Alternative Lending Sources for Tech Startups
September 22, 2020 3:00 AM
Watch our expert panel who held a lively discussion exploring lending sources beyond venture debt as startups look to reach the next milestone.Speakers:
- Neal Shenoy, CEO and Co-Founder, BEGIN
- Yair Segev, NY Practice Lead, CFO Services, Escalon Services
- Guy Kurlandski, Managing Partner, North America, Liquidity Capital
- Anthony Millin, Chair, NEXT powered by Shulman Rogers (moderator)
Read below for a full transcript of the conversation.
Basant Kedia - Good morning and good afternoon. My name is Basant Kedia. I'm a Senior Managing Director for First Republic Bank. Thank you all for joining us today for the webinar on alternative lending facilities for tech startups. As you are aware, First Republic has a long history of serving the tech community, not only with the banking services, but also the content and insights that can be helpful to you. Especially in these difficult times. We're looking for ways to provide you more practical information and guidance, such as our discussing today. We have invited an expert panel speakers. Neal Shenoy, CEO and Co-founder of Begin. Yair Segev, New York head of Escalon services. Guy Kurlandski, Managing Partner of North America Liquidity Capital. And our moderator, Anthony Millin, Chair of NEXT powered by Shulman Rogers. Before we start, a quick housekeeping note. We will be taking questions at the end of the session. To submit your question during our conversation, please use the Q&A icon at the bottom of the screen. And now, I will now turn it over to our moderator for today, Anthony Miller. Anthony, you're on mute.
Anthony Miller - Can you hear me now?
Basant - Yes.
Anthony - Great. So thank you Basant, and thank you First Republic for hosting today's event. I'm very honored to join you all today as moderator for this great panel. Just briefly about my background, I've been a serial entrepreneur, a venture partner in a seed stage venture capital fund, and Founder and Chair of NEXT powered by Shulman Rogers, which is an innovative new model for delivering legal services for the full lifecycle of startup companies. We offer predictable legal fees through more than 75 fixed price packages designed for startups, delivered by senior attorneys through a hands-on, high touch model and integrate technology platforms to deliver collaborative, transparent, and efficient client centric experience. For more information, you can visit us at www.next.law. I would now like to just take a go around with our great panelists today, and have you each just introduce yourself and your company, and maybe with the focus on your experience and roles in the startup and emerging growth company space. We'll start with Neal, and then move on to Yair, and then Guy. So Neal.
Neal Shenoy - Thank you, Anthony. Thank you for Basant and First Republic for this wonderful opportunity to partake in a panel, which I think is very timely and hopefully relevant to many of the attendees, both on the venture side and as entrepreneurs. Very briefly, I'm CEO and co-founder of Begin, who is the parent company of the Homer Early Learning Program. We are one of the fastest growing subscription programs in home learning, focusing on children zero to six. And we've had an opportunity to be able to create a program that delivers the best educational start possible to young children and their parents on their first journeys towards learning, formally and informally. I've been the CEO of that company for the past seven years. We're now in the process of completing a series C round of financing, and hope to speak to some of our experiences in both attracting strategic capital, venture capital, and most recently, alternative financing as well as a part of that journey. Very quickly by way of background. I'm a serial entrepreneur. I began my career working in structured products at Donaldson, Lufkin & Jenrette, and both Investment Bank and the Merchant Bank. Following that, I had an opportunity to create multiple companies alongside the same set of partners. Those companies include one of the largest music streaming platforms in the world called Saavn, which was acquired by Reliance. A company called LiftMetrix, which was acquired by HootSuite. And alongside Begin, a company in the consumer subscription space called LeagueApps, which caters to amateur and recreational sports. So again, thrilled to be a part of the conversation, and hoping to add a little bit of insights and experience about how we built our capital stack for this business and others.
Anthony - Great. Thank you, Neal. Yair.
Yair Segev - Hi, good afternoon or good morning. Thank you, Basant, thank you, First Republic for having us and arranging this great webinar. My name is Yair Segev. I'm heading the CFO practice at Escalon, and also the East Coast, New York area of the Escalon operations. Escalon basically does the essential business services. We cover the finance operation from CFO to accounting FPNA and stuff. We cover the HR or employee life from hire to retire, including benefits. And we also do taxes and insurance. We are registered brokers in all 50 States. We're working with many startups. We have over 1300 clients, many in the tech and growing businesses, and in many spaces of the tech. We can go through the ABC, ad tech, biotech, cyber tech, data tech, and on and on and on. And thank you for having me and I'm looking forward.
