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The spectrum of alternative capital continues to change dramatically. Check in to see what these capital providers have to say about the shifting landscape and how to leverage successfully.
Here's the TL;DR from the experts:
1 - Give lenders time to learn & truly understand your business.
2 - Develop relationships early on in order to build your track record.
3 - There's a lot of variations of non-dilutive capital; educate yourself
4 - Be forthcoming with a lender. Surprises & skeletons take deals off track
5 - Do reference checks on your lender(s)
6 - Good financials matter more in early-stage debt deals than equity deals
This session featured Holly Dungan of CIBC Innovation Banking Group; Todd Schneider of Spinta Capital; Rob Spangler of Bigfoot Capital, and moderated by Roman Villard of AVL Growth Partners.
Transcript
Roman Villard:
All right, well, let's go ahead and jump in here, people will continue to filter in. But super excited to chat on today's topic of alternative or non-dilutive capital and various forms of debt. The idea here, as part one of a three-part series, is to educate on what are various forms of debt, how to start thinking about it, how to prepare for discussions with various lenders. And so this is the first session where you'll hear from capital providers and the various seats that they sit in. The second part will be the perspective of venture capital and how they perceive debt, like or dislike. We like that they like it, hopefully on this panel here. The last part is on the perspective from entrepreneurs and founders and those that have gone forth and utilized debt to help their growth. So without further ado, I will introduce the folks that are joining us here today. If you guys don't mind, just share a little bit about who you are, who you're with, and what you guys do. Todd, if you want to kick us off?
Todd Schneider:
Sure. Good to be here, Roman and Chris. Quick background on our firm, I'm one of the co-founders of Spinta Capital. We're based here in San Francisco, we're founded by former lenders from firms like JP Morgan and B of A, as well as smaller venture debt providers, like WTI TriplePoint. And we are not a lender. We're, we're a specialty advisory firm and our sole focus is helping technology and consumer growth companies raise debt financing across a variety of use cases. We like to call ourselves the Silicon Valley's debt capital markets [inaudible 00:01:44], and really the goal is to help companies gain access far more efficiently to the modern lender market, which we'll talk about shortly, which spans hundreds of options and really help companies accelerate their process and solve for the right structure, right partner.
Roman Villard:
Awesome. Thanks, Todd. How about you, Holly?
Holly Dungan:
Yeah. Good morning. Yes, so I'm with CIBC Innovation Banking Group. And the group has been around under CIBC one of the top five banks up in Canada, with half a trillion in assets. The group was really formed about three years ago and similar to Todd's genesis story, also founded by a team of lenders. The bank acquired a venture-debt fund called Wellington Financial, so folks might be familiar with them. Very much a debt shop DNA, and so we lead with debt. So we're a commercial lender in a fairly sizeable bank, but we try to take the best of that, which is really our balance sheet size and strength and stability, and lend that into the growth market. Our team has a pretty heavy focus on software and recurring revenue. Businesses can cut checks up to 50 million. And I'm based in Menlo Park. We have offices though in Canada and throughout the U.S., kind of in all the spots you'd expect us to be, and we just opened our UK office.
Roman Villard:
Perfect. That's great, thanks. And last but not least, Mr. Rob.
Rob Spangler:
Yes, thank you. Good morning, good afternoon. So I'm with Bigfoot Capital based out of Denver, Colorado. We've been around since 2017, so relatively new compared to the other groups here. And we are lenders to software businesses, primarily B2B SaaS businesses, but we'll also look at B2B marketplace, B2B tech-enabled services. Anything B2B with sticky, consistent recurring revenues, we'll look at. You could think of us as an MRR lender, a non-dilutive growth capital provider, but at the end of the day we're lenders too, to growing software businesses. I think it's important to differentiate that we are not a bank. We are not providing venture debt. We are providing growth debt, bridge debt, kind of situational debt for companies that are looking to continue to grow while avoiding dilution. We can come into bootstrapped companies, we can come into lightly capitalized companies, we can come into institutionally backed companies. We have a lot of flexibility on that front.
Roman Villard:
Perfect. Awesome. And I'm Roman Villard, with AVL Growth Partners. AVL is a full-stack CFO firm serving seed through series B stage companies, helping instill the right financial infrastructure and scalability for growth until you're ready to hire full time. So a lot of what we do revolves around capital and bringing folks like these into our client base. So Todd, I'd love to start with you just from a macro perspective, seeing as you guys have visibility across a wide variety of lenders. You guys have put together a pretty phenomenal, what you call, a periodic table of lenders, and correct me on that if I'm wrong, but it's a very cool resource you guys have on your website. So certainly folks check that out on Spinta's website. But Todd, I'd love to get your perspective macro-wise, what are you seeing as far as trends are concerned and anything that would be note-worthy for those that are looking at debt options?
Todd Schneider:
Sure. Yeah. So I mean, I can start with just high-level, big picture trends, then I'll drill in slightly on some of the newer structures that are basically being utilized today. But in general, I mean, no surprise, but the punchline here is there's more capital and there's more non-dilutive financing options than ever for growing tech and consumer growth companies, whether those companies are VC backed or not. And really the swell of new options and the swell of capital, aimed at this market segment, is a combination of increased supply, but also increased demand.
So on the demand side, the company staying private longer has created bit of a capital gap at the mid and later stages that debt can solve sometimes very nicely. And also on the earlier side of things, certain entrepreneurs are seeking to just maintain more control of their business longer before they raise significant equity. And there's more options now, even prior to a significant institutional equity round that can be minimally dilutive or non-dilutive.
And then on the supply side, I mean, the proliferation of the recurring revenue business model, offers a very stable underlying asset to lend against. And then separately, I think the secret's gotten out at this point, but venture debt has been a fantastic place to get yield for investors in a low yield world. And that's attracted significant additional capital. And the strategy's actually been the best performing private debt strategy in the U.S. over the past 15 years.
So I'll just touch on the growth of the lender market and then just a couple notes on structure and then I'll pause. But in the early days of venture debt, there was probably just a half a dozen lenders, couple banks, couple funds, and fast forward to six years ago, when we founded our firm, that had grown to 75 lenders serving the venture market. And then fast forward another five years to today, there are over 200 institutional sources of debt capital aimed at serving growing venture companies. And that represents somewhere in the range of 20 billion of annual capital that's being deployed in the form of debt to venture companies. And really the make up here is comprised of banks, traditional private funds, public VCs. There's a couple fintechs that are VC backed, that are now providing their own form of a venture debt. Handful of family offices and