Almost all app developers face a common financial challenge: Keeping cash flowing during the time between launch of a new app and payout of revenue by the app stores and platform holders.
This period of time is referred to in the app economy as the “funding gap.” It’s common in many different industries, especially among manufacturers that have to shell out capital to pay for raw materials but don’t receive revenue from customers for weeks or even months sometimes.
The funding gap can be especially challenging for app developers due to the length of time that can transpire between launch and revenue — typically from 30 to 67 days. This is usually the “make or break” time during the app launch cycle when developers need to be pouring every cent they have into paid user acquisition (PUA) to generate more installs.
Without a plan to plug the funding gap, even the most successful and well-funded app developers can run into financial problems fast. So what are some potential solutions to this problem?
Equity Financing: Lots of DrawbacksThe first solution that developers usually think of is to raise more equity financing. After all, there’s no financial problem that another round of equity funding won’t solve, right?
Not so fast. There are several big drawbacks to equity funding that developers often sweep under the rug in their quest to get the cash they need to successfully make it through the app launch cycle.
The first is simply cost. Equity is usually the most expensive capital a startup business will acquire. This is true in any industry, by the way, not just app development. When you sell equity in your company, you are diluting ownership in the business — sometimes significantly. While the money isn’t coming out of your pocket right now, it will later.
Worse yet, you have no way of knowing right now exactly how much money equity financing will cost you because you don’t know what the future value of these ownership shares will be. Also, venture capitalists usually don’t like for their money to go toward funding advertising because it’s not a smart way to deploy their capital. Instead, they want to see you invest in creating product, building team and adding value – not locking up their money in financing marketing spend.
Debt: Costly If You Can Get ItIf not equity, the next financing solution most developers think of is debt. This can be in the form of credit cards or a small business loan from a bank.
Using credit cards to plug the funding gap is a pretty simple solution. If you have good credit, you can easily receive one or more personal credit cards and quickly build up a total credit limit of $5,000 to $10,000 or more. But credit cards typically carry double-digit interest rates that can gobble up your profits fast. Also, you can easily spend several thousand dollars a day on cost-per-install ads and thus hit your credit limits quickly.
As for a small business loan, the days of startup companies receiving unsecured bank loans are long gone. Banks simply aren’t interested in loaning money to startup app developers unless they can pledge significant personal assets as collateral — typically, a primary residence. You should think long and hard before agreeing to pledge your home as collateral for a bank loan.
Revenue Recycling: A Better SolutionFortunately, there is another financing solution that many app developers are now using to plug the funding gap and grow their app revenue during the app launch cycle. This solution takes advantage of a financing concept referred to as “revenue recycling.” Here’s how it works:
A specialist app finance company can advance the amount of outstanding receivables you are owed from app stores or platform holders directly to the advertising network of your choice (less a small financing margin, typically 3%). In essence, you are reinvesting revenue you’ve already earned (but haven’t yet received) from the sale of apps and in-app purchases directly into paid advertising campaigns to reach and acquire new users.
In this scenario, the app or game is funding its own user growth. As a result, you don’t have to spend your own money — or a venture capitalist’s or bank’s money — to grow your user numbers. You can control your UA spend using a dashboard to monitor and add credit to advertising network accounts on a daily basis based on their accrued app store sales.
It Comes Down to FinancingHere’s something important to keep in mind: If your app’s or game’s metrics are any good and you can acquire users profitably (LTV > CPI), then it just becomes a financing issue — or in other words, how quickly can you get paid? For example if you can acquire users for a $1.00 CPI and have a 30-day LTV of $1.50, why would you raise VC money for such a short payback period if a non-dilutive and cheaper option was available?
One app developer utilized this strategy to achieve a 300% increase in DAU and grow their revenue 5 times in a six month period. The developer recycled their weekly revenues into paid user acquisition campaigns combining Facebook, Google Universal App Campaigns, and video install ads.
The developer drew down cash against their app store receivables every seven days and was able to quickly increase their reinvestment. In addition, they closely monitored their user acquisition and monetization metrics and increased marketing spend dramatically each time they released a new update.
By the way, you can use the same concept to accelerate collection of your outstanding receivables in order to cover overhead and keep the business’ doors open. Or you can use a blend of the two concepts as needed, given the stage of your business in the development cycle.
Here, the app finance company will advance you a percentage of your outstanding receivables from app stores — typically 95 percent — every seven days. This can be a good financing solution if you need working capital to meet payroll and cover overhead expenses like rent, utilities and the like.
A New Twist on Receivables FinancingRevenue recycling puts a new fintech twist on a common type of business financing that has been around for a long time: receivables financing.
By accelerating receipt of outstanding receivables to plug the cash flow gap that all app developers face, you can grow your business effectively in the fast-moving app economy. Revenue recycling unlocks a reliable stream of revenue — so you can spend your time ensuring that your app title is a success or working on your next big hit … instead of worrying about financing.
The bottom line: Taking advantage of the financing concept of revenue recycling is the best way to improve capital efficiency and finance a cycle of growth — without diluting equity or relying on credit.
Martin Macmillan is the CEO of Pollen VC, a FinTech company that uses the concept of revenue recycling to provide receivables financing to app developers globally. To learn more about Pollen VC’s smart financing solution for app developers, visit Pollen VC.