Anthony - Great. Thank you very much, Yair. Guy.
Guy Kurlandski - Yes, hello. Hello everybody. Nice to meet you all and thank you as well to First Republic bank and to Basant for hosting this beautiful event and getting together an esteemed group of people. So thank you for that. I am the managing partner for North America for a company called Liquidity. I'll go a little bit into background. I am personally serial entrepreneur. I've been involved in several businesses and taking them through to exit myself. The Liquidity Capital, where I currently am is a company that was formed by a lot of entrepreneurial people. And today is connected to some major banks and institutions, financial institutions. And we are effectively alternative funding. Typically later stage companies, around series B onwards, and we fund on the premise of trajectory growth. So we look at where we believe a company has got the ability to get to base as well on where it is being. And we fund in a different way. We're not equity funders and we're not typical, secured venture debt. So it's a different model. So we can obviously explain in due course if people are interested to hear more about it.
Anthony - Great, thank you very much. So to start off today, what I'd like to do is to set a framework for our audience. At a high level overview, what I'd like to just have you all just help lay out, is what a typical capital stack would look like for a tech startup company, as it's growing to kind of understand the elements and roles of each part of the capital stack, and then where within this capital stack does alternative lending fit in both stage wise, and where does it fit in within that? And I'm happy, maybe for this question we can start with you Neal.
Neal - Sure. So as I mentioned, Begin is a series C business. And just to give a bit of an evolution of our capital stack and when we were introduced to alternative lending and when we chose that. Like many startup companies in our space, our series A round was predominantly filled by angel investors, family offices, and seed stage funds. And this was done back in 2012. Our series B round was our first truly institutionally led round of capital, and we included traditional growth equity and venture investors in the series B round. We also started in the series B around to take a closer look at the power that strategics could play in our business as well. And then currently our series C round, we are able to be very flexible with regards to the capital on the equity side. And so while pulling in traditional venture financing and growth equity, we had a focus on both domestic and international sources of capital. We complimented that with strategic capital. As we'll talk about in a moment, we had an opportunity to be able to work actually with Liquidity on putting in place an alternative facility alongside our equity. To be very specific, some of the names that have been on the journey for us just to be able to make this a little bit more tangible. On the seed stage side, we received capital from Advancit, which is a fund started by Shari Redstone, John Miller and Jason Ostheimer. Shari is the chairman of course of CBS and Viocom. She certainly understands the children's publishing business as owners of Simon and Schuster, the children's media business as owners of Nickelodeon. We were the first investment made out of her first fund. Similarly, we took capital from GSV, a big education fund in the early stage, on their early stage fund called GSP accelerate. Examples of series B investors for us included Wellington. Our largest investor investors in Uber, Airbnb, Warby Parker, and Pinterest. We were the first investment that they made in consumer education. And our series C round has been very interesting because we've now expanded as we have a foothold on our business into more international VCs and strategics. The strategics that have invested in our around including Lego ventures and Jim Burry playing music. On the venture side, we took a prominent fund called 314 capital in India, as well as a fund called Trust Bridge in China. I think most notable for this conversation is that, we knew as a recurring revenue subscription business with a tremendous amount of predictability, that we could create a balance in our capital stacks between equity financing, permanent capital, and more traditional or nontraditional forms of debt financing. We explored, as we can talk a bit about, venture debt opportunities, but what we really fell in love with was the model that Liquidity offered, because they understood the dynamics of our business as a consumer subscription company and the predictability of that. And we were able to put in place alongside a $50 million series C financing, a $25 million credit facility with Liquidity over a two year period of time. And having been a relatively sophisticated in terms of our capital structure, we were really enamored with what Liquidity can provide us in terms of stretch financing for the purposes of really growth marketing, business development, and expansion. So, our capital stack today looks very consistent with what a venture financing would look like, or I should say what a venture backed company looks like, with I think the uniqueness being that fully, one third of our current round was done in partnership with Liquidity, which again, brought down our cost of capital, brings in a tremendous amount of flexibility. And we think will supercharge our growth as we look to three X or four X the business over the course of the next three years.
Anthony - Great. Thank you. So, what we're hearing is, and maybe we can go, Guy, to you. A lot of companies who are on the call may have started off the safes and convertible notes, and then gone into some of the priced equity rounds that Neal talked about with these series A and series B, and going into series C. Guy, in terms of where you see in the capital stack, alternative lending fitting in, kind of between some of the early stage, as I said before, seed financing, tops of securities, and the price rounds and traditional debt, kind of where do you see in the life cycle of the company, capital stack stepping in with some of the tops of alternative lending options that you bring?
