Dan Martell - Alternative Funding Options with BJ @ LighterCapital.com

00:00:00.000 I was talking to a guy who was a super successful entrepreneur

00:00:02.720 from years ago.

00:00:04.280 He'd taken money from VC.

00:00:06.160 And he's like, yeah, yeah, they returned my phone calls

00:00:08.360 because I literally returned them like 400x.

00:00:10.760 I was like, wow, that was such expensive money.

00:00:13.680 I mean, it was like eight years or something like that.

00:00:15.120 But you're like, think about how expensive that money was for you.

00:00:17.400 And he's like, I never thought about it that way.

00:00:19.560 Entrepreneurs, we're trained to think

00:00:22.080 about go and raise that VC money.

00:00:25.000 And it's not bad.

00:00:25.760 In the right situations, I'm not anti-VC.

00:00:29.040 But if you can mix it up and keep smart ownership,

00:00:32.160 it makes a huge difference.

00:00:33.600 Ignition sequence start.

00:00:35.700 3, 2, 1.

00:00:47.040 BJ, how's it going?

00:00:48.180 It's going great.

00:00:48.680 Appreciate you coming on the show.

00:00:49.500 Absolutely.

00:00:49.980 Thanks for having me.

00:00:51.000 I'm pumped to chat.

00:00:51.800 Lighter Capital, essentially helping people

00:00:53.720 raise non-dilutive capital to grow their SaaS companies.

00:00:57.540 Yep.

00:00:59.040 You've been doing it for a while, right?

00:01:00.800 Been doing it for a while.

00:01:02.460 I've been doing it for about seven and a half years.

00:01:04.720 So we started early.

00:01:05.960 What have you learned about the SaaS financing space

00:01:09.720 in the last seven years?

00:01:11.660 How long do we have?

00:01:12.480 Yeah, we've got time.

00:01:13.500 That's what I want to dig into.

00:01:16.220 It has evolved a ton.

00:01:17.760 I mean, frankly, startup financing is always evolving.

00:01:22.000 Today, most companies, when they're starting out,

00:01:24.540 get convertible debt, for example.

00:01:26.380 I was a VC back in the early 2000s.

00:01:28.840 Convertible debt was nowhere to be found in those days, really, that much.

00:01:32.300 A little bit, but not much.

00:01:34.340 Today, I think, overall, what we've seen is the rise of alternatives.

00:01:37.340 And obviously, I'm a little bit biased, because that's where we sit, is alternative financing sources.

00:01:41.740 And that's just nothing but good for founders, right?

00:01:44.340 They have more options, more possibilities, especially with SaaS.

00:01:47.760 And one of the reasons why we really early on started focusing on SaaS is because you can get to revenue pretty quickly,

00:01:52.420 compared to the old days when you had to go raise $5 million and then have a bunch of engineers,

00:01:57.060 and then you'd go and try and sell the product.

00:01:58.520 And oops, it didn't sell.

00:02:01.480 Or you have to go buy all the equipment

00:02:02.940 and everything like that.

00:02:04.920 So these companies become, they get to revenue faster.

00:02:07.380 And therefore, their financing options are much more.

00:02:09.280 They don't have to go and raise that highly dilutive early

00:02:12.700 equity round to go and actually build a business and such.

00:02:17.600 And how many of you funded, 360 companies?

00:02:19.480 We're at about 365 companies we funded

00:02:22.060 with about 630 rounds of financing.

00:02:24.480 Total capital deployed?

00:02:25.680 Total capital deployed is $168 million.

00:02:29.520 And we're doing-

00:02:30.260 It's a whole lot of equity that people

00:02:31.600 didn't have to give up.

00:02:32.440 It's a lot of equity, and especially early equity.

00:02:35.640 We're not replacing a $40 million round.

00:02:38.000 We're replacing a million to $3 million early, early round

00:02:42.300 that you're giving up 25%, 30% for that.

00:02:45.800 That's really what we're replacing.

00:02:47.140 Or we're just complimenting.

00:02:48.340 Like, hey, you're going to raise a million from angels,

00:02:50.360 and you'll get a million from us.

00:02:51.900 And you'll get way farther before you do that true Series A.

00:02:55.260 And what do you guys, you guys are willing to fund

00:02:57.260 a third of their ARR run rate?

00:02:59.780 About a third of their revenue, yeah.

00:03:01.020 It's usually like three to four months worth of MRR.

00:03:03.220 OK, and is there a minimum MRR?

00:03:05.420 Minimum MRR, 15K.

00:03:07.580 We're working on some stuff that might go earlier than that.

00:03:09.960 But as of today, it's minimum 15K.

00:03:12.740 So we cut $50,000 checks.

00:03:15.840 Last week, we did a $50,000 deal.

00:03:17.380 We did a $1.5 million deal.

00:03:18.560 And what's the due diligence involved for that?

00:03:21.560 Yeah, one of the things that makes us a little bit different

00:03:23.640 is we've actually developed software

00:03:25.360 to go and process these deals much more quickly

00:03:28.100 and make it very methodical and very analytical and data

00:03:33.100 driven.

00:03:33.760 So when our customers, and we call them customers,

00:03:37.260 we don't call them portfolio companies,

00:03:39.000 when our customers come in, they apply,

00:03:42.060 they give us much of data, they ultimately just log into,

00:03:44.520 like, their QuickBooks, their banking,

00:03:48.000 all that kind of stuff, all goes into sort of an algorithm.

00:03:50.820 Now, it doesn't mean that we're just cold people.

00:03:54.080 We talked to them on the phone several times.

00:03:55.820 We understand what they need, figure out

00:03:57.400 what's the best structure to work for them,

00:03:59.680 and things like that.

00:04:01.580 And then it ends up being like digital documents

00:04:04.860 and the whole nine yards.

00:04:05.520 So we estimate it takes about 10 hours of total work

00:04:09.300 for a founder.

00:04:09.820 That includes talking to us, uploading stuff,

00:04:12.460 talking to their lawyer.

00:04:13.440 Your 10 hours or your founder's 10 hours?

00:04:14.920 Founder's 10 hours.

00:04:16.740 And talking to their co-founder, talking to their board members,

00:04:20.760 All that stuff is about 10 hours total time spent.

00:04:24.240 So we like to say we cut down the fundraising time

00:04:26.220 by about 90%.

00:04:28.620 It's probably more than that, because it takes more than 100

00:04:30.840 hours to raise an angel round.

00:04:32.280 Yeah, no, that's being generous.

00:04:34.440 It's brutally painful.

00:04:36.200 And was it called revenue-based financing when you started?

00:04:39.700 It was.

00:04:41.220 There was no, there wasn't really like an industry,

00:04:44.120 necessarily.

00:04:44.680 There were a couple people kind of screwing around with it.

00:04:46.020 Because it's kind of like in the factoring,

00:04:46.980 like you're selling, but it's, you know,

00:04:49.260 Is it more like potential getting paid with the subscription?

00:04:52.560 Yeah, it's much longer term.

00:04:54.480 So factoring is more working capital.

00:04:57.080 So like, oh man, I need to go pay my employee today,

00:04:59.420 and I've got a PO or accounts receivable,

00:05:02.580 and I just need to close that 45-day gap or whatever it is.

00:05:05.860 Whereas we're giving companies money typically

00:05:07.620 for three to five years.

00:05:09.080 And so we're like, hey, you're going to go,

00:05:11.100 most common use of our capital, hiring salespeople,

00:05:14.380 doing marketing initiatives, and doing product development.

00:05:17.520 Yeah, so it's all stuff that needs to be longer term capital.

00:05:20.800 They're paying us over time.

00:05:22.180 And ideally, they're growing and they're paying us more later

00:05:24.400 than today so that the payments scale with the business.

00:05:27.840 And how does it work?

00:05:28.500 Is it 8% of revenue or something like that?

00:05:30.580 It varies, but it's typically somewhere

00:05:32.160 between 2% to 8% of revenue.

00:05:34.960 But the whole goal is basically you're going to go and have

00:05:37.380 this money, and you're going to go and make investments

00:05:39.720 in the business that are going to pay off in like six months,

00:05:41.880 a year, 18 months, down the road a ways, right?

00:05:45.280 much like a round of VC does, or angel round.

00:05:48.820 But yeah, it's typically 2% to 8%.

00:05:50.920 Our average customer has about 83% gross margins.

00:05:53.900 So one way of looking at revenue-based financing

00:05:56.680 is to say, OK, let's say it's 5%, just

00:05:59.440 for ease of mental math.

00:06:01.180 Hey, I'm getting, say, $500K, or whatever it is today.

00:06:04.700 But my gross margin is going to go from 83% down

00:06:09.640 to 78% for the next three years or so.

00:06:13.940 Can I deal with that?

00:06:15.040 how much do I need to grow to make that worthwhile?

00:06:17.820 And you don't really need to grow that much

00:06:19.720 to make it worthwhile.

