Disclaimer All research on startup and the whole investment memo has been done for personal use of Akim Arhipov.
Debt marketplace, enabling startups to borrow against founders’ projected personal income.
Addressable Global Market:
As things stand, there are quite limited ways how startup can get funding.
- On one side of the table we can see VC funds, with high demands and expectations. They are very involved in the global success of the investment + they take equity.
- On the other side, there a banks and/or revenue based financing, which set quite high % interest and need to have hard data for their scoring model before making a decision. Generally speaking very high entry lvl.
Scramble - loans based on persona, founder/s in our case. Scrambles scoring model is based on the founder/s future income. Credits, at this stage, go up to $100k per founder, and are being paid out in parts. The pool of funds is a mix of institutional funding (85%) and private funding (15%). Making this model scalable and more attractive for the private investors.
Scramble intentionally stayed below radar in Tallinn, piloted on friendly Moscow-based startups, maintained a very small team (14 total, 6 full-time) and low burn rate (€20-25K). Clear signals of the fit (startup profile - product offering - acquisition channel - debt funds) emerged only in Nov-Dec 2021. We discussed results with a few investors and concluded that it's best to grow metrics for 2-4 more months before raising Seed round to scale. Scramble still has 9 months of cash runway for that. However, to keep growing we needed more money to lend, so we decided to do an extension debt round.
Scramble designed a simple 6% interest loan, with an extra 9% success fee that is only paid by startup when loan principal is repaid by the business. If business fails, founders as individuals have 5 years to pay back 6% interest loan.
- Scramble solution uses 2-component mix of funds: 85% of cheap, low risk institutional funds; 15% of "first loss" funds of retail investors.
- Every month we originate a batch of startup loans. All repayments from startups first go to institutional investors; only after they are paid, retail investors get their money. Institutional investors get 12% flat return even if 100% of startups fail.
- Retail investors make up to 30% return if all startups survive, and lose money if more than 50% of startups and more than 30% of individual founders default on their obligations. So retail investors act as a "protective buffer" for scalable institutional capital.
Instagram urban lifestyle businesses. Think of it this way: almost every offline product you use daily while living in a major city - consumer brands, grocery shops, restaurants, hotels, etc. - was likely designed and built prior to early 2010s or even before that. This was before several things happened:
- Gen Z and Millennials became mainstream customers, bringing focus on sustainability (zero waste, eco-friendly, vegan, etc.), niche personalisation and customisation (personalised fit, non-mass production, craft manufacturing, artisans, etc.), extreme online + offline convenience, and adding brand and emotional appeal to traditionally utilitarian categories ("not just antibacterial soap, but soap with personalised herbs components")
- Instagram became major platform enabling extremely quick development of a bold, highly interactive online brand with almost no MKT budget
- White-collar employees got tired with exhausting corporate grind and increasingly moved to start new type of innovative startups - non venture funded, but also not classic mom & pop family business
People talk a lot about how online platforms (Amazon, Netflix, etc.) are killing offline businesses. People talk less how old-school, mass-production Procter & Gamble, Walmart, Hilton, Starbucks are being disrupted and supplemented by a swarm of small innovative non-VC businesses with niche products but super loyal audiences. Think craft beer, corner hipster cafes, thematic hostels, organic cooking oil produced by manual pressing, etc., etc. All these guys need replacement for old-school bank business loans to fund working and expansion capital.
- Paid Ads
- Investing bloggers
- Direct sales
LTV of a startup: €275k
*There is also a separate logic how Scramble is onboarding private investors, document of which can be shared upon the request.
For retail investors:
- Scramble is making good margins only with bigger amounts amounts, retention is the key;
- Currently they are giving out up to €100k per team with 100% responsibility per founder in the founding team;
- Scoring model is only around the founder, Scramble does not apply scoring model to business at this stage.
Once the lead is taken into sales pipeline, Scramble, as a background check, focuses on:
- Tracking engagements - to get basic understanding of the instagram shops engagement how well is the shop;
- Collaboration between brands within instagram, practice shows, brands follow each other only if there is a legit interest to collaborate.
Security for investors:
- Scramble gathers startup in batches, always keeping 5% of the loaned amount as a security;
- Mostly there are more than 1 founder in the startups, hence, joint responsibility, capping €100k per person up to €200k per company in case of 2 founders;
- 85% of the total loan amounts are funded by own, institutional money, only the remaining 15% comes from Scramble marketplace;
- This mix of institutional money and partly private money - makes the model scalable.
In Development + Future:
- Polish the existing model;
- Implement scoring model for business in order to lower the liability for the founder for the loan taken;
- Obtain needed licensing in order to ease the process of peer to business financing.
Operations from here on
Simply scaling the model, below is a projection, assuming 30% of the startups fail.