Guy - So of course, I can talk about what we do at Liquidity. It's difficult for me to talk about the entire alternative lending space because it's a very wide space, ranging from peer-to-peer lending all the way through. We specialize in really coming in typically in around the B round company, sometimes a late A round, typically a B round onwards. And we're there to, in many cases, support companies that have very good growth trajectories, their unit economics make sense, equity has reached a point where it's difficult and expensive to come to an agreement on the value of equity, and yet all the other variables are there for them. But more and more, what we're seeing is that we're being utilized, much like Neal explained, as part of an intelligent blended stack, that's going to give longevity to the growth of the company and allow it to under its own demise grow itself to where it needs to go. And that seems to be a very interesting area, certainly in the last two or three months, as certain parts of how you fund your company have changed or become very uncertain or unknown. We're using predictability in our model. So we understand that companies, CAC LTV ratio, as an example, if it's a positive ratio, its predictable where it could go, we can help support the acquisition of clients, let it grow to where it should be. There is a cost obviously to the company, but there isn't a cost to the cap table at that point. And blending those two costs seems to be the right approach. Very much so.
Anthony - Great. Thank you Guy. One of the things on this topic Yair, that would be helpful, you're looking at financials of companies and helping them work with those financials, kind of where do you, when you are working with clients kind of start to recommend to them that in addition to looking at traditional sources of financing that they should start to consider, or at least assess some of the types of alternative lending options that Guy brought up or that you Neal is using. So kind of, you could give this from the perspective of somebody who's looking across many different startup companies at the strength of their financials that would be very helpful.
Yair - Yeah, so I think we need to distinguish here between the early stage that early stage startups, where the financials are less important and more the dream, then they go to all these, they can get grants, like Maryland will give you and help you get the grants for anything related to bio research. And then there are other niche incubators or platform like MedStartr who deals with, again, with bio and health, and now they're very popular with what's going on with the pandemic. And on the other side of the range, the ones that are after series A, B, once you get predictability, stability, and you don't really need the money, that's when you take the alternative loans and make sure you have the liquidity, because once you raise the money, you start to spend heavy on marketing and growing, and that's when you need the money. And you only know when you've raised money. You can predict when you're going to raise the next round, but the more money you have in your pocket, the better you are.
Anthony - So we've kind of talked a little bit about the capital stack and different elements of the capital stack. It would be very helpful just too kind of provide the audience with a little bit more of a definition. I know Guy, you said it's very broad, but if you could just give kind of, in your own mind, how you would define alternative lending as a category versus venture debt or traditional bank debt. If you could just help lay that framework for the audience, that would be great.
Guy - Yes, of course, for me, anything alternative is something that isn't mainstream. So, that's why I say it's a really, a very broad area. It can be anything from, as I say, peer-to-peer lending through to the products that we offer. And our lines are typically, as Neal said, we have a $25 million line with them. We can please lines up to a hundred million dollars. So really it's broad. From the investor that's investing a hundred dollars in peer-to-peer lending, which makes it very hard to define what it is, but it's certainly an area that is, and has been growing, and tends to grow in difficult situations. I'm sure there will be some new forms of alternative lending that will come out of the pandemic that we're all in today. I think there'll be a lot of people or a lot of companies in situations that don't fit the regular model, and people will come up with various solutions. I really feel though that I can only talk best to our solution and what we do, because this is the solution that I understand better than others. But in the sort of venture debt world, there are various solutions as well, but some are considered mainstream, some are considered alternative. Our solution is at this point, I suppose, really it's an alternative version of venture debt. It may, at some point become mainstream. We call it trajectory growth funding. And it's around the premise that we understand the companies we invest in deeply. We really do a very deep dive into their analytics and the way they operate, and understand where they could go and where they're headed, and base our decisions upon a continual underwriting process. A lot of more traditional venture debt takes a snapshot at a point in time, but doesn't continually underwrite in the same way or with the same efficiency. So, that could speak to that part. But I think the important thing to take away is certainly, I believe there are quite a few earliest stage companies on this call today, is that it's more important than ever to really think about how you're going to stack together and build your company, and how you're going to fund it. In days past, let's say, in previous generations, it was simpler. Today, there are many more alternatives out there. And at the end of the day, the game is to try and preserve your equity for as long as you can, so that when you do need to potentially sell equity, you're doing it at higher evaluations. But at the same time, it's very important to take a company that has a good product fit, and focus on getting a good product fit, getting your unit economics right, getting your CAC LTV ratios to be strong. It's very important to grow at the same time with speed. So to make sure you have all the right sources. And to Yair's point, take the money while it's available, especially a market like this tells us more than ever, and we don't know how that's going to change. You could be growing your company even through a time like this at a 30% year-on-year growth rate, only to find that you can't get the equity raise at your previous valuation, not because you haven't been growing, but simply because the market conditions have changed. So I think a lot more attention has to be given to how you build that stack as an entrepreneur or group of entrepreneurs in a startup business. I don't know if that really exactly answered the question. I'm sorry, Anthony.