00:06:20.600 If you're going to grow, overcoming

00:06:22.780 that sort of additional cost of goods sold in a way,

00:06:27.000 you don't need a lot of growth to make it kind of worthwhile

00:06:29.500 and make it work.

00:06:31.160 And so that's one way.

00:06:33.500 There are a lot of different ways to think about money.

00:06:34.920 I'm thinking of the dilution on the fact

00:06:38.100 that you're not given equity.

00:06:39.420 What's the simple, is there a formula you give founders

00:06:42.300 and say, if you're going to raise x and you do this

00:06:44.680 versus waiting on.

00:06:45.920 Like, how do you help them think through it?

00:06:47.420 It's tough.

00:06:48.040 We actually have some calculators

00:06:49.120 that can calculate out like the value of warrants,

00:06:50.780 the value of equity.

00:06:51.860 So we actually have an online tool called our cost of capital

00:06:54.040 tool, where they can say, hey, over the next three years,

00:06:56.740 I need to raise X amount of dollars over X amount of rounds.

00:07:00.260 And I expect to grow revenue from where I am today

00:07:03.560 up to a certain amount over that time.

00:07:05.260 And then we'll kind of calculate the cost of equity

00:07:07.320 and the cost of our debt.

00:07:08.620 Because if everything goes well,

00:07:10.120 it's expensive to raise equity capital.

00:07:12.340 Oh, yeah.

00:07:12.680 I mean, if you're a winner, like I was talking to a guy who was a super successful entrepreneur from years ago.

00:07:18.360 He'd taken money from VC.

00:07:20.360 And he's like, yeah, yeah, you know, they returned my phone calls because I literally returned them like 400x.

00:07:24.780 I was like, wow, that was such expensive money.

00:07:27.900 I mean, it was like eight years or something like that, right?

00:07:29.320 But you're like, think about how expensive that money was for you.

00:07:31.600 And he's like, I never thought about it that way.

00:07:33.880 Entrepreneurs, like, you know, we're trained to think about go and raise that VC money.

00:07:38.280 And it's not bad.

00:07:39.900 In the right situations, I'm not anti-VC.

00:07:42.680 Um, but if you can mix it up and keep smart ownership, it makes a huge difference.

00:07:47.560 So in the back in the day, I mean, I'm, you know, kind of newish to the fundraising, raised

00:07:52.300 my first capital in 2009.

00:07:53.720 So about a decade before that, didn't even understand this whole thing.

00:07:57.440 Um, but their Silicon Valley bank back in the day, they would kind of, my understanding

00:08:02.440 is they would ride along with the VCs, kind of like the VCs invest, so we'll give you

00:08:06.000 some extra money as debt or whatever and take warrants.

00:08:07.980 And that was the kind of their model.

00:08:09.300 Yep.

00:08:09.960 And since then, RBF and Tiny Seed,

00:08:13.900 and there's this whole new, it's almost like financial,

00:08:19.000 I'm not calling it financial engineering,

00:08:20.300 but there's just a slicing and dicing the financial options.

00:08:22.740 Financial innovation.

00:08:23.540 Yeah, totally.

00:08:26.540 How do you see these different categories of capital?

00:08:30.100 Yeah.

00:08:31.060 I'd say this.

00:08:31.780 The way we often think about it, and I think

00:08:34.820 to present to founders is divide the world.

00:08:37.680 if you make kind of your old quadrant diagram, right?

00:08:39.600 So two by two.

00:08:40.620 Two by two.

00:08:41.220 So on the x-axis, it's you've got a VC sponsor or no VC

00:08:45.300 sponsor.

00:08:46.200 And then on the y-axis, just revenue size.

00:08:48.300 So we're basically in that kind of inner quadrant

00:08:51.220 where you have no VC sponsor most of the time.

00:08:53.160 About 90% of the companies we find have not raised true VC,

00:08:55.920 like seven figures plus from a VC.

00:08:58.320 SVB is very much you have to have an equity sponsor, right?

00:09:01.920 So we actually partner with them a lot,

00:09:03.220 because companies that are sort of in our target zone

00:09:05.640 and their target zone, there's this very clear delineation.

00:09:08.520 Have you raised from a qualified VC?

00:09:11.280 And qualified means qualified for SVB

00:09:13.200 to go and give you funding.

00:09:14.380 Because if you qualify for funding like that,

00:09:17.380 it's going to come with a warrant.

00:09:19.000 But the warrant's not that big from SVB.

00:09:21.460 They're bigger from traditional venture debt.

00:09:23.220 But from SVB, they're not that big.

00:09:24.400 That's the cheapest money you're going to get is from a bank.

00:09:26.320 And that's what you should do.

00:09:27.040 They can give you larger amounts.

00:09:28.120 They probably know the VC.

00:09:29.140 There are good relationships there.

00:09:30.580 And so that's wonderful.

00:09:32.340 But if you're pre-raising that Series A from a brand name VC,

00:09:36.140 that's really where our target zone mostly is.

00:09:38.100 So like I said, 90% of the companies we fund

00:09:40.440 are pre-Series A. About 45% are bootstrapped,

00:09:43.800 45% are angel backed.

00:09:45.000 And so they squarely fit in that quadrant that's

00:09:47.100 not venture sponsored.

00:09:48.340 And then under typically like, you know,

00:09:51.000 under like eight or so, 10, 15 million in revenue.

00:09:54.340 It depends on the bank and the different capital sources.

00:09:57.620 But once you get up to 10 plus million in revenue,

00:10:00.220 Even if you don't have a VC sponsor,

00:10:02.860 there are more different kinds of funds available.

00:10:05.440 I mean, we're growing up into that space,

00:10:07.180 and we love companies that are up to that size.

00:10:09.040 But those companies can typically kind of go around

00:10:11.440 to a bunch of different sources and find different things.

00:10:13.660 There are other funds that are there.

00:10:15.100 They've got a history, usually.

00:10:16.000 It's more traditional, but business financing.

00:10:17.840 Yeah, and if they haven't raised a VC round,

00:10:20.020 they're usually not burning a lot of money

00:10:21.640 because they don't have much money to burn.

00:10:23.240 And so they may or may not be able to get bank money,

00:10:26.660 but there are more and more and more choices in that realm.

00:10:29.780 But it's really still hard to get debt capital

00:10:32.160 for non-venture sponsored and less than, say, $10 million,

00:10:35.880 especially less than $5 million in revenue.

00:10:37.580 It's very tough.

00:10:38.840 And what happens?

00:10:40.340 I mean, everybody wants to assume it's all going to be good,

00:10:43.120 and we raise money, and we pay it back.

00:10:45.200 But what do you guys do when stuff goes wrong?

00:10:48.020 Yeah.

00:10:48.620 BJ, what happens, man?

00:10:49.460 You've got to get some goods to get hired?

00:10:50.780 No, no, no.

00:10:53.600 I mean, the companies that we're funding, what is it?

00:10:56.120 It's source codes and brain cells.

00:10:57.660 Yeah.

00:10:58.400 Yeah.

00:10:58.900 What are you going to do, liquidate that?

00:11:00.820 Can't do it.

00:11:01.660 So no, I mean, we have never foreclosed on a company.

00:11:06.400 We've had out of, it's really interesting, though.

00:11:10.280 Our portfolio is very, very different than a venture

00:11:12.420 portfolio, right?

00:11:13.100 If you have a VC portfolio and you go fund, say, 10 companies,

00:11:16.600 you hope as a VC, you're going to have two winners.

00:11:20.060 And then you probably have six that are like,

00:11:22.020 got my money back.

00:11:23.100 And then you usually have a couple that are down.

00:11:24.820 So like back when I was a VC, it was like 2-6-2 rule, right?

00:11:28.220 And so really, it's heavily weighted

00:11:30.380 towards the sort of power dynamics of VC stuff.

00:11:33.600 Ours is completely the opposite.

00:11:34.820 We're not a home run hitter.

00:11:35.780 We're like the masters of the single.

00:11:37.760 So so far, our loss rate is really low.

00:11:41.240 We have very few companies that have just failed.

00:11:44.900 We don't disclose all these sort of numbers,

00:11:46.520 but our charge off rate is about 3%.

00:11:48.220 It's about like a small business loan from a bank.

00:11:51.620 And most of these companies go on,

00:11:53.360 and the companies that have paid us off,

00:11:56.300 They'll be acquired.

00:11:57.740 They'll go on and raise an equity round.

00:12:00.060 Every once in a while, they'll grow up

00:12:01.360 to the point where they're kind of more profitable

00:12:02.740 and they qualify for bank financing.

00:12:03.940 Let's pay us off with a bank loan, which is, you know,

00:12:05.960 they're getting money for 5% or whatever for a bank.

00:12:07.780 It's great.

00:12:08.700 And then we see our job is to kind of help companies grow out

00:12:11.000 of the same, grow out of that quadrant,

00:12:12.420 whether they want to go and raise VC

00:12:13.920 or whether they just want to grow up and get bank financing

00:12:16.140 or something like that.

