VCs told Quantum Metric's CEO that his startup should be valued at $1 billion, but he discovered taking on a $25 million loan was a better deal

  • In February, Quantum Metric CEO Mario Ciabarra was fielding calls from investors at a rapid clip and getting unsolicited term sheet offers that valued the company at $1 billion. 
  • The term sheets offers slowed once the coronavirus hit but his company kept booming, growing annual recurring revenue at 70%, he told Business Insider.
  • By June, VCs were calling again, but the valuations were lower, even though revenue-under-contract had grown, said Ciabarra. 
  • So he decided not to take on a new round of funding yet. Instead, he opted for a $25 million loan from Silicon Valley Bank until he could secure a venture funding round at the terms he wants.
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In February, Quantum Metric CEO Mario Ciabarra was fielding calls left-and-right from venture capitalists eager to pour funding into the company.

"We weren't actually trying to raise any specific amount of money," he told Business Insider. "Of course, we entertain conversations cause it's great to get to know folks. And we started getting term sheets that were unsolicited."

Investors were also valuing the young startup at roughly $1 billion, he said. That's an eye-popping valuation for a company that launched in 2011, especially considering that Quantum Metric's last funding round was a $25 million Series A just two years ago that pegged the firm's worth at $125 million, according to an estimate from Pitchbook. 

In March, once the pandemic brought much of the globe to a grinding halt, those offers began to stop trickling in at the same pace. But then in June, when Quantum Metrics got a new round of solicitations, Ciabarra said the valuations weren't as high.

This was particularly baffling to Ciabarra because he says business is booming in 2020. Quantum Metric is experiencing 70% growth in annual recurring revenue, an industry metric to reflect multi-year contracts that is often used for subscription-based models. 

So Ciabarra decided he didn't need to take on more investors at all if the deal they wanted to offer was so substantially less than what they pitched just a few months earlier, when the company had less revenue under contract. 

Instead, he could go the time-tested route of taking on a loan. And to his delight, he discovered the process for securing a business loan was just as competitive as selling equity to venture capitalists.

'Very substantial funding round' looming 

Ciabarra is still eyeing another fundraising round in the coming months — one that he promised would be "very substantial" and a precursor to a possible initial public offering as early as 2021.

In the interim, however, Quantum Metric secured a $25 million debt financing from Silicon Valley Bank — which Ciabarra described as a "stepping stone" to get to a Series B. 

"It's not an instrument for everybody all the time," he said. "We were able to garner a much greater dollar amount with much better terms then most folks would be able to get at a stage like ours."

The benefit of debt financing over equity investment, according to Silicon Valley Bank Managing Director Josh Dorsey, is the influx of capital without the need to sell off another chunk of the company or dilute the value of existing shares. Of course, the downside is that companies then have to service the debt and pay the money back with interest, and that great terms on loans hinges on the ability to do so.

"When companies get to a certain scale, they can qualify for a debt capital that can provide meaningful runway to get to those next milestones," he said. 

'Our success isn't about throwing money into problems'

The choice between the two funding paths gets to the heart of one of the biggest problems for entrepreneurs this year: access to capital.

When the coronavirus sparked extreme uncertainty over the future of the economy, some VCs pulled back offers or scaled back investments. That coincided with CEOs like Ciabarra looking to safeguard their own businesses by raising capital to mitigate the global economic turmoil.

And he had the added challenge of scaling up to meet what Ciabarra describes as immense demand for Quantum Metric's product. The company's technology essentially pinpoints important metrics around customer satisfaction and then helps developers to build products around those findings. It works with corporations like Lululemon, Alaska Airlines, Neiman Marcus, and 3M. 

In the case of mattress company Purple, for example, Quantum Metric helped analyze site performance to uncover that its seat cushions — which was a small piece of the business previously — were selling extremely well. That led Purple to put more promotional dollars behind that product and helped close the gap as sales fell in other areas.

Overall, Quantum Metric has raised $50 million in capital — an amount that is likely far less than many other startups that also tout the "unicorn" title. Instead, Ciabarra says it's the startup's "efficient growth" that is now attracting so much investor interest.

"Some companies may choose to raise money to acquire a customer, acquire revenue, acquire products," he said. "Our success isn't about throwing money into problems."

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