Anthony - It does, that's great. Neal, you've just gone through a process of finding and choosing alternative lending. From the perspective of the entrepreneur, maybe you can explain to entrepreneurs who are out there, how they even go about trying to understand and find the different types of alternative lending options and how to source capital, and from your own experience, how you honed in on the top of alternative lending that you chose to use rather than, more traditional venture debt or traditional bank lending, just to kind of explain how you found that and how you would advise other people to look at the different choices that are out there.
Neal - Sure. Anthony, let me add a bit to Guy's explanation, just for the benefit of other entrepreneurs that are maybe earlier on this journey about what some of the different models of financing are. So presuming that everyone here appreciates that there is safe notes, there's convertible notes, there's preferred share offerings as well. We'll obviously know that. But along our journey, we found a number of different alternative mechanisms for financing that were effectively valuable to our type of business. Again, as a consumer subscription business with predictable cash flow. One example of that is factoring. So we have a lot of our subscriptions going through the app stores. App stores, like most distributors are on a 30, 60, 90 payment delay. There are lenders that are out there that said, listen, we know from an account receivable standpoint that you're receiving this money like clockwork from Apple, we can see the reporting. We'll advance you 95, 97, 98% of those amounts upfront, and we'll collect that from Apple directly. That's great from a cash flow perspective, it's expensive on an IRR basis, but that cash flow could be very powerful depending on, as Guy put it, the efficiency of your marketing spend. So that's one model that we've used. The second model that we've used, is a model where we have had a lender lend us specifically marketing dollars. That money can only be spent on marketing. They've done diligence on what the CLTV, customer lifetime value to customer acquisition cost ratio and the payback period is. And they've structured the payback of that marketing dollars based on what our revenue curve looks like. So if they're lending us say a hundred thousand dollars of marketing today, and they know that in the course of a year, we'll make $150,000 back, they'll say, why don't you pay us back a hundred thousand dollars plus interest over 12 months, you're still profitable with regards to that. And again, that gives me incremental marketing dollars that I can spend that can be ROI positive. That's the second model. The third is traditional bank financing, which is just a credit lines and credit facilities that you can use, especially if you're a seasonal business or there's working capital trucks. One step up from that would be venture debt financing, which is semi-permanent capital where effectively you're drawing three, five, 10, $15 million upfront. There's an interest only period on that. You're then amortizing the loan. Usually you're talking about a three to four to five year duration, but there are a lot of covenants in place with regards to how you're going to manage your business. And that can get very tricky for an entrepreneur. What Liquidity offered us is a hybrid model, where they said, you can draw down on capital. The capital has to be put forward towards growth. You're going to pay that back, in our case, over a 12 to 24 month period of time. And, we Liquidity are going to be relatively modest in terms of covenants. We're going to understand your business and let you operate the business as you see fit, as long as we have confidence in how you're spending the money, what the revenues are that come from that, and the predictability of that. And that was a very bespoke process of talking to Liquidity, and putting the structure in place that made sense for them, and made sense for us. So I wanted to start by just sharing that based on the stage of your business and the needs of your business, there are factoring lines, there's marketing advances, there's traditional bank financing, there's traditional venture debt, and there's alternative financing models, which are hybrids here, all of which may or may not make sense for your business. And based on the questions that we receive at the end of the panel discussion, we can drill down into what some of the structures are. Now, to answer Anthony's question directly. I'll tell you that we effectively approach the market with a tremendous amount of curiosity and diligence. Despite coming from an investment banking background, I was very familiar with convertible notes, safe notes, and equity financing round and all the terms there, but I was not very knowledgeable about venture financing or alternative lending or factoring. Here, I relied on people like Basant, and our relationship at First Republic, because he can both educate me on the structure of these deals, and facilitate a lot of those introductions. We went to our venture funds, who of course have a portfolio of companies that have used a multitude of different financing. And we did our own research ultimately as well. We found Liquidity through a common advisor and investor that connected us, and we did our due diligence, but there is no silver bullet because the market for financing is evolving so rapidly, and having multiple conversations again, with your venture investors, your angel investors, your commercial banking relationship, and your advisors, will allow you to get a really good sense of that landscape. And quite frankly, there's a lot of information online as well that you can use to great effect.
