A New Tool Founders Can Use to Finance Growth

I first heard about customer value financing a few weeks ago when I read a blog post by David Cummings, a successful Atlanta-based entrepreneur and investor. The concept intrigued me. The idea, as I understand it, is to finance growth of a company by providing a loan to fund the cost of acquiring new customers. Think sales, marketing, and other costs incurred to convert people into paying customers. The expenses of acquiring customers are paid upfront, and recouping those costs (and eventually making a profit) from revenue from customers can take time. This creates a drain on cash flow and can hamper growth if capital isn’t available.

Customer value financing sounded great in principle, but I wanted to see it in practice. This week, General Catalyst and Lemonade Inc. announced a $150 million customer value financing deal. This caught my attention because Lemonade is publicly traded, so more details of this deal and the outcome will be available than if it were private. I figured this would be a great opportunity to understand customer value financing.

Lemonade filed its form 8K with SEC with high-level deal details. It also published a blog post outlining the deal rationale and shared metrics and projections to support the rationale. This is great information for better understanding this deal and how it adds value to the company. David, who understands customer value financing, published a great blog post today with his thoughts on this deal. I’ll defer to his post to interpret the above-mentioned posts.

Lemonade’s total 2022 revenue was $256 million, making it a late-stage start-up that happens to be public. For the last decade or so, most companies at this stage in their life cycle have been private, so details about them (including growth strategies) were closely guarded secrets. For those interested in understanding customer value financing, I think this deal is an opportunity to understand and track the outcome of a new (to me at least) growth strategy available to entrepreneurs.