00:12:16.980 That's kind of our mission is to help them grow out

00:12:18.920 of that tough, tough, tough spot where traditionally only money

00:12:22.020 is equity.

00:12:22.660 Yeah.

00:12:23.140 And do you guys have, today, is there

00:12:26.100 tools connected to their financial system,

00:12:27.900 so that way you guys can dynamically adjust their payment?

00:12:31.120 Yeah, we just pull stuff out of APIs.

00:12:33.260 Wow.

00:12:33.860 So yeah, QuickBooks Online, Xero, et cetera.

00:12:36.580 Or even like QuickBooks Desktop, we've

00:12:38.080 developed software where we can just

00:12:39.660 suck in the information from that.

00:12:40.660 But that wasn't there seven years ago.

00:12:42.080 No, no, no, no.

00:12:43.480 We had to develop all that.

00:12:44.440 Isn't that cool?

00:12:45.020 Yeah, we had to develop all that, and then analyzing it,

00:12:47.280 monitoring it.

00:12:47.860 So I mean, the whole point of lighter

00:12:50.780 was to make it a lighter lift on entrepreneurs,

00:12:53.100 and then also a little bit of a play on igniting your growth

00:12:55.460 and things like that.

00:12:56.360 But a lot of it is truly making it a lighter experience

00:12:58.980 on the entrepreneur.

00:12:59.540 So both fundraising and then just the monthly reporting.

00:13:02.480 So monthly, all the companies have

00:13:04.340 to come in and submit financials and stuff like that.

00:13:06.260 But they just go, connect my QuickBooks Online again

00:13:08.520 and pull it down.

00:13:09.540 We finished the financials for June, connect it up.

00:13:12.580 And we just take it.

00:13:13.700 And we ask them a couple quick questions, and that's it.

00:13:16.740 That's so cool.

00:13:17.660 Yeah, and we suck the payments.

00:13:19.100 All loan payments are just ACH.

00:13:20.560 We just pull it out and speak of it.

00:13:21.840 So it tries to make it easier on the entrepreneurs.

00:13:24.240 I mean, you know what it is.

00:13:25.260 Like, as an entrepreneur.

00:13:25.980 Yeah, you just don't want to think about this stuff.

00:13:27.600 You don't want to think about this stuff.

00:13:28.660 You want to think about product and customers and hiring

00:13:31.640 and all that kind of stuff.

00:13:32.920 All the stuff that makes the business unique.

00:13:36.320 And then all the stuff that's just the same as anybody else,

00:13:38.660 like accounting and certain aspects of HR and benefits

00:13:41.720 and money and things like that.

00:13:44.700 We're trying to help companies out with as much of that as possible.

00:13:47.600 And where does your capital come from?

00:13:49.340 Yeah, we have raised $120 million in funds

00:13:54.960 to go lend out to companies.

00:13:56.280 And we're allowed to then reinvest that funds.

00:13:58.780 That's how we deployed about $170 million.

00:14:02.200 Yeah, you just recycle the capital.

00:14:03.220 We just recycle the capital back in a new loan.

00:14:05.260 So it started off with about a $20 million fund

00:14:07.640 that was funded by a family office.

00:14:08.940 What was the minimum check size when you guys started?

00:14:10.400 $50k.

00:14:11.120 OK.

00:14:11.620 It stayed at $50k.

00:14:12.540 Yeah, you were deploying $50k, but what was the minimum

00:14:15.140 you would accept into the funds?

00:14:15.980 Oh, accepting the funds.

00:14:17.120 Actually, the way we've set up the funds,

00:14:18.980 God, it's grown over time.

00:14:20.000 Building a business like Leiter Capital,

00:14:22.220 one of the huge difficulties is capital, right?

00:14:25.580 Obviously, because if you don't have it,

00:14:26.940 you don't have the product, right?

00:14:28.700 And so when we first started off, we actually

00:14:30.900 took equity money, and we're funding loans with equity

00:14:33.060 money that we'd raised.

00:14:34.440 And then we finally got a family office in Seattle.

00:14:36.920 Equity meaning you sold equity in Leiter Capital.

00:14:38.360 We sold equity in Leiter Capital.

00:14:40.160 Actually, Leiter Capital is actually venture-backed itself.

00:14:42.600 OK, yeah.

00:14:43.060 It's an interesting thing.

00:14:44.960 We have 65 employees that developed all this software

00:14:47.140 and things like that to sort of change startup finance.

00:14:49.520 So we actually raised three rounds of institutional equity.

00:14:54.760 But we started off, yeah, with just

00:14:56.320 like a little pool of capital that was just equity money

00:14:58.660 we'd raised to go and deploy it and sort of start experimenting

00:15:01.120 with these loans.

00:15:02.380 And then over time, we were able to get a family office

00:15:05.140 to go give us at first $10 million.

00:15:07.040 And then they agreed to add on $10 million.

00:15:09.120 And then we raised $100 million fund

00:15:10.840 from a group that's public called Community Investment

00:15:13.280 Management.

00:15:13.860 It's actually based here in San Francisco.

00:15:15.760 And they focus on a $100 million fund commitment.

00:15:19.660 Wow.

00:15:20.240 So you get 10, though, from this family office.

00:15:22.700 Yeah, ultimately 20 from them.

00:15:24.300 And then that's built up and already

00:15:25.780 been almost entirely paid back.

00:15:27.700 What did they see in the model that they liked?

00:15:31.920 A nice, and this is the same for all the investors

00:15:34.960 in these pools of capital, a highly diversified pool

00:15:37.820 of small business loans and companies that

00:15:40.240 are relatively predictable.

00:15:41.920 Super in that sense.

00:15:43.180 Yeah, I mean, it sounds kind of strange.

00:15:44.680 You're talking about startups, and I'm

00:15:45.920 saying they're relatively predictable.

00:15:48.080 But in mass, as a whole group, when you've got a portfolio

00:15:50.900 of like 200 of these or something like that?

00:15:52.780 There's like a pretty, you've got a history and a track

00:15:55.300 record of just like next month that's kind of coming in.

00:15:58.180 Totally.

00:15:59.560 Very early on, when I was a lighter,

00:16:01.400 I sort of went and struck a bit of a partnership

00:16:03.620 with Salesforce.

00:16:04.320 And Salesforce used to train a lot of the ISVs that were

00:16:07.000 building on the AppExchange, get to 10 customers

00:16:10.060 and you'll never die.

00:16:11.200 And I was like, music to my ears.

00:16:13.580 Really?

00:16:14.080 And they were basically like, yep, you get to 10 customers.

00:16:16.380 We almost won't let you die, because Salesforce's end

00:16:20.020 customers would suddenly have the lights go off

00:16:22.320 on some features they liked, right?

00:16:24.320 And so they were like, yep, we just tell all these things,

00:16:27.940 get to 10 customers.

00:16:29.140 And in a way, it's true, right?

00:16:30.940 Like if you get to 15, 20K, it comes down to founder

00:16:35.100 longevity, really.

00:16:36.300 Like do you have the sort of intuitiveness

00:16:38.640 and the personal resources to keep through that sort of

00:16:41.500 valley, the grind to get it to that point

00:16:43.980 where it can actually pay his salaries and stuff.

00:16:46.260 And what are some of the niche SaaS companies?

00:16:48.300 What are some examples that you find are just so cool?

00:16:51.000 Because that's the greatest part is,

00:16:52.320 as software eats the world, it's becoming more niche.

00:16:55.380 Every industry is.

00:16:57.240 Oh, god.

00:16:57.740 We see so much stuff.

00:17:01.320 Interestingly, one of the areas I just

00:17:03.360 had never thought of software, probably,

00:17:05.500 and it was one of the most amazing businesses we ever

00:17:07.980 funded, was church software.

00:17:09.480 Cool.

00:17:10.420 Like, I don't know.

00:17:11.700 Just don't think about selling software to church.

00:17:13.320 Management and communication.

00:17:14.560 Tithe management.

00:17:15.300 So it had payments in it.

00:17:16.320 It kind of had basically CRM and membership management

00:17:19.440 and stuff like that.

00:17:20.100 These are great businesses.

00:17:22.220 It's an amazing market.

00:17:23.100 It's obviously a global market.

00:17:24.640 It's relatively stable.

00:17:26.660 And if you can show them a positive return on the tithe,

00:17:30.600 like someone asks you, how much do you

00:17:33.140 want to give to your church?

00:17:34.280 You're like, oh, I'll do like $50.

00:17:35.820 And I'll do that every week or whatever it is.

00:17:38.940 So mentally, you're committing to $200 a month or whatever.

00:17:42.960 But in reality, you don't go that much in the summer,

00:17:45.200 and you kind of skip it at certain other times.

00:17:46.960 And sometimes you don't have a 50, and stuff like that.

00:17:49.200 Whereas you just say, I'm going to do it every time,

00:17:51.200 and they're going to pull it every time.

00:17:52.800 Yeah.

00:17:53.300 You're going to call the church and say, don't.

00:17:55.080 Yeah, don't take it.

00:17:55.900 Don't time this time.