Anthony - Great. Thank you, Neal. Yair, you guys have a lot of a big base of tech clients, many of whom full in later stages. How do you help them find, what are some of the ways that you can advise them on how to find some of these different types of sources of lending that might be available to them?
Yair - So, we are working with a lot of financial institutions and lenders, and we have experience with all the niche, many niche outfits that specialize in, as I mentioned in bio. Like, if you have your base in Maryland they would help you write the grants, and assist you in getting the money. Ohio has four B to B center, because it's a center of distribution. They will assist you. Not always, you'll find your entire funding in one place. Sometime you'll get 20% here, 30% there, and the rest in another place. So by this, connecting them and walking them through the, let's call it due diligence, of this funding source, that's helped because even before we take them to that place, we know what are the requirements, what this specific outsource of money we'll ask or going to ask, or going to request. And sometime it will be, oh, your equity missing, to say, 10,000, find another 10,000. And then we can go to that place. So, by working with so many companies and so many source of funding, when we go to a summer, we just need to introduce to a couple places and we know who fits to whom, not a 100%, and maybe more through February than now, because things are changing. So by the experience of working with so many, we can easily connect the funding source and the lender.
Anthony - It sounds in this area which is more dynamic and newer, having surrounding yourself with great advisors, it sounds like that's kind of the way Neal was able to identify some of these, and Yair, how you work with some of your clients, that's an important part. Just in terms, once we talk you a little bit about the market and how it's evolving, Guy, you touched a little bit on, you're seeing kind of growth in this market and you have very seasoned successful entrepreneurs like Neal, who are starting to look at and bring into their capital stack, some of these different options. How do you see the role of this segment? Each of you see the role of this segment of the capital stack, alternative lending options, if growing and evolving over the next several years. I mean, I know everything is impacted over right now in one way or another by COVID, but on a broader, longer term trend line, how do each of you see this evolving segment of the market changing?
Guy - Personally, I think it is definitely going to become more sophisticated. We believe we've brought something more sophisticated into the market ourselves, which alleviates many issues that we faced ourselves as entrepreneurs, which was, later stage companies, everything was running right in terms of unit economics, as I've mentioned before. And yet we felt the value of our equity was too valuable to give away, and all the debt products that were currently in the market didn't understand our tech SAS Company. It's hard to secure against the tech SAS Company because you don't have that warehouse full of widgets. So we came up with a, we believe sophisticated, workable option, and have wonderful clients in our portfolio. Neal is a testament to that, and some really great companies, and are enjoying the fact that we have redesigned a solution for that point in time for those companies, but there will be other solutions, I'm sure, that will come into play. Certainly earlier stage companies as well. I think, like I said, as well, I think it is more important than ever that founders, especially we're getting back into the earlier stage companies. They actually consult with experts about how to put together their stack and really understand all the costs of the money they're bringing in. I think there are a lot of misunderstandings. There are a lot of products out there. There are lots of possibilities. Everything has to work in a very balanced and intelligent way to get you to the finish line that you want to get to. And that really necessitates a lot of deep thought. And I think some expertise as you put together that stack and trying to figure out how you’re run through the different stages. I think that all entrepreneurs should spend some of their time just trying to understand what is available ahead of time. Don't ever bring yourself to the point where now you really need to take the money that's on offer with a good company. You need to know that you're taking the intelligent money, and you need to also compare things properly. It's sometimes harder to do than it first seems, but different products, different types of financing, obviously carry all sorts of different face charges. But then there's also the background charges, the costs that are sometimes less clear. We recently dealt with a company that had so much, for a small line, had so much reporting to do to the debt provider that provided them that line. But the cost burden was literally taking up something like 25% of their CFO's time and two other bookkeepers. And it was a small line. And that wasn't acquainted into the costs when they entered into the transaction. So I think it's good to really understand all the different complications, the transactions. To Neal's point, when you get into certain deals, what do these warrants really mean, how will they affect us? How will they affect our freedoms? Potentially you're in a business where the success of your business is that you have certain freedoms that you're may be signing away in the mandates, and the warrants and the covenants that you're agreeing to. So again, we like to think of ourselves as a solution that is simple to put things down. So our contracts are relatively short. Don't take, sorry Anthony, you're a lawyer, but don't take too much of a lawyer's time to actually process. And there's not too much redlining that's going to go on. It's simple and easy to understand, and easy for everybody in the business to understand. In some cases that's not possible, and things will be more complicated. But know what you're getting into, I think is very important.
