Happy Sunday, friends. Our longtime readers will know that I can be a bit of a Chicken Little. For example, when big, splashy startups hit the scene a couple of years ago and called themselves RBF, I asked whether their tech-first/underwriting-second approach to the market would lead to higher more losses than their investors would tolerate. And if so, would those loss rates have a negative impact on the perception of RBF and alternative capital among LPs and other allocators. I think the jury is still out on that.

I also wondered if structures like MCA that disguise themselves as RBF would tarnish RBF’s reputation among entrepreneurs because eventually founders would realize that a 12-month payback cycle is a very tight timeframe within which to deploy capital and generate a return. I think that is actually happening now, as entrepreneurs are confused about the difference between MCA and RBF, and that is not good for us. And, now it seems regulators don’t understand the subtleties between these structures, as several states are enacting guidelines targeting MCA, but that impact us. So the MCA-as-RBF confusion has definitely had an effect on our market, and it is now inviting regulation. 

Enter summer 2022. Runaway inflation, likely recession, capital market contraction, etc., etc., etc. And this week, one of the darlings of the ecommerce RBF space (though it’s more like MCA, as you know), ClearCo, announced it laid off a quarter of its staff. This is big news. ClearCo is funded by SoftBank and some of the premier VCs on the planet, and they are now shifting from growth-at-all costs to batten-down-the-hatches, risk-mitigating sustainability. 

Will we see belt-tightening by other firms focused on funding B2C and DTC ecommerce in coming months? Yes, and I think that’s going to have a chilling effect on startup growth especially in emerging markets like LatAm and India where RBF and RBF-like funders have exploded in the past couple years. 

But it isn’t just B2C, DTC, ecommerce or emerging markets. Broadly, the appetite for risk even by the most aggressive alternative capital funders out there is coming down.  QED investor Matt Burton, shared in a recent PitchBook article about his portfolio company Capchase that, "The number of loan applications has gone way up, but the risks are higher in this rising rate environment, so approval rates have decreased." That’s telling. It’s the first public acknowledgement I’ve seen that even aggressive B2B alternative funding sources are tightening their belts. 

It begs the question: is there more risk in the average portfolio now? Yes. Even sticky B2B subscription products are not immune to a broad slowdown in corporate spending. And, at the end of the day, how a portfolio of RBF or alternative capital loans fares will depend upon how well CEOs respond to the curveballs the market throws at them, and that’s pretty unpredictable. We just haven't seen this yet.

And that begs another question. If there is just more systemic risk, which implies higher loss rates, will the RBF space lose its luster as a result (back to my original question here)? I’d say that it depends on you. See, the good companies still need capital. And if you can effectively underwrite those companies and assess the new risks, now is a great time to be funding them. But your underwriting better be sound. And your stomach better be strong. The market is going to throw curveballs at you and your portfolio for a while. 

That’s a pretty glass-half-full readout, right?