00:17:56.920 Yeah, I was on vacation.

00:17:59.320 That's so neat.

00:18:00.060 I mean, I remember when I first started raising capital

00:18:03.400 from VCs and realizing they had to go raise money.

00:18:05.400 Yeah.

00:18:05.900 You know what I mean?

00:18:06.600 I think founders don't realize that the people giving you

00:18:09.020 money have to go raise their own money.

00:18:11.400 So you have to go do the same thing they have to go through.

00:18:16.740 So as a CEO, what have you learned

00:18:21.020 about just scaling the organization

00:18:22.720 to the amount of people and the raising capital side?

00:18:25.860 Building the business.

00:18:26.800 Raising capital is a bitch.

00:18:28.080 Yeah.

00:18:28.860 Because you have both the equity side originally,

00:18:30.900 and then now you've got essentially the fund.

00:18:33.400 Yeah.

00:18:34.400 Even when capital today is relatively as cheap

00:18:37.240 as it's ever been, it's still tough.

00:18:40.680 And for us, one of the difficulties

00:18:43.260 was we're dealing with really long-term loans.

00:18:45.600 So you can say, like, hey, we just

00:18:46.940 went and made a bunch of loans.

00:18:48.380 And a capital source would be like, that's great.

00:18:50.480 Tell me how they worked out three years from now.

00:18:52.600 I can't wait for three years.

00:18:54.560 It's kind of like being an enterprise SaaS business

00:18:56.360 and a big customer saying, well, yeah,

00:18:57.980 when you go sell that other customer in like two years,

00:19:00.120 come back and tell me.

00:19:00.720 You're like, that's not startup time.

00:19:01.780 I can't deal with that.

00:19:03.240 So yeah, convincing people just like any other startup,

00:19:07.420 just like we had to go and convince people to, you know.

00:19:10.120 And is it because it's such a small check size, too?

00:19:13.000 They'd rather deploy more?

00:19:15.460 So in general, in the money business,

00:19:18.420 if you can go deploy lots, they'll

00:19:20.500 give you money at a cheaper rate,

00:19:21.720 and it's almost more readily available.

00:19:24.360 But when you're starting and trying to prove a new market

00:19:26.720 and new structure, you got to get people that

00:19:29.600 are willing to dig in and take a bit of a risk.

00:19:32.500 And so that takes a lot of trying to find people.

00:19:36.400 For example, for our $100 million fund,

00:19:38.600 And actually, when we're doing employee onboarding and stuff, I go through this with the employees.

00:19:42.480 When we raised the $100 million fund, we'd always raise the $20 million, right?

00:19:45.320 So we had some bit of track record, but we'd funded at the time like $16 or $17 million of loans and such.

00:19:51.200 And they were still pretty young.

00:19:52.660 But when I went to go raise that fund, I presented, I pitched in person 35 different institutional lending sources.

00:20:01.420 And after doing all that, some of them I was there like 9, 10 meetings and stuff like that.

00:20:05.820 But I was in New York every third week,

00:20:07.960 and in San Francisco about once a month, and so that.

00:20:10.260 I mean, all over the place, because we're based in Seattle,

00:20:12.100 but there's no money like that in Seattle.

00:20:14.240 And out of all that, one term sheet.

00:20:18.480 And it's the one group we then worked with,

00:20:20.020 community investment management, and they've been great.

00:20:21.920 We then more recently went out and said, OK,

00:20:23.760 we want to raise a new fund.

00:20:24.880 Is there people that help with relationships and connections?

00:20:27.700 There are some.

00:20:28.200 I've heard of this for family offices.

00:20:30.060 There's some, investment bankers and stuff like that,

00:20:31.880 but it's so hard to know if you're getting somebody high quality

00:20:34.000 or not.

00:20:35.500 But when we went out to go and raise this next fund,

00:20:37.540 which we're in the midst of hopefully closing out here

00:20:39.340 really soon, we kind of worked just first level networks

00:20:42.740 and went out and said that and had like eight term sheets.

00:20:45.160 Wow.

00:20:45.860 Because you have a track record.

00:20:47.020 Yeah, you got a track record.

00:20:47.960 It's all about being proven in the money business, right?

00:20:50.200 Just like, I don't know exactly how this works,

00:20:52.500 but what I've heard is Sequoia basically just calls up

00:20:55.420 their existing LPs and says, tell us the next three weeks

00:20:58.720 or whatever whether you're in or not.

00:21:01.120 Do you have to say whether you're in or not?

00:21:03.180 Pretty easy for them because they've

00:21:04.380 got an amazing track record.

00:21:06.740 Obviously, we're nowhere close to that.

00:21:08.460 But it's still the money game.

00:21:09.960 It gets easier and easier.

00:21:10.800 Where do you see the innovation going

00:21:13.140 in the future for the alternative financing sector?

00:21:16.440 Maybe some of the stuff you guys might be thinking about?

00:21:18.400 Yeah.

00:21:20.000 I think there's just going to be more and more and more

00:21:22.180 very specific forms of capital for specific uses.

00:21:25.700 And you're already seeing this some for us.

00:21:28.180 I've seen this.

00:21:29.180 Some acquisition.

00:21:29.680 Connect your Facebook account.

00:21:30.900 Let's look at your.

00:21:31.760 Yeah, like customer acquisition.

00:21:33.600 Spend, we'll finance just that.

00:21:35.320 Totally, exactly.

00:21:36.340 And so people going in and saying, hey,

00:21:38.000 I can go look at your Google Analytics and your Google,

00:21:40.400 whatever your paid spend and things like that on ads,

00:21:43.340 and I can see their ROI you're getting on it,

00:21:44.840 and I can go finance that.

00:21:46.800 More and more of the almost like niche uses of capital.

00:21:49.800 So you can imagine if you're a startup founder,

00:21:53.060 you're going to have kind of like your corporate capital,

00:21:55.500 whether it's your angels or VCs or whatever,

00:21:58.020 us kind of on that side of things mostly,

00:21:59.840 or SVB or whatever stage you're at.

00:22:01.560 But you might also have these sort of almost niche uses where, hey, we're selling on the Apple App Store and stuff like that.

00:22:06.600 And we've got basically a factor that's paying us because they can see Apple says they got, you know, 600 downloads and they're owed, you know, 50,000 bucks from Apple in 45 days.

00:22:16.180 And so we'll go finance that.

00:22:17.680 You're seeing more and more stuff like that that just allows the startups to pull that capital in faster.

00:22:24.380 It's interesting, because I remember

00:22:25.580 when somebody was telling me on the Amazon side

00:22:29.480 when they essentially, they'll lend you money based on,

00:22:32.400 like, they know your inventory, they know your sales volume.

00:22:35.620 I mean, as an entrepreneur, it's interesting to think,

00:22:39.760 who are the people that have relationships with me

00:22:41.700 that have data that can introduce opportunities

00:22:45.560 to kind of finance?

00:22:46.520 Well, and for a lot of these big platforms like Amazon,

00:22:48.840 if they don't do it, some other group will.

00:22:51.560 Yeah.

00:22:52.060 So I don't know if you've ever heard of Cabbage.

00:22:54.200 Yeah.

00:22:54.540 Cabbage with a K, right?

00:22:55.820 So they do financing.

00:22:56.860 They started off financing eBay sellers.

00:22:58.800 Not that different than Amazon Marketplace sellers, in a way,

00:23:01.520 right?

00:23:01.700 I mean, somewhat different.

00:23:02.520 But they basically went after those eBay sellers,

00:23:05.540 because they could get all the scores, and the track record,

00:23:07.560 and the history, and everything like that, and see that.

00:23:09.180 And they've diversified off of that.

00:23:11.620 But you see more and more and more of that kind of stuff

00:23:13.360 growing up.

00:23:13.900 And then, obviously, platforms like a Cabbage or Lighter

00:23:16.180 Capital, where we're trying to diversify into more and more

00:23:18.320 and more of those sectors, where they can go and serve

00:23:20.760 end customer in more and more and more ways.

00:23:22.560 OK.

00:23:23.060 So I mean, we're doing the same thing.

00:23:24.940 We started off doing this revenue-based financing thing,

00:23:27.360 which is cool because it's kind of like has certain aspects

00:23:29.980 of debt and equity that are good for the entrepreneur.

00:23:32.940 But then we've come out with lines of credit

00:23:35.560 and just straight up normal term loans and stuff as well.

00:23:37.900 Really?

00:23:38.280 So yeah, and we're seeing that take off hugely.

00:23:41.000 So we just announced and did a public launch of term loans

00:23:44.620 and lines of credit in June.

00:23:47.220 OK.

00:23:47.720 And as of August, revenue-based financing

00:23:51.160 was less than half of the deals that we underwrote in August

00:23:53.600 already has just totally started taking off.

00:23:55.340 Wow.

00:23:56.300 Yeah, because go figure.

00:23:57.620 You know, they're founders.

00:23:58.820 You've got a relationship.

00:24:00.000 You've got a relationship.

