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.

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