Happy Sunday, friends, and happy new year too! Like many of you, I spent a little time reflecting on 2022, and on how 2023 is likely to shape up for the alternative capital and RBFN community. I wanted to share a couple thoughts that keep rattling around in my brain. 

More lookalike short-term products
2022 saw several (dozens?!) of new alternative capital providers bringing look-alike debt products to market. Here’s my question: do we really need yet another factoring/MCA product disguised as founder-friendly revenue-based financing capital? I’m not so sure. Entrepreneurs figured out in 2022 that those products are not as great as advertised. I think adding another short-term ARR-acceleration product to the market is just a me-too move at this point, yet I see announcements about more coming to market every week, especially in the markets everyone wants to target (SaaS, etc.). And I’ll be honest – I think those 12 month ARR-accelerator products suck. They’re great cash generators for the lender, but they’re not actually great for the borrower…because they’re such great cash generators for the lender. 

Still, we’ll see more of those companies come to market in 2023. I think they will struggle though, as all of the marketing in the world (which is how the VC-backed lenders launched) will no longer mask the extractive nature of their products. A large cohort of entrepreneurs have now experienced the downsides of those short-term products, and they are sharing their experiences with fellow founders. Their voices will drown out the advertising. So while we’ll see more market entrants, we’ll see interest in those short-term products decrease in 2023. That will be trouble for the lenders launching or coming out of stealth in 2023.

Performance will matter, and 2023 will sort out good lenders from not-so-good lenders
Look, everyone thinks they’re good at underwriting. And some actually are. 2023 is going to tell us which of the alternative capital providers out there do have solid underwriting. Gone are the days of government stimulus and abundant VC money to offset losses and mask performance issues. Also gone are the days of PPP and EIDL masking borrower issues like burn and cash efficiency. We are arriving at a recession, and even the stickiest B2B companies will see slowed growth, and likely increased churn. That’s a tough combination, and it will favor what I’ve always thought of as the “real” businesses. The ones who don’t have to depend on outside capital to survive and thrive. The ones who can flip a switch and get to breakeven. 

I think 2023 will see portfolios crack, and I think we’ll see a few lender failures as a result. Which ones will fail? That’s tough to say, but the growth-at-all costs platforms out there are the most likely suspects, along with smaller capital providers who don’t have enough scale to absorb losses. 2023 will probably be a rough ride for everyone, so buckle up.

Still, our opportunities will increase because good companies will skate to the puck
As VC funding dries up and banks continue to take less risk, the companies that can flip the switches to get to breakeven and sustainability (and the ones who eschewed VC funding all along) will be looking for new growth opportunities, and for new growth capital. In this time, solid fundamentals are the new sexy. In this moment, having a sustainable business with predictable unit economics will be everyone’s goal. Isn’t that what RBF and alternative capital providers have been looking for all along?

Just think: A company with solid fundamentals and a growth opportunity in a recessionary environment (where valuations are taking a healthy beating) will be looking for capital that they may not have been looking for before. That means alternative capital formats like RBF and others are in a good spot to help. 

Those companies are going to skate to our puck, i.e., they’ll bring their solid fundamentals to growth capital providers who can move quickly to help them because that’s the kind of company most of us look for all day long. So while 2023 is going to be rough in terms of portfolio performance, I think it will bring a wave of new opportunity as entrepreneurs batten down the hatches and tighten up their management.

Where will the next wave of innovation come from?
Now, if we see more copycat products, more portfolio losses, and more demand in our market, the question I am most interested in at the moment is: what is the next innovation that moves the alternative capital market forward, and where will it come from? We’ve seen quick term sheets, digital underwriting, adaptation of existing loan formats to new markets, and more in the past couple years. What will be the next big thing in our market in 2023? I have a couple ideas on that point, but I’m not sure yet. What do you think? Seriously, hit reply and tell me what you think.