00:24:00.860 You know the company.

00:24:01.600 Hey, we're willing to give you a revenue-based financing loan

00:24:03.860 for $400K for the next three years.

00:24:06.680 But you have a bunch of AR and stuff, too.

00:24:09.060 Might as well give you a $200,000 line of credit

00:24:11.240 as well against your AR.

00:24:12.220 So you can go and finance all that, too,

00:24:14.240 because there's working capital needs and growth capital

00:24:16.820 and they're somewhat different.

00:24:18.120 So interesting.

00:24:19.340 I mean, it's like any other business, right?

00:24:21.260 If you've got a customer, and the customer likes you,

00:24:23.840 and you've got a good relationship,

00:24:25.380 just figure out how else you can go and serve them

00:24:27.200 more and more and more.

00:24:28.100 Totally.

00:24:28.720 It's no different than a SaaS business or anything like that.

00:24:32.120 Why did you move away from the VC space?

00:24:34.920 Me, personally?

00:24:35.520 Yeah.

00:24:38.140 You know, I liked being a VC.

00:24:40.640 It's intellectually about five years.

00:24:43.580 It's intellectually super satisfying.

00:24:45.900 You get to see the future.

00:24:46.900 You get to see a lot of different stuff.

00:24:48.340 Yeah.

00:24:50.020 And who knows?

00:24:51.060 I may go do it again someday or something like that.

00:24:52.920 But I also like being an operator because you build something.

00:24:56.060 As a VC, you're an indirect operator.

00:24:59.140 Influencer of the operator now.

00:25:00.260 I mean, you're working with CEOs.

00:25:02.900 You're working with really interesting people and stuff.

00:25:05.680 But at the end of the day, they're the ones actually taking action.

00:25:08.560 And so you're very much an indirect operator and influencer of things.

00:25:13.080 I mean, VCs, to your point, they have to raise capital.

00:25:14.780 They're actually building a business themselves, too.

00:25:17.200 A lot of respect once I understood that.

00:25:18.980 It's a brutal business.

00:25:20.260 Yeah.

00:25:20.540 Especially today when there's a lot of money out there that's going.

00:25:23.140 I mean, it's hard for entrepreneurs to go raise VC money.

00:25:26.040 But it's also, like, for VCs to try and go get the best deals, it's also super hard.

00:25:30.240 And VC goes through these massive cycles of returns, right?

00:25:34.740 During the dot-com era, they made massive amounts of money.

00:25:37.760 And then for the ensuing about 15 years after that, VC returns were, generally speaking, pretty bad.

00:25:43.460 And then they've come back in more recent years

00:25:46.340 and the sort of SaaS has come forward

00:25:48.480 and there have been more IPOs and things like that.

00:25:50.640 Do you think you can get the loans to a point

00:25:53.600 where it is a click-click approve?

00:25:56.840 For certain types of loans, possibly,

00:26:00.960 it's really fascinating.

00:26:03.040 And this may change over time, but our customers

00:26:05.080 want to talk.

00:26:05.920 Like they want something that's fast, just like all of us.

00:26:08.080 Oh, it's just like even SaaS products.

00:26:08.700 Like if you're at like, I feel like $250 a month,

00:26:11.540 like they want to talk to you.

00:26:12.620 Like, if I'm going to spend that kind of money,

00:26:14.000 I want to know the use case that I've got and your thing,

00:26:17.320 is it going to work?

00:26:18.080 Totally.

00:26:18.620 Yeah.

00:26:18.920 Exactly.

00:26:19.420 It's exactly the same.

00:26:20.120 So in general, sort of all of them,

00:26:22.340 for them, you may be the first time they've taken money.

00:26:25.460 We are very, very frequently the first institutional money

00:26:28.820 that they've taken.

00:26:29.420 They've gotten money from an angel or whatever

00:26:31.420 and some of that, and they raise it off of a pitch deck

00:26:33.620 and a model.

00:26:34.120 For them to sign some legal paperwork and commit.

00:26:37.420 Yep, exactly.

00:26:38.520 And they commit.

00:26:39.220 They have to give us financials each month

00:26:40.720 and all this kind of stuff, right?

00:26:41.740 And so we have to go in and understand all that.

00:26:44.040 And we're good at understanding messy stuff, obviously.

00:26:46.260 But a lot of times, it's the most formal kind of process

00:26:48.380 they've ever done to go and raise capital.

00:26:51.600 And so, yeah, it's something that at some point in time,

00:26:57.980 if you're going to do really small stuff,

00:27:00.160 yeah, you could start to do click-click.

00:27:02.300 But customers want to talk.

00:27:03.220 But they want to talk to somebody.

00:27:04.120 Yeah, it's a very interesting thing.

00:27:06.220 One of the issues we face in our business

00:27:09.080 is how do you build trust remotely, right?

00:27:11.960 Because most financing sources, you've

00:27:13.000 got to go and pitch them and meet them.

00:27:15.100 And it's all about do you have chemistry or whatever.

00:27:16.700 And we're like, no, we're trying to take all that hassle out

00:27:18.840 of it.

00:27:19.280 That's also the process through which you build trust.

00:27:21.940 So we're doing a lot more things,

00:27:24.300 kind of like SaaS businesses, video conferencing on Zoom,

00:27:27.140 all that kind of stuff.

00:27:27.900 So you can sort of start to build trust with stuff

00:27:29.720 while we're trying to build trust and yet not be obtrusive,

00:27:32.500 trying to be lighter on them, right?

00:27:35.180 So I do think we'll probably end up

00:27:37.760 some products that are click-click,

00:27:39.900 but they'll be on the low end in terms of size.

00:27:42.000 Especially lead gen.

00:27:43.220 Yeah, get them in the door.

00:27:44.240 Get them in the door, build some incumbency with the customer,

00:27:46.800 understand them.

00:27:47.960 And then as they grow, start to be like, OK, hey,

00:27:50.180 now you could probably qualify for this and qualify for that.

00:27:52.840 And they just start a relationship, right?

00:27:54.480 It's amazing, even for us.

00:27:58.400 You think you know a business and stuff like that,

00:28:00.620 and you give them money.

00:28:01.540 And then march forward several months

00:28:03.240 after giving them money.

00:28:04.380 You tend to know them a lot better.

00:28:06.100 And it's just life.

00:28:08.380 It just happens that way.

00:28:09.640 And as much as we've got all this fancy software

00:28:11.260 to understand them, when you see them actually

00:28:12.720 go and perform after you've funded them

00:28:14.020 and what they're doing, what their concerns are,

00:28:15.640 and talk to the entrepreneurs a little bit more,

00:28:17.740 you just understand a lot better what's going on.

00:28:19.600 And you start to build that bond all the more.

00:28:22.440 And that just helps you serve them better.

00:28:26.340 How much of what you guys have a model?

00:28:29.480 Is there negotiations involved?

00:28:31.860 Yeah, a bit.

00:28:32.440 Yeah.

00:28:33.540 We usually have about four phone calls,

00:28:36.360 from kind of first touch to money and bank.

00:28:40.140 First one is really more of like we've just kind of got

00:28:42.180 a sketch of the company and understand

00:28:44.340 do they kind of meet our rough criteria.

00:28:46.260 And that's totally like, are we good for you

00:28:48.280 and are you good for us?

00:28:49.420 What are red flags for you guys at that stage?

00:28:52.020 High churn?

00:28:53.480 Our biggest red flags, well, high churn is tough to fund,

00:28:57.420 but it's not like a huge red flag.

00:28:59.320 It's just kind of like, hey, that's difficult.

00:29:01.360 It's sort of one of our criteria is

00:29:02.760 We want to see something that's kind of roughly

00:29:06.060 benchmarks out well with a certain cohort.

00:29:08.140 Like if you're selling enterprise,

00:29:09.300 we expect lower churn, small business, higher churn,

00:29:12.060 consumer, way higher churn.

00:29:13.140 So just meet within some benchmarks.

00:29:14.280 Yeah.

00:29:14.660 Are you within the general parameters that make sense?

00:29:17.760 The biggest red flags, I mean, there's

00:29:19.380 basic criteria at that stage.

00:29:21.000 A lot of people think they're SaaS or not SaaS.

00:29:22.940 I don't know why.

00:29:23.520 That's just like the weirdest thing.

00:29:24.700 They think they have a subscription business.

00:29:26.440 They don't.

00:29:26.940 They're SaaS.

00:29:27.600 You're not a tool.

00:29:28.300 Yeah.

00:29:28.800 Just because you have a subscription

00:29:29.640 doesn't make you a SaaS.

00:29:30.520 And we'll fund stuff.

00:29:31.480 We just want to see recurring.

00:29:32.600 So we don't care if you're technically fast or not.

00:29:34.100 OK, so you guys are cool if it's not just.

00:29:34.980 Yeah, we do a lot of tech-enabled services.

00:29:37.540 We're starting to do even more tech services type of stuff.

00:29:39.840 So we started with a beachhead market,

00:29:42.040 and then broadening, right?

