The fintech sector is facing a wildly different world in 2023 than it did in 2021. Capital is scarce and valuation multiples have plummeted as the broader tech market pulled back, and fintech startups everywhere are struggling to raise money. So when Canopy Servicing, a fintech startup building software to facilitate loan servicing, reached out with news that it had raised fresh capital, we couldn’t resist taking a deeper look.
The company recently raised a $15.2 million Series A1 round, TechCrunch has exclusively learned. Canopy last raised funding in August 2021, and at the time, it had reported fast customer growth during a hot moment for fintech products and startups alike.
We were curious how Canopy was able to raise another tranche of capital in this climate, so we caught up with the company’s CEO, Matt Bivons, to find out how things are going. We also talked about why the company is raising a Series A1 instead of the Series B we had expected it to secure next.
Beating the drought
There’s a straightforward reason Canopy has been able to secure more capital despite raising funds during what might have been the hottest year in fintech: its performance. Bivons said the company has gross margins above 80%, is closer to 200% net revenue retention than 150%, and will process more than $1 billion this year with its software. More importantly, Canopy expects to increase its annual recurring revenue by 2.5x to 3x this year. That’s precisely the sort of top-line expansion that venture investors like to put their dollars behind.
But why raise a Series A1 instead of a Series B? According to Bivons, the company was simply not ready to take the latter path — the A1 round will allow it to scale its annual recurring revenue to the $10 million mark in the next 15 months, he said, noting that the startup would then be in a much stronger position to choose the partners that it wants. That makes sense because larger rounds at lower valuations cause more dilution.
Canopy’s existing investors picked up what Bivons called their “super pro-rata” in the Series A1 round, which was co-led by Foundation and Infinity Ventures. Canopy previously raised from Canaan and Homebrew, among others.
Still, despite existing investor demand, quick growth and solid economics, Canopy took a valuation haircut. Per the CEO, Canopy’s Series A, worth $15 million, was raised at a $48 million pre-money and a $63 million post-money valuation. The A1, in contrast, was raised at a $35 million pre-money and a $50.2 million post-money valuation. Bivons added in an email that his company doesn’t normally share those figures publicly since valuations rise and fall with the market.
You can see why prior investors in Canopy wanted to buy more. They got a discount in a company that they had already bet on — one that had performed well since they last invested. Why not double down?
A good representation of the startup ethos
I presume that loan servicing is not something that you spend a lot of time thinking about. I most certainly do not. However, that doesn’t mean that loan servicing doesn’t matter (it does) or that it could not benefit from a slug of technology to help bring the process into the modern era.
What is loan servicing? Per Bivons, his company’s core thesis is that “every company eventually gets into lending,” which always “starts at [loan] servicing.” Servicing infrastructure, the CEO explained, is what happens after a person or company gets approved for a credit card, a term loan or even a “merchant cash advance product.” From the moment a person or company becomes an active loan customer, the Canopy system handles all the rules and policies that govern that product all the way until the person charges off or closes their account, he said.
Given the variety of loans that are possible, you can imagine the wide variety of terms they could carry and the number of potential accounts and activities one would need to track. There’s a good amount of complexity that Canopy wants to own for its customers. In a sense, Canopy is a good representation of that ur-tech-startup idea: Find a complex and inefficient part of the world and fix it with software.
The difference between this company, which targets enterprise-scale businesses with multiple loan types on offer, and other startups that have pursued similar methods is that Canopy has long sales cycles. It is also not pursuing a bottom-up approach to growth like we often see with software companies that charge on a per-seat basis and look to land a few customers before selling to an entire team or division.
So while it may take Canopy longer to close a new customer, its business model makes that work rather lucrative. Per Bivons, Canopy charges a minimum platform fee and then collects a variable fee on top of that price, which is calculated as “bips on AUM.” In English, that means Canopy charges a few basis points — hundredths of a percentage — on the total loan value that it is managing for its customer.
Hence the longer sales cycles: Canopy wants big customers that are grappling with significant loan volume and a lot of complexity, because that is where it can provide the most value. Loan servicing grows in complexity as the lender manages more loan types, customer profiles, terms, and the like, and a larger, complex loan book means Canopy can collect more revenue.
Bivons also walked us through some of the product work that Canopy has done since we last spoke. It has built a new service that lets customers create new products and simulate their performance to get an idea of what they should expect on release, and how a product may perform with different terms. There’s also a preview feature that lets you see what might happen to your loan book if customers change their behavior (e.g., their default rate picks up). With more capital aboard, Canopy can afford to keep building.
This Series A1 is proof that fintech companies that raised in 2021 can indeed raise more capital. It just might require impressive results and a valuation haircut.
All that fintech investment had a real impact on banking penetration in Latin America
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