The 3-10-50 funding model for Product-As-A-Service

Funding is a critical enabler of Product-As-A-Service, allowing for a scalable business model. 

As your As-a-Service business takes off, it’s important to keep up with the changing times and adapt your funding strategy accordingly. That’s where our “3-10-50 funding” model comes in—it’s the ultimate guide to navigating the funding journey for As-a-Service. 

This model is designed to help you find the perfect solution as you move up the ladder and generate more As-A-Service revenue each year. So whether you’re just starting out or you’re a seasoned pro, our 3-10-50 model will help you stay ahead of the game and keep your business thriving.

Depending on the As-A-Service yearly business volume generated (here we take into account the yearly net production funded (i.e. the Annual Recurring Revenue of your contracts: value of recurring revenues from the subscription contracts signed for a calendar year), there are 4 main funding milestones:

• $0 – 3M = Start with your own funds 

• $3M- 10M: Single funder strategy

• $10M – 50M: Multi-funder strategy

• $50M+ = Own captive  

Download the Secrets of Physical Product-As-A-Service whitepaper 

$0 – 3M = Start with your own funds 

This means that your organization uses its own funds to finance the assets used by your customers. This is a first step to test the market, allocating a maximum envelope and starting building a portfolio and co-build the product with your core customers. 

The objective is to establish a suitable envelope that accommodates both your acceptance of cash investments and the risk of customer insolvency. This is doable at first, however as your As-A-Service business grows it will limit you as you can’t have your balance-sheet full of your customers assets on a mid to long term basis. 

If you want to address a wider end-customer base, diversify your funding sources, and reduce the risks of exposure, you will need to find external sources of funding. This “ownbooked” portfolio may serve as a solid foundation for initiating discussions with potential external funding partners, and may be offered for sale to such partners initially.

$3M – 10M: Single funder strategy 

Now that your model has reached some level of materiality and you start being comfortable with the associated unit economics, the next logical step is to scale your funding model. By selecting an asset financing pathway and securing an external funding resource, you can effectively unburden your balance sheet and enhance your working capital. 

This is a crucial step towards expanding your business model without compromising your company’s metrics and financial ratios. This step involves selecting the right funding partner and establishing partnership with them. 

Asset financing, a long-standing practice employed by Equipment & Vendor Financing entities (referred to as Funders), particularly in the realm of IT assets, can be replicated for various equipment types and tailored to suit the unique requirements of the As-A-Service business model.

The most commonly seen funding schemes proposed by the equipment funding industry are the Sales & Lease back, the Operating lease, the assignment of Receivables, the sub contracting. 

The primary focus of funding lies in evaluating the precise requirements of a vendor/customer, while concurrently comprehending the various forms of funding that are accessible. 

It is imperative to direct efforts towards identifying the most appropriate funder and establishing a durable relationship that is founded not only on the legal obligations of both parties but also on trust. A shared comprehension of expectations at every phase of the funding procedure is of utmost importance for the effective execution of a scaled As-A-Service proposition.

A funder mapping analysis should be conducted to select the most relevant funder. Some points to consider for your selection include approval process performance, geography, contract type available, pricing, legal support etc. 

When you have identified the most appropriate funder, a funding communication pack should be carefully prepared. The objective of such a pack is to provide reassurance to the funder and to demonstrate that the potential performance risk of working with you is minimal and that large As-A-Service business volumes are likely to happen. 

Then, you will need to sign a vendor program/cooperation agreement with your selected funder. A thorough analysis and review of their clauses by experts is recommended at this stage as these agreements will govern the relationship in the long term. 

$10M – 50M: Multi-funder strategy 

When the total value of current deals becomes significant, it becomes necessary to diversify funding sources to avoid relying on a single entity. This diversification provides more flexibility in allocating deals and reduces interdependent relationships.

A multi-funder approach allows a company to implement an asset financing program that offers a wider range of coverage across different types of funding and financial institutions. This approach prevents companies from being solely dependent on the risk tolerance of a single financial institution or their large corporate customers.

However, it is not advisable to onboard numerous partners with insufficient business volume. If the available resources are limited, it becomes impossible to satisfy all partners or none of them when distributing the resources.

$50M+ = Own captive

Creating a captive is the ultimate step in your As-A-Service funding strategy. It consists in creating your own financing entity and acting as a complete one-stop shop for your customers. When opting for such a strategy, here are some points to define: 

• The type of captive finance scheme according to your strategy 
• The strategy of the captive in terms of circularity compliance
• The geographical coverage
• The margin sharing between the organization and the captive
• The business plan for the captive investors with profitability scenarios 
• The strategy on portfolio refinancing, with the investors’ funds at first and adding external portfolio funding

The complete playbook to launching your own Product-As-A-Service solution

Despite the fact that the As-A-Service literature is quite vast, executives from the “physical product world” are often left behind due to the lack of concrete guides on deploying Product-As-A-Service models. The vast majority of literature falls short when it comes to explaining what to do from a funding, finance, and accounting standpoint.

The Secrets of Physical Product-As-A-Service whitepaper will offer you the essential advice for effectively building your own solution and the strategies employed by industry leaders.