00:29:44.300 But the true red flags, besides sort

00:29:46.720 of the quantitative type of things, are just the person.

00:29:49.240 If you're talking to somebody, and they're

00:29:50.740 talking about how they're going to be bigger than Uber next year,

00:29:54.380 cuckoo, just stuff like that.

00:29:56.340 You've probably seen a lot of that in the VC.

00:29:57.580 I mean, you see a lot of that stuff all over the place.

00:29:59.980 Yeah, when I was a VC, I was a VC in clean tech.

00:30:02.180 And I literally had a guy who was introduced through a friend

00:30:05.060 like scream at me in a bar saying,

00:30:07.420 you don't know what you're missing, man.

00:30:09.140 You don't know what you're missing.

00:30:10.020 I'm going to be the next Yahoo.

00:30:11.120 This is a long time ago.

00:30:12.440 And so like that when Yahoo was still huge.

00:30:14.340 And so I'm like, I'm a clean tech VC.

00:30:16.880 You're like a portal.

00:30:18.800 Like, I just can't.

00:30:20.360 Like, he just couldn't take it.

00:30:22.340 Couldn't take a no.

00:30:24.500 So we'll see some red flags.

00:30:26.140 Like, people are just a little wacky.

00:30:28.020 And you know, entrepreneurs.

00:30:29.740 It's interesting because sometimes they're wacky and good.

00:30:31.840 Yeah.

00:30:32.600 They can be wacky and bad.

00:30:33.940 Yeah, totally.

00:30:35.100 Entrepreneurs by their nature are wacky,

00:30:36.640 but wacky is not necessarily a pejorative term.

00:30:38.840 Yeah.

00:30:39.700 How do you compete, I mean, as more people have gotten

00:30:42.460 into this space, how do you guys think

00:30:44.020 of differentiating the way you guys do it or what you do?

00:30:46.820 Yeah, it's an interesting question, right?

00:30:49.620 Because at the end of the day, money's just green, right?

00:30:52.320 It just comes with terms.

00:30:52.960 No, that's the thing about financials, yeah.

00:30:54.620 Yeah, it just comes with some terms.

00:30:55.780 It's some structure, right?

00:30:57.400 And so it's just money.

00:30:59.320 That's just a fungible commodity.

00:31:01.480 And then there's terms and structure around it.

00:31:04.420 And then there's the group or the person or whatever.

00:31:08.300 Do you trust them?

00:31:09.280 Like if you end up, yeah, exactly.

00:31:11.300 Like if you hit the edges of some covenant or whatever,

00:31:13.580 are they going to just foreclose and be a bad actor?

00:31:16.080 So we obviously focus a lot on making sure

00:31:19.240 that we're a good actor and then keeping the structure in a way

00:31:21.280 that works with our customer really well,

00:31:23.800 all that sort of fundamental stuff.

00:31:25.480 But yeah, as more and more money comes into the space

00:31:27.720 and finds that it can get a return there,

00:31:29.240 it gets more competitive.

00:31:30.120 And you can compete in a couple different ways.

00:31:32.020 You can either be more customer centric, which

00:31:34.800 we try to do and try and be better with them.

00:31:36.960 So we measure our own NPS and stuff like that.

00:31:39.360 Cool.

00:31:39.960 Yeah.

00:31:40.460 So we have an NPS.

00:31:42.120 We had a baseline NPS last summer, about 63.

00:31:44.200 And now we're at about 70.

00:31:45.620 Yeah.

00:31:46.120 So it's pretty high.

00:31:47.360 For financial.

00:31:48.120 Yeah.

00:31:48.620 Yeah.

00:31:49.120 You know what, Bank of America is a ..

00:31:50.540 Yeah, yeah.

00:31:51.000 No, like AT&T.

00:31:52.000 These are all single digits, if not zero.

00:31:54.000 Yeah, they suck.

00:31:54.540 You're in the Apple.

00:31:55.720 Apple, Amazon-ish type category.

00:31:57.420 Yeah, that's amazing.

00:31:59.400 But then really listening, right?

00:32:00.520 Because even we have people that'll

00:32:01.920 say on an NPS score, like, OK, they give us a six.

00:32:04.080 They have some critique.

00:32:05.260 Like, OK, we want to know what that is

00:32:06.960 and go try and figure it out.

00:32:08.620 So anyway, making sure that you're

00:32:10.020 very customer centric and stuff like that,

00:32:11.520 because obviously that builds trust and gets customers.

00:32:14.280 You can compete on terms, but that gets dangerous, right?

00:32:18.120 And then you fall out of your wheelhouse.

00:32:19.800 You fall out of your wheelhouse.

00:32:21.120 In the long run, there's going to be a downturn

00:32:22.500 at some point in time.

00:32:23.880 You know, we don't want to collapse and stuff, right?

00:32:26.700 And then the other thing is just like, what more can you

00:32:28.680 actually provide the customer, besides just a friendly voice

00:32:31.260 and good terms, all that kind of stuff.

00:32:32.980 And so we focused on that.

00:32:34.240 We have a whole initiative called More Than Money

00:32:36.280 for this exact purpose.

00:32:37.980 So we've lined up a whole bunch of what we call perks.

00:32:40.500 So if we fund a company, they can get free Amazon Compute

00:32:44.100 Time, AWS Compute Time, $10,000 worth.

00:32:46.740 They get like 90% off HubSpot the first year.

00:32:50.040 So we've got a whole set of perks that they can get.

00:32:53.360 And that was really sort of twofold.

00:32:54.680 Number one, can we go and they can

00:32:56.700 get sort of these free things and stuff like that.

00:32:59.460 And most of them are all the tools

00:33:01.860 that a lot of SaaS businesses want to use anyways.

00:33:04.120 And so can they go get a discount?

00:33:05.520 And of course, the providers of those

00:33:07.320 love to go and do that because they just want to, yeah,

00:33:09.260 it's just lead gen.

00:33:10.320 And they're perfectly willing to give up some of the first year

00:33:13.260 or whatever it is to go and get that.

00:33:15.720 Number two, the other thing we found, of course,

00:33:17.560 is a lot of our customers sell to small businesses.

00:33:20.580 And so they want to be listed in that kind of little marketplace

00:33:23.380 of things and get the promotion that we

00:33:24.860 do for that whole system.

00:33:27.100 So a handful of our customers that we funded

00:33:29.980 are then part of our perks.

00:33:31.240 Yep.

00:33:31.780 So hey, if it's a lead gen for them, it's great.

00:33:33.160 Ecosystem.

00:33:33.740 Yeah, totally.

00:33:34.440 And of course, we don't get anything from it.

00:33:35.260 Have you guys ever done an event as a value add?

00:33:38.380 CEO summit?

00:33:39.080 We've talked about having a lighter capital conference

00:33:41.160 and getting them all together.

00:33:42.620 Yeah, we definitely need to do that.

00:33:43.460 One of my investors did that.

00:33:44.640 It was one of the most valuable things he ever did.

00:33:46.780 Yeah.

00:33:47.320 Yeah.

00:33:49.320 It's definitely something we'd really like to do.

00:33:51.120 Yeah, because everybody's like, same mentality, because like, yeah.

00:33:54.940 Totally.

00:33:55.440 And a lot of times, we can see it when we go and meet customers.

00:33:59.820 We don't have to meet them to go fund them,

00:34:01.320 but it's a small place, right?

00:34:03.800 And so at a Sastr conference, or here at Sastoc,

00:34:07.080 or something like that, you do meet up with them.

00:34:08.740 And it's pretty interesting.

00:34:10.240 I remember one time I was at the second year of Sastr,

00:34:13.240 and it just epitomized our customers to me.

00:34:15.920 I was supposed to meet one for lunch,

00:34:17.880 and we're just meeting at a conference around a little table.

00:34:20.320 And one of the other founders that we funded

00:34:22.660 happened to be there.

00:34:23.440 And so we started talking.

00:34:24.500 And so the three of us were talking.

00:34:26.320 And the next thing I knew, the two of them

00:34:27.520 were just talking.

00:34:28.120 And they cared a lot more.

00:34:29.800 They were trying to figure out, what's the equity portion

00:34:32.380 I should give to some key hire I want to give?

00:34:35.040 And one was wondering about it, and he was like, yeah,

00:34:37.280 the person's asking for this much.

00:34:38.420 And the other guy's like, no way.

00:34:39.200 I would never give more than this.

00:34:40.900 It's only their own problems.

00:34:42.320 It's lonely being a CEO.

00:34:44.000 It's super lonely.

00:34:45.080 And going and finding people that are facing the same issues

00:34:47.660 and they're not being judgmental of you

00:34:49.760 And so that is really rare, right?

00:34:50.960 Because you can raise money, and you've got investors,

00:34:52.540 and they're always judging.

00:34:53.540 I mean, it's their job, right?

00:34:54.520 And their bias, yeah.

00:34:55.380 Yeah, and so when your employees are always judging,

00:34:58.180 and your customers are always judging, and stuff like that,

00:35:00.380 and the CEO, you're always on stage.

