company’s total equity and debt raise to more than $700M. Led by JP Morgan Chase Bank and Hercules Capital, this incremental growth financing will enable Tipalti to further invest in product innovation and support its customers in managing complex payables operations at scale.

Since its $270M Series F in December 2021, Tipalti has continued to reach new heights with transactions soaring by 50% in 2022 for a total annualized payments volume of $43 billion. Amidst the economic downturn and more recent events like the SVB fallout, Tipalti has increased its global customer base to over 3,000, all while maintaining a 98% customer retention rate for five consecutive years.

On top of the funding, Tipalti also just announced three new additions to its executive bench, including new CMO, Des Cahill, a seasoned marketing executive with extensive expertise in helping SaaS and B2B companies scale through the intersection of brand, data-driven marketing, sales and customer service.

Crowdfund Insider recently connected with Tipalti’s CFO Sarah Spoja, who led the deal, as well as Catherine Jhung, Managing Director at Hercules Capital. They discussed the details of the latest raise and what this means for the fintech industry more broadly.

Our discussion is shared below.

Crowdfund Insider: What is debt financing?

Tipalti Team: Two primary types of funds can be used to grow a business: equity and debt. When a company takes debt financing, it’s given the commitment of capital from the lenders in exchange for a cost of that capital paid to the lender, as well as the full value of principal repaid at the end of the debt maturity. There are lots of different types of debt: revolvers, term loans, warehouse facilities, etc. and each has its own structure. The key difference with debt financing is that it does not create dilution and it is eventually paid back with interest.

Companies pursue debt financing because it allows them to raise capital quickly for various purposes: expanding operations, purchasing equipment or inventory, acquiring other businesses or investing in research and development. It provides the necessary funds to make substantial investments without depleting existing cash reserves or diluting ownership.

Crowdfund Insider: How is it different than regular funding?

Tipalti Team: The main difference between equity and debt financing is that equity financing allows companies to raise capital with no obligation to repay the funding amount, whereas debt financing requires full repayment with interest to the lenders. When a company takes equity financing, the company receives the funds in exchange for new company shares being issued. The investors then own a portion of the company and the company experiences dilution (each existing share owns less of said company) due to the issuing of new shares. Equity funds are received immediately and can be used to grow and run the business.

Crowdfund Insider: Why is this announcement significant?

Tipalti Team: With VC investments having plummeted by 35% since 2021 (source: Axios Pro) and investors’ and lenders’ focus on the quality of the investments they are making, the bar for being able to raise equity or debt in this macro environment is extremely challenging. Amid the economic conditions, lenders, especially large ones like JPMorgan Chase Bank (JPMC), are only looking to lend to stable, growing and profitable (or soon-to-be profitable) companies. This is because they need to underwrite a best-case that gets them their money back at the end of the loan and the company’s financial plan supports the debt financing.

Crowdfund Insider: Why did Tipalti pursue this round of debt financing?

Tipalti Team: Given the uncertainty in tech capital markets right now, the opportunity for well-priced debt capital gave us more flexibility. Tipalti did not need equity financing as we have the majority of the funding we raised 18 months ago – $270M Series F in December 2021 – on the balance sheet. That said, we
believe for our shareholders, customers and employees that this is a prudent time to add debt capacity and strengthen the balance sheet.

It further demonstrates our ongoing commitment to innovation and continued dedication to helping our customers scale quickly by making payables strategic with operational, compliance and financial controls.

Crowdfund Insider: What goes into making a debt financing deal?

Tipalti Team: In many ways, completing debt or equity financing rounds are similar. Both require finding partners – in this case lenders – who have a mandate that matches the needs of the company in terms of the size of the funding round, type of capital and stage of the company. You want to have enough conversations and get plenty of potential prospects in the process so that you will have some options to choose from. However, the more potential partners you spend time with, the more time and output will be required from you and your finance team to support that.

Ultimately, in almost every funding round at Tipalti, we have gone into them with 4-5 potential partners we are most excited about, based on earlier conversations and an understanding of their mandate and how Tipalti will fit into their ‘sweet spot’ for investing.

There are some differences in debt rounds. In particular, there is a more formal process for underwriting done by the lenders and in my experience, the legal process post-term sheet does take substantially longer than in a typical equity round.
What is really important for companies to consider before taking on any debt financing is to ensure their financial plan is achievable and to negotiate financial covenants (if any) that will not limit their flexibility to execute while meeting the needs of their lenders.

Crowdfund Insider: Why did JPMorgan Chase and Hercules Capital provide this financing?

Tipalti Team: Both JPMorgan Chase and Hercules Capital make very deliberate and careful decisions when choosing investment partners. We have known the JP Morgan team and the Hercules team for many years, but this was the first time we were able to work with them on the corporate side. As mentioned before, they both believe in Tipalti’s ability to “break the mold” when it comes to technological innovation and are on board with the future direction of Tipalti as we continue to change the payables market landscape. Their partnership is a testament to our continued success and bright outlook.

Crowdfund Insider: What is Tipalti’s history with funding rounds?

Tipalti Team: To date, Tipalti has raised a total of $700 million; $550 million in equity financing and $150 million in debt financing. Prior to this year’s financing round, Tipalti raised just over $550 million in Series F funding in December 2021, at a valuation of $8.3 billion.

Crowdfund Insider: How will Tipalti use the capital?

Tipalti Team: The raised capital will primarily be used to continue our investments in product innovation and support our customers to ensure the best products and services to help them scale and automate their payables’ processes and operations.
Since the growth funding news, we have already announced that we embedded OpenAI’s GPT-4 technology to strengthen Tipalti Pi (Payables Intelligence), a continuously-adaptive and integrated payables intelligence engine that harnesses the power of AI. It will soon include two new capabilities: Auto Coding and Ask Pi.

Leveraging generative AI, Auto Coding analyzes the context of the purchase order, the invoice and the ledger, allowing for improved matching accuracy and helping to further eliminate manual coding. Ask Pi, an AI-powered digital assistant with robust data analysis functions, allows any user within the organization to easily access information and answer key business questions instantly through a chat interface, ultimately saving time and resources.

These latest capabilities, in addition to several new products, services and integrations we will announce later this year, advance our mission to revolutionize the payables process and continue delivering valuable insights to our customers.

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