Launched in: 2021
Key Metrics: Retention of the onboarded startup
Number of users: 2 startups currently + 100 startups from London is the next goal about 10m€ in 12-15 month
Paying customers: 2
Key things that happened between Sep-21 and Jan-22:
- deployed €7K loans in Q3-21, €65K in Q4-21, on track to €100K in Q1-22;
- narrowed target customer profile: Instagram urban lifestyle startups (including modern niche retail & e-commerce, consumer products, food);
- built new financial mechanics, including all underlying legal paperwork and establishment of the UK-based wholesale lending company. We now use 2-component source of funds (senior A loans, subordinated B loans), whereby 85% of funds for loans come from wholesale debt partners and 15% of "first loss capital" from retail investors on Scramble online marketplace. Crucially, this mix enables low loan interest rate for startups while giving high risk protection to institutional debt providers;
- identified startup pre-approval and acquisition approach: parsing of Instagram business accounts with validation via founder's LinkedIn accounts;
- identified retail investors acquisition via online channel (paid ads on Instagram, affiliate MKT with influencers and financial bloggers);
- identified that startups don't have CFOs, founders can't handle finance and legal work themselves, and established process of helping our customers end-to-end;
- built Instagram-centric brand activities - regular stories, posts, Instagram posts boosting and paid ads. Content created jointly with startups that we fund;
- got trademark Scramble registered in the EU and UK (despite presence of registered TM Scramble by Mattel, producer of game Scrabble, Barbie dolls, etc.). Among other things, this allows us to introduce Scramble mobile app in AppStore later;
- introduced joint surety by multiple co-founders of a startup. This allows startups with 2+ co-founders to borrow more against joint obligation to repay from all co-founders;
- got confirmation from the leading UK law firm Taylor Wessing than we can lend to UK startups from an Estonian platform without FCA license;
- process of moving to a UK parent company is underway. New company Scramble Limited will be the new parent of Scramble, with Estonian company Scramble OU remaining our operational entity. This helps with fundraising, access to debt capital markets, and customer branding;
- brought two critical full-time team members: online growth manager Ketteri and engineering lead Vasily. Ketteri is our first Russian-non-speaker, so the whole team learns to operate using English as primary language). Got a high-profile Product & Technology advisor Sergei Anikin - CTO of Pipedrive for last 9 years, ex Skype, ex Swedbank, 20+ years of experience.
Traction on the startups:
Traction on the retail investors:
Investments so far
Amount: 698,696 €
Investors so far:
- Sergey Anuryev
- Grigory Rubin
- Alexey Pisartsov
- Irina Kurmakayeva
- Mike Sandler
- Dani Sandler
- Vitaly Bedarev
- Evgeny Loginov
- Dawoon Kang & Jack Smith
- Taavet & Sten
- FJ Labs
- Quiet Ventures
Amount raised until today:
*More detailed Cap table can be seen upon the request
Highlight to the founder: Kamil Kurmakayev
Country: UK / Raised: 60,7m USD to date Product: Crowdcube enables individuals to invest in small companies in return for equity or an annual return. Customers: Undisclosed Growth: Undisclosed
Country: IE Raised: 336m USD to date Product: Wayflyer is a revenue-based financing platform for e-commerce brands.Customers: Undisclosed Growth: Undisclosed
Country: UK Raised: 118m USD to date / Product: Uncapped is a provider of revenue-based financing that enables founders to raise growth capital without interest or equity. Customers: Undisclosed Growth: Undisclosed
In addition, from Founders:
The biggest insight on product terms is almost trivial. Most important thing for a loan is that it is easy to get, has meaningful size, and is inexpensive. Price in particular is very important in case business fails and it's a personal obligation. So we designed a simple 6% interest loan, with an extra 9% success fee that is only paid by startup when loan principal is repaid by the business. If business fails, founders as individuals have 5 years to pay back 6% interest loan.
It's not obvious how to provide cheap loans to risky startups. Scramble solution uses 2-component mix of funds: 85% of cheap, low risk institutional funds; 15% of "first loss" funds of retail investors. Every month we originate a batch of startup loans. All repayments from startups first go to institutional investors; only after they are paid, retail investors get their money. Institutional investors get 12% flat return even if 100% of startups fail. Retail investors make up to 30% return if all startups survive, and lose money if more than 50% of startups and more than 30% of individual founders default on their obligations. So retail investors act as a "protective buffer" for scalable institutional capital.
General Ask: € 1m new cash-in via convertible note, 20% discount to Seed round valuation, €12M pre-money valuation cap
*For Taavet & Sten commitment: €150K, 10% annual interest rate working capital debt facility that was already provided in Spring 2021, to be converted at this funding round
Investment instrument: convertible note, 12% annual interest, 20% discount, €12M pre-money cap
Valuation cap: 12 000 000 €
Valuation floor: 5 000 000 €
Interest rate: 12% common
Maturity date: 22.02.2023
Round closing deadline: commitments finalised 01 Mar 2023 / money transfers finalised 15 Mar 2022
General Cap Table: Assuming fully diluted Pre-seed notes (2021, €5M valuation cap) and Seed #1 (this round, €12M valuation cap) at valuation cap:
Early team: 4.6%
Unallocated ESOP: 5%
Runway: Until Sep 2022 with cash that is already in the company (€450K at start of Jan); up to 24 months with new cash-in
Funds allocation: Core team, bank and legal fees: €40-50K per month
- Sales & MKT, including content (both for startups and retail investors): growing from €5K to €25K per month
- Working capital for Mar to Jul 2022 (5 months): growing from €75K per month to €230K per month, total €700K. This money to be refinanced with external debt facility as part of second closing of Seed round
Burn Rate: From Jul 2021 to Jan 2022: €25K average OpEx burn rate (excluding working capital)
- From Jul 2021 to Jan 2022: €25K average OpEx burn rate (excluding working capital)
- From Feb 2022: growing from €40K to €75K over 3-4 months (excluding working capital)
Pitch Deck is HERE