00:35:01.580 But with a peer that's facing some of the same stuff,

00:35:04.400 they feel really good and open, and they can go share

00:35:07.320 the difficulties and get good, solid answers, right?

00:35:10.220 So much of this stuff is so hard to benchmark.

00:35:12.440 Like, what is a good percentage to go give it

00:35:15.020 to a key executive?

00:35:15.920 Or how do you climb your pricing scheme up

00:35:20.540 on existing customers?

00:35:22.280 Yeah, that's the right way to do that.

00:35:23.420 Or all that stuff.

00:35:24.380 Yeah.

00:35:26.100 So they get a lot of value.

00:35:26.900 I mean, we're just a conduit, obviously, in some ways.

00:35:29.600 But they get a lot of value out of talking to each other.

00:35:31.020 So you guys have talked about SEO Summit.

00:35:32.420 Yeah.

00:35:33.020 Every year, we're like, should we do it this year?

00:35:34.580 Should we do it this year?

00:35:35.160 I think the year you do it, you'll be incredibly.

00:35:39.920 To me, it's getting founders that

00:35:41.840 are on that shared journey at that moment.

00:35:43.580 Because it sounds like you have a very specific type

00:35:45.580 to a customer, so there's nothing like somebody

00:35:47.740 that curates that, where it's like you get in a room,

00:35:50.500 you're like, holy crap, it's like I came home

00:35:52.000 to the mothership.

00:35:53.300 And you can talk in shorthand, and especially now

00:35:57.280 that you've got those other loan products and stuff.

00:36:00.820 So the ones that are using it will essentially upsell

00:36:03.280 the other ones like, hey, you should get this thing.

00:36:06.980 As a CEO and an entrepreneur, who have you

00:36:11.640 needed to become to be the person that continues to lead?

00:36:15.400 It's a heavy question, but it's a great question.

00:36:16.900 It's a great question.

00:36:17.640 Because that, to me, is.

00:36:18.620 Yeah.

00:36:20.240 Yeah, I mean, listen, as an entrepreneur,

00:36:22.340 you're always having to evolve, evolve, evolve, evolve,

00:36:24.640 evolve, right?

00:36:25.520 And the more successful you are building the business,

00:36:27.320 the more quickly you have to evolve, which is exhausting,

00:36:30.980 right?

00:36:31.600 And actually, I remember in your speech you was giving,

00:36:33.740 you were talking about how the first couple of years

00:36:35.440 you had certain sort of flaws, and you had to go figure those

00:36:37.520 out.

00:36:38.080 I mean, we all do it, right?

00:36:39.760 And it just depends on, is it flaw number one or number seven

00:36:42.140 or number two, whatever it is, we all go and do that.

00:36:44.480 And so it's a just constantly figuring out,

00:36:49.760 like, what's the next sort of adaptation you need to go do?

00:36:53.240 And are you going to be really good at going and doing it?

00:36:56.220 And if you're not, how are you going to make up for that?

00:36:58.640 And what is the best step for the business?

00:37:01.220 And what were some of those for you?

00:37:05.280 God, so many.

00:37:06.420 It's almost hard to think of individual ones.

00:37:11.400 I mean, there's always letting go, right?

00:37:13.780 Letting go just as a general theme.

00:37:15.880 When I started Lighter, there were three employees and me,

00:37:19.000 and we did everything.

00:37:19.480 What do you mean, like, delegating?

00:37:20.840 Delegating off and delegating off in the right way, right?

00:37:24.940 Not in a, there you go, I come back 30 days later.

00:37:28.000 How come you've not done it perfectly the way I would do it?

00:37:31.400 And so not being the constriction point

00:37:35.080 and just the process of letting go is always just not necessarily

00:37:39.340 hard because you know you want to go do it,

00:37:41.100 but doing it in the right way and choosing the right things

00:37:43.420 to let go, and the right people to let it go to,

00:37:46.060 and doing it in a way that you're setting up for success,

00:37:48.160 and not for failure, and all those sorts of things.

00:37:50.620 I think those are the things that often

00:37:53.020 consume a lot of our time.

00:37:54.200 And there's no way to learn that.

00:37:55.000 You almost got to do it and get a feedback loop going, right?

00:37:58.460 Because you just brought up a really great point of like,

00:38:01.100 did I delegate the wrong things?

00:38:02.660 Because if you give away something that's critical,

00:38:04.500 it's like, oh, my business didn't grow because I gave away

00:38:07.000 this critical thing.

00:38:08.440 Maybe next time I shouldn't.

00:38:09.720 And then there's some people, they

00:38:11.580 to get delegation happy, and all of a sudden, it's like,

00:38:14.620 nothing.

00:38:15.460 Nothing happening.

00:38:16.120 Yeah, people are overwhelmed.

00:38:17.280 Things aren't being done.

00:38:18.420 Totally.

00:38:18.840 And then, you know, you build, obviously,

00:38:20.680 all these expectations for people, right?

00:38:21.940 And the team's 60 now?

00:38:23.700 Yeah, it's about 60, 65 people.

00:38:25.080 Yeah, so you've had to learn.

00:38:26.980 And you're saying in the early days,

00:38:28.100 this was a challenge for you.

00:38:30.000 Yeah, I think it's a, I mean, it was a challenge for me.

00:38:32.100 I think it was a challenge for lots of folks.

00:38:34.180 I don't know that I was particularly worse,

00:38:35.980 but I was probably worse at this particular thing at this time.

00:38:38.580 Like, we all kind of have our terrible points

00:38:40.520 doing that stuff, right?

00:38:41.480 Of like, hey, OK, I think I can go give this away.

00:38:44.300 And I'm going to give a bunch of latitudes.

00:38:45.680 I think that person can handle it.

00:38:46.680 And then all of a sudden you realize, oh my god,

00:38:47.840 I gave so much rope and they hung themselves with it.

00:38:49.340 And now I've got a problem where some critical thing

00:38:51.500 isn't done, and this person's not doing well kind of spiritually,

00:38:56.000 emotionally, because they just bought something.

00:38:58.340 They failed.

00:38:58.880 And it's not always their fault it was.

00:39:01.340 Totally, totally.

00:39:02.320 I mean, I'd say just in general, like a stressed out

00:39:05.480 but successful entrepreneur is always looking at like,

00:39:07.780 what did I do?

00:39:08.840 Always.

00:39:09.340 I mean, you can't be Trumpish narcissistic about it,

00:39:12.280 but you've got to be looking and saying, OK,

00:39:14.120 how can I take some ownership for how that ended up happening?

00:39:19.200 That I've never had a problem with.

00:39:20.420 I was a pretty self-reflective guy.

00:39:22.540 Yeah, I was probably more on the overly stressed side.

00:39:25.480 That was one thing, too, like turning off.

00:39:27.460 I'm not good at turning off.

00:39:30.520 I just came back from the longest vacation I'd ever had

00:39:32.860 in seven years by far.

00:39:34.840 Two weeks.

00:39:35.580 Wow.

00:39:36.080 Two weeks.

00:39:36.820 Full turn off?

00:39:38.740 Come on.

00:39:39.760 Not full turn off.

00:39:40.420 Emails in the morning?

00:39:41.120 No, yeah, totally.

00:39:42.040 Completely still.

00:39:42.640 I love emails in the morning.

00:39:43.840 My rules is if I can get it done before the family wakes up,

00:39:46.360 then it's fair game.

00:39:47.380 I'm not taken away from them.

00:39:48.700 That's my rule.

00:39:49.840 I even broke that.

00:39:52.660 So Slack and whatever else.

00:39:54.640 But I did go 10 time zones away.

00:39:57.520 And that really forced some break.

00:39:59.260 That's a forcing function.

00:40:00.360 Yeah, we just went to Crete and to Paris.

00:40:02.140 Nobody's there to talk to.

00:40:03.680 Nobody's there to talk to.

00:40:04.580 They're still sleeping.

00:40:05.360 So in the morning, when you wake up and looking at it,

00:40:06.760 you're looking at yesterday's emails.

00:40:08.460 and still have that right basically for the team.

00:40:10.260 And then you're giving them certain responses.

00:40:11.880 And you don't have that, like, I just responded to this thing.

00:40:14.680 And then something else came to the top, right?

00:40:16.400 So you're doing your look through, your responses,

00:40:18.540 and that's that.

00:40:18.840 You go do your day.

00:40:19.500 Yeah.

00:40:20.120 And then by the time they're waking up, you're like, no, no,

00:40:22.380 I'm glad I didn't know.

00:40:23.940 And do you feel like you're getting better at that,

00:40:28.200 turning off with the family?

00:40:30.360 Somewhat, somewhat.

00:40:31.780 But I tend to dive in.

00:40:34.340 I could just do that in life.

00:40:35.460 I've always done that in life.

00:40:36.720 Full on.

00:40:37.700 I'll just go dive into stuff.

00:40:39.760 I decided that when I got out of college,

00:40:42.380 I decided I wanted to go and move to Taiwan

00:40:45.220 and learn Chinese.

