This morning Airbase, a startup that sells spend and budgeting software for companies, announced a $23.5 million extension to its Series A. TechCrunch covered the company's first Series A tranche last year when it put together a $7 million round. The firm has now raised a hair under $31 million, including a founder-supplied $300,000 initial investment. Bain Capital Ventures led the company's A extension.
Why did the startup raise an A extension instead of a full Series B? Airbase CEO Thejo Kote told TechCrunch that he considers his firm "a Series A company" instead of a Series B firm because of where it is "in the lifecycle of building [its] business." Answering the same question, Bain Capital Ventures' Ajay Agarwal, who led the round, told this publication that in light of how Seed has changed in recent years, the company's Series A tranche 1 could be viewed as a Seed round itself. That would make this Series A extension more akin to the company's A.
Either way, Airbase's valuation went up sharply in the round, rising around 3x according to the CEO.
How did Airbase manage to put together a fun, if slightly atypical Series A, less than a year after its original Series investment? By growing like heck. According to Kote, Airbase expanded its annual recurring revenue (ARR) 4x in 2019 and is shooting for the same result this year. From a far-larger revenue base, it's a big goal. (Presuming that the company was at $1 million ARR or so when it kicked 2019 off, it would have landed at $4 million ARR before this round; another 4x would put it at $16 million ARR at the end of 2020. The more early-2019 ARR you guess Airbase might have had, the larger its 2020 goal becomes).
But not everything -- sadly -- is numerical. Let's talk about product, competition, and market selection.
Spending, budget, and interchange
Airbase helps companies spend money and track that spend. On the money out side of things, Airbase has virtual cards, regular corporate cards, and a method for paying bills. On the tracking side, Airbase has spend reporting and controls to help limit cash outflows. The company wants to make how a business buys goods and services easier to control and manage.
Given that there are a few companies out there which buy things, it's a big market. And one that is being served, at least in party by Utah's Divvy, which offers a similar set of tooling. I asked Kote about the competitor, and how he thinks Airbase is different. His answer was notable, and brought the two companies target markets and methods of revenue generation into the mix.
Regarding markets, Kote thinks that Divvy is targeting smaller companies while Airbase is going after mid-market firms (companies with over 100 employees). Turning to revenue, Divvy's main product is completely free (the company did recently add Divvy Capital to its product roll and will expand its services over time, it told TechCrunch in a call) and Airbase's isn't. Airbase offers a free tier, but for larger companies that spend more, it charges a SaaS fee for its software.
How is Divvy free and how does Airbase offer a free tier? Interchange, which is something that we've discussed at length in recent weeks. Interchange lets companies that issue cards collect a percentage (small, single-digit, and usually measured in bips) of transactions that go through its payment infrastructure. This is the vast majority of Divvy's revenue today; charging nothing has allowed it to quickly add customers and post impressive growth (more here). Airbase, going after larger customers, will have two revenue streams: generating incomes from interchange as well as software fees.
I might say that this method of charging a price could slow Airbase's logo (customer) growth, but given how much it expanded revenue in 2019 I'd sound absurd.
In a conversation with TechCrunch, Kote broke down how he sees the two companies' approaches and markets standing in contrast:
Time will tell if this is a good contrarian approach or a bad contrarian approach. [But] our approach is to be primarily think of ourselves as a software company. We charge for the software that we provide. And I think that also reflects in the kind of companies we go after. I think Divvy and Airbase goes after different parts of the market. I think Divvy's a little more focused on the smaller end of the market. I don't have any internal data, maybe you do, but I'm pretty sure the majority of their companies would be less than 50, or maybe even less than 100 employees. And the majority of our customers are more than 100 employees. We truly go after mid market companies because the problem we solve, and the depth we solve it with, is more aligned with that kind of group of companies.
Going against free for a more expensive product is interesting and fun for us on the outside—it sets up a bit of competition. Divvy will, I presume, add more and more tooling to its product and try to attract bigger customers (larger clients means more spend and more interchange revenue). And Airbase, with its free tier, is still in the market for smaller companies. There is room for both to survive, but I'd hazard they'll tangle in the next few years.
Certainly Airbase's investors are bullish on its choices. During a call with TechCrunch, Bain's Agarwal said that startup has a "killer product solution," and "beautiful software." Asked why he made the decision to put money into Airbase so quickly after its preceding round, Agarwal said that, apart from its business momentum and belief in Kote, the startup's problem and market size, in addition to current customer reviews, were catalysts. That's high praise.
Airbase now has lots of new capital and a big growth goal for the year. Let's see if they can reach it.