Anthony - Great.
Neal - I can add a few thoughts and sort of response to that. I think if you take a step back and look at the dynamics of what's happening in the venture segment. From a macro basis, you have a tremendous amount of innovation and desire, both in the U.S. and internationally on innovation and new venture creation. So there's a tremendous demand for capital that's taking place, given entrepreneurship and innovation and startups effectively continuing to sort of ascend as a track for a lot of entrepreneurs and a lot of executives. The second is you see a tremendous supply of capital. That's now chasing a fairly finite quantum of deals. The third, is you're seeing a tremendous evolution of business model, right? 10 years ago, subscription wasn't as invoke a business model as it is in now. 20 years ago, SAS, wasn't a business model that was as viable as it is today. And forth, you are seeing a tremendous amount of sophistication we think among entrepreneurs that are using capitalization and liquidity based options as a powerful model to build a moat around their companies. Entrepreneurs that understand their businesses and have access to diverse pools of capital can grow their businesses more quickly because they're not reliant on the same model of financing. So to answer Anthony's question, I think you're going to see a tremendous amount of innovation in the financing space because of the supply of companies, the demand and availability of companies, the invention of new business model and collection mechanisms, and sophistication of entrepreneurs that appreciate that. Simple examples, secondaries have become hotter. Venture debt has been a larger segment. Alternative financing is growing. Companies like Brex are being born overnight from a financing perspective. Factoring businesses are now in vogue. Safe notes were created as an alternative to convertible notes. This has all happened literally in the last 10 years. And we think that will continue. So first point is I think this will only grow, and it's a function, to Guy's point, of entrepreneurs spending 10% of their time really understanding how this can be leveraged for their benefit. The second is that as entrepreneurs, we tend to focus on one thing, which is capital and evaluation. And there is a much more nuanced way of thinking about capitalization more broadly speaking. We as entrepreneurs don't tend to focus on things like information rights. We don't tend to focus on things like covenants. We don't tend to focus on things like liquidation preferences. We don't tend to think about things like redemption, and all those things have a significant impact on how you operate your business. The reason that our board ultimately felt comfortable pursuing a liquidity type of model versus traditional venture debt was because, even though venture debt may have a more permanent capital stack. And in some instances, maybe slightly less expensive, to Guy's point, the cost of managing a venture debt relationship and the consequences of heeding your covenants was too much for us to bear on a risk reward basis. So to Guy's point, being a student of the forms of financing and an understanding qualitatively and quantitatively, the cost of financing, not just from a standpoint of capital amounts in liquidation or a valuation will make you more effective. And finally, understanding your business intimately and appreciating how this capital can help you grow. Maybe it's more marketing spent, maybe it's inorganic acquisition, maybe its geographic expansion. You could really use as a powerful lever. I'll give you a very simple example without naming names. I'm an advisor to a company in the ed tech space, which this year will do about $10 million of recurring revenues. They're certainly growing. They have been in a tough COVID environment looking for series A venture financing. And through no fault of their own in part, because you literally cannot meet investor’s in-person. That's been a slower process. That's been throttling some of their growth ambitions. One of their board members said, as an enterprise education business, which has long-term contracts that are pay out over time, what if I created a bespoke vehicle for you where I will fund your contracts upfront, and get paid back almost like a factoring model on the basis of those receivables? By putting that in place and a very bespoke model, this was done not through an institution, but through a board member. It invalidated the need for them to be able to raise a series A round of financing, because of sophistication of thinking about how the business operates, and finding in this case, a lender with a close relationship who understood the business, to put in place a bespoke structure. So knowledge, sophistication, and diligence here, beyond the traditional venture financing models will make entrepreneurs that much more effective. And it's really effectively time well spent, to Guy's point, if you can dedicate some of your bandwidth to understanding these options and exploring that with the network of people that you have, board members, advisors, venture capitalists on your cap table, and bankers like Basant as well.
Anthony - Great. Very helpful, thank you, Neal. In terms of getting ready to speak to different alternative lenders, maybe Guy and Yair, you can talk from both the experience of being an alternative lender and helping companies prepare to go out and seek these types of alternatives. How would you advise companies to prepare for the process? What should they expect in terms of your due diligence process as an alternative lender versus what you're seeing other alternative lenders putting people through? How does their process differ from kind of a traditional equity round and what should you as an entrepreneur be doing to kind of prepare for a successful process in preparing and kind of understanding the way your business is going to be viewed by these alternative investors?
Guy - I'm happy to take a first stab at it, Yair. Again, from our perspective and my perspective previously as an entrepreneur. So I've been on both sides of this. I think obviously, in the end it should always come down to, all companies should know their numbers. When you go to speak to an investor, be it an equity investor or a debt investor, whichever side you're on, you should have a good, deep understanding of your analytics, yourself. So much so that it's always impressive when you see that a company has a data room. And they're going to need that data room with all the relevant data and predictions and everything else ready at any point in time to go to either marketplace. But of course, there is that key difference that when you're selling equity, you are to, Yair's point, and you’re still selling a little bit of a dream. There can be that little extra piece in there that it's the ambition, whereas the debt market should be realizing only what they truly understand and can analytically prove. As you move through the stages though, I actually don't think there's very much difference at all. I think it comes down to, you need to have a well-prepared data room, and you need to be able to speak to your numbers and where you're taking the company and where it's been. And understand that when you go out to the market, you have to be very realistic about your ambitions, about what you're trying to reach from which parties, how they are going to secure themselves, what are their mythologies? So you have some concept of who you're talking to, about what, but in the end, no exaggerations. If you do a prediction three years out, based on maybe four years of trading history previously, due diligence will take place. And, in that due diligence, I know certainly we look at what's coming in the CRM and what's been converted all the way through to a paid invoice. And I would expect the same of most investors at a certain level.
Yair - Yeah. So I agree. Know your business, as Guy and Neal said, know your business. Know your business, know your product, and definitely know your market that you're targeting, and know your competitors. To say I have no competitors is tricky, because if you have no competitors, maybe you are in the wrong fit. Then, know who are you talking with? If you're talking with someone who all they care is your equity number, then make sure you have the right balance sheet to go to this person or institution, because if you go to the wrong person with the wrong balance sheet, with wrong financials, you're wasting your time. Raising money takes a hundred percent. It's a full time job on top of couple other full time jobs that every founder has. So make sure that if you have a weak balance sheet, don't go to those that are looking for a strong balance sheet. It's basically, know who are you talking with before you go. Do your due diligence, do your homework, make a short list of those that you want to talk with, that are willing to talk with you. Try to find a warm introduction, and always, it's like looking for a job, talk with whoever is willing to connect you with anyone that is willing to give your money.
Anthony - Thank you, Yair. Neal, one of the things, I think, that also would be helpful given the breadth of the different tranches and types of capital that you've raised, is to help people understand what to expect on the other side of closing around, of alternative financing, similar to what you closed with Liquidity. But to kind of understand the different types of investors that you have, what to expect in terms of involvement, in terms of ongoing compliance, in terms of reporting and information rights, how did these different investors interact with you and what do you look for and expect from the different investors, and particularly the alternative lenders?
Yair - Fantastic. That's a great question. And to be very reductive about this, when you are traditionally talking to venture investors, it depends on whether you're talking about an A round or a B round. They are looking more at the company's potential, and the company may not yet be predictable. And that's okay. And they're receiving an outsized return on an IRR basis because of that risk reward. Venture lenders and alternative financing investors are not always participating in your upside. At best, they may have some slight warranty coverage. In many cases, they don't have any equity upside. So it's really important that they understand your business because they are generating their returns from based on interest or based on a repayment of the lent amounts plus a premium as well. So again, when you are having conversations with investors versus lenders, there are different ways that they're looking at your business, and there's different types of information that they may be interested in as a function of that. Because alternative lenders, venture lenders are going to care about security and predictability and payback. What's really important to keep in mind when you're negotiating these deals is A, what are the information rights that those lenders are asking for? What is the form of that? What's the frequency of that? Are there covenants associated with that? And what is the dispute resolution process if there is one as well? So in our process with Liquidity, we had a very clear understanding of what type of reporting we would be able to, or we need to pry for Liquidity. How much of that is bespoke? How much of that is automated? How frequently is that? Are they joining our board as an observer? Are they expecting us to have a monthly check-in? And if there are parts of the business that don't necessarily go according to plan, what is that process and what are the implications of that, and what are their protections as well? And we felt very comfortable with that level of reporting, the cadence of that, how much time we have to put in, and how similar or dissimilar that was from how we're reporting to our investors. That was a big part of our evaluation in terms of partnering with Liquidity. Aside from those mechanics, really important is building the relationship, right? So regardless of whether a venture capitalist is on a journey with you for 10 years, and playing for upside, or you're on a three year journey with an alternative lender, relationships really matter. And so, part of what I would also encourage, despite how busy we are as entrepreneurs, is whatever you can do to build a relationship with your lender prior to taking the capital and post taking the capital, that is the currency that you can use when you need additional capitalization, you may need some relief, or you may need to restructure, right? Always fix the roof when it's sunny, not when it's raining, and then you can rely upon that sort of relationship when you do need ultimately their support as well. And so, these are the basics in terms of relationship management, but so important because, again, alternative lenders and venture lenders are looking at your business with a slightly different risk reward ratio than a venture capitalist that may be in the deal with you for a decade plus.
Anthony - Great, thank you. One question that just came in from our audience that I just wanted to throw out. And the question is just asking. For a company is an excellent company with a history, and is seeking capital more because of economic slowdown. Will this top of alternative lending work for an established company that, again, is impacted by the global environment or is it meant more for companies that are more venture oriented companies with a lot of future expected growth?
Guy - I presume that's for me.
Anthony - Yeah.
Guy - And what Liquidity does. Yeah, look, the right answer here is that we had a model, and we stick to it pre COVID, but there are changes as a result of COVID. And, I think the best thing is, I would love to talk to you about it. There are lots of questions I would have to ask that this forum wouldn't be the right place, but we are doing deals with companies that are effected obviously by COVID, but it's still strong companies have a good history, are potentially in a growth mode, but a much slower growth mode that they were previously. I'd be happy to speak to you afterwards about it, and set up a call and understand exactly what your needs are.
Anthony - Great, thank you. So we're coming close to the end of the session, and I wanted to just give, I don't see any other questions that have come in from the audience. Why don't we just kind of make our way around? This time, we'll start with Yair. And if they're, just to share any final thoughts you have on anything you feel like we haven't covered today on this topic that you'd like to share with the audience, and we'll kind of make our way to Neal, and then end with Guy.
Yair - Yep, so just to add to this question, I think it depends on which industry you are. If you were on the, like we work world, you were great till February. But on other issues I would say, again, depends on which industry you are. Explore, there are plenty of opportunities to raise money now, especially if you're in the healthcare business. Use it now because that's the time to raise money for certain industries.
Anthony - Great, thank you. Neal?
Neal - I'll summarize some of the key themes that we discussed, which is, number one as an entrepreneur, building a business. So critically important that you understand your numbers and your business and how capital can create both leverage in your business and a moat. It's great to then take that knowledge and really spend the time to survey the tremendous flexible capital that's out there. And to do that through building a network across all the relationships that you have. Thirdly, to have the conversations, especially when you don't need the capital to build the relationships and understand the role that these different capital providers can play. As we always say, sometimes it takes a relationship to get to a relationship. And finally, to be in a position where, when you are looking at terms, look at those terms holistically, not just the cost of the capital, the amount of the capital, but the covenants that are involved, the information rights, the remedies that are available as well. If you follow that trajectory, I think it can be a very powerful way to build your business as we've talked about today.
Anthony - Great. Thank you, Neal. And Guy?
Guy - Yes, I think actually Neal summarized it very well. I think it is imperative that you know your business, you know your financials that you're always ready because you do know your financials to approach, be it equity or debt, for a review and to raise capital. Don't be shy to raise capital when you have capital. I can tell you we personally like seeing companies with longer runways. The longer your runway, financial runway, and the more attractive it is to potentially fund you with more money. And when your unit economics are right, the decision is, and this is in the end down to the people driving the bus, right? Where do you want to take it? Some people are comfortable stepping off with a lifestyle business. Some people are trying to build a big business. If you are, and the ambition is to be ambitious and build a big business. Take money while you can get it, get your unit economics right, and spend it the right way, and be able to prove that you can spend it the right way. The money is there. I'm happy to talk to you if you're in that position and see what we can do.
Anthony - Great. Well, thank you so much Guy and Neal and Yair. I think I'm going to hand it back now to the First Republic team for any closing remarks.
First Republic - Thank you, Anthony. And that's a wrap on our discussion today. So thank you to our speakers for joining us, and giving, and sharing your insights and expertise. Special thanks to Anthony for moderating for us today. We'll follow up with everyone with an email with related information and resources. So keep an eye out for that. And at First Republic, we are proud to serve you as part of the innovation community across the U.S. And please feel free to reach out to us for any of your banking needs or any additional information you may need. Have a wonderful day, everyone. Thank you.
Anthony - Thank you.