00:40:48.020 I ended up with a master's in Chinese political economy

00:40:50.640 and then was like, do I really want to do this?

00:40:54.180 Wow.

00:40:55.180 And then shifted gears into building startups.

00:41:01.800 As a CEO and leader, how do you

00:41:06.460 think about innovation for where you're going to bring things

00:41:10.000 next, like essentially sequencing?

00:41:13.300 Because I believe that success is a byproduct

00:41:15.340 of sequencing, recipes, same ingredients, different order.

00:41:19.060 You get a cake, the other one, you get a mush.

00:41:21.620 So how do you prioritize, or how do you

00:41:24.180 think about strategic prioritization for?

00:41:27.520 Yeah, for the company, in terms of long-term strategy,

00:41:31.400 or just what we're kind of building?

00:41:34.860 One of the things we've really been focused on recently

00:41:37.540 is building out more core competencies.

00:41:40.680 So for example, we're in a funding business.

00:41:43.620 So of course, the first thing you have to be good at and build

00:41:45.660 up is the ability to fund the right businesses

00:41:48.420 and get money into them and not fund the wrong businesses.

00:41:52.200 So a whole lot of time and effort around.

00:41:54.240 Loan origination.

00:41:55.240 Yeah, loan origination.

00:41:56.380 Can we go and attract companies, bring them in,

00:42:00.120 and fund the right ones and don't fund the wrong ones?

00:42:02.720 And so we built this whole system around that.

00:42:04.820 And we got really kind of good at that stuff,

00:42:06.440 everything from customer acquisition piece

00:42:08.520 and building awareness and our brand

00:42:10.400 and all that kind of stuff to that.

00:42:12.020 But what we were not really good at

00:42:14.180 and we're trying to get much better at

00:42:15.540 is just general project management, product management,

00:42:19.100 things like that that, you know,

00:42:20.680 if we were like an enterprise SaaS business

00:42:22.320 or something like that, we probably

00:42:23.140 would have focused a lot more on product instead of that.

00:42:24.980 But now we're at the point where we want to develop

00:42:27.620 all these other things we're going to offer these companies.

00:42:29.580 We've got to be good at managing a portfolio of products.

00:42:33.240 And so that takes building other skill sets,

00:42:36.680 but just building other muscles, right?

00:42:38.440 And also, just as you're getting larger,

00:42:41.540 just having more of that project management competence

00:42:43.800 and things like that so that you've

00:42:45.360 got systems in place to go hold people accountable

00:42:48.240 and organize things better and things like that.

00:42:50.360 And so just building up those other competencies

00:42:53.060 at the business that will allow it to grow and scale

00:42:55.820 over geographies and into more target markets and things

00:42:58.700 like that over time, that's really

00:43:00.440 what we're mostly focused on so that we don't just come out

00:43:03.980 with a line of credit and term loan, which we did.

00:43:07.040 But those are sort of our first products

00:43:09.140 after this revenue-based thing.

00:43:10.280 And it was painful for us to come out with that.

00:43:12.500 Not surprising, not like anything shocking or whatever.

00:43:15.420 But when you aren't accustomed to doing that kind of thing

00:43:18.440 and you go do it, it's a new muscle you're building.

00:43:21.740 But we've got to get way, way, way better at that kind of thing

00:43:24.140 and just rolling that stuff out.

00:43:25.520 And so that each year we've got several new products coming out.

00:43:28.400 And we're like, whether we're going to do some credit cards,

00:43:30.200 we're looking at, or whether we're going to, pardon me,

00:43:32.440 launch into new geographic markets and things like that.

00:43:35.000 That's stuff that's, you know, we just

00:43:38.000 haven't developed those muscles all that well yet.

00:43:40.060 But you kind of know, this is where we're going.

00:43:42.180 Here are the muscles that we need to develop.

00:43:43.820 Yep.

00:43:44.320 Product is one of those, yeah.

00:43:46.200 Yep, totally.

00:43:46.840 So you're going to have multiple financial products

00:43:48.920 and some things that are more than money

00:43:50.740 as offerings to these companies.

00:43:53.280 And then you're going to do it over multiple geographies, right?

00:43:56.040 So most likely entering Canada later this year,

00:44:00.240 maybe beginning of next year.

00:44:01.440 We're also looking at Australia, the UK, some other markets.

00:44:05.220 We have a really close partnership with Silicon Valley

00:44:07.020 Bank, and they've got folks in the UK, and also in Germany,

00:44:12.600 and Israel, a partnership in China.

00:44:14.760 And that will probably take us a long time.

00:44:16.180 Yeah.

00:44:16.600 But there's enough opportunity in the other places.

00:44:19.540 But then now you're facing the issue of now

00:44:22.140 you're going to have a remote workforce operating

00:44:24.260 over multiple different time zones.

00:44:25.720 A whole new set of skills.

00:44:26.560 A whole new set of skills.

00:44:27.440 As of today, every single person that we have is in Seattle.

00:44:31.360 Really?

00:44:32.500 And we've looked at hiring other places,

00:44:35.440 and we decided, you know what, we're just not mature enough yet.

00:44:37.960 Not there yet.

00:44:38.620 Nope.

00:44:39.120 We're not going to be that successful at it.

00:44:41.800 It's know thyself.

00:44:42.860 Totally.

00:44:43.700 Know thyself and know, as entrepreneurs in some ways,

00:44:46.920 we have to be insane to go on that journey.

00:44:49.200 100%.

00:44:49.800 But at the same point in time, you

00:44:50.620 have to have an accurate enough sense of yourself

00:44:52.360 and your organization to know, like, OK, how far can I push?

00:44:55.020 Yeah.

00:44:56.300 And so, yeah, those are some of the things in front of us.

00:44:59.900 BJ, where can people follow along online?

00:45:02.560 We're going to reach out.

00:45:03.640 Lighter Capital, obviously.

00:45:04.780 Yeah.

00:45:05.360 We're all over LinkedIn.

00:45:07.300 Yeah.

00:45:07.480 Like, LinkedIn is really our biggest thing.

00:45:09.360 I mean, we'll do stuff on Twitter some and Facebook some

00:45:12.040 and things like that.

00:45:13.080 But LinkedIn is really more the centerpiece for us.

00:45:16.040 And you've been to every Sastr?

00:45:17.700 So you're going to go?

00:45:18.520 Sastr.

00:45:19.180 We'll probably do more of these Sastoc things as well.

00:45:21.540 I love Sastoc.

00:45:22.220 It's my favorite one.

00:45:22.900 Yeah.

00:45:23.680 And SASTR, we've been to all the SASTRs.

00:45:25.700 We'll probably always go to SASTR.

00:45:27.100 Yeah.

00:45:27.360 Any other SAS events that you guys are evaluating that?

00:45:30.600 We're looking at some in Canada, SAS North.

00:45:33.580 SAS North.

00:45:34.140 We've heard it's pretty cool.

00:45:35.100 I'll be there.

00:45:35.640 Yeah.

00:45:36.000 Yeah.

00:45:36.300 It has the word SAS in it.

00:45:37.740 I'm usually speaking.

00:45:38.540 You're there.

00:45:38.980 Yeah.

00:45:39.460 Yeah.

00:45:39.720 I liked it when Patrick Campbell had SAS Fest.

00:45:43.140 I like that name better than Recur.

00:45:44.920 Yeah.

00:45:45.180 I've heard of Recur.

00:45:45.720 That's another good one.

00:45:46.680 Yeah.

00:45:48.180 Yeah, it's neat, the proliferation of events in the SAS space.

00:45:52.520 It is.

00:45:52.940 All over the world.

00:45:53.840 Yeah, I think Alex from SASI was telling me that today,

00:45:57.060 there's one in Berlin and Paris, SAS-specific events.

00:46:02.120 So as you roll out your geographies,

00:46:04.700 there'll be a built-in distribution network for you.

00:46:06.620 Yeah, yeah, exactly.

00:46:07.780 I mean, it's a great way for us.

00:46:08.980 Because although we focus on acquiring customers much more

00:46:13.520 indirectly and online and things like that,

00:46:15.400 it's awesome to go and actually meet people.

00:46:17.020 In person.

00:46:17.560 And yeah, and I mean, they want to know,

00:46:19.080 coming back to our other conversations,

00:46:20.020 they want to know you're real.

00:46:21.100 All I can trust.

00:46:22.420 Awesome.

00:46:22.880 DJ, I appreciate you coming on.

00:46:23.800 Yeah, absolutely.

00:46:24.440 Thanks so much.

00:46:25.140 We'll talk soon.

00:46:25.700 Cheers.

00:46:26.320 Thanks for watching this episode of Escape Velocity.

00:46:29.560 Be sure to like and subscribe and leave a comment with your biggest insight from our conversation.

00:46:35.000 Be sure to check out the next episode.

Dan Martell - January 02, 2020

Alternative Funding Options with BJ @ LighterCapital.com - Escape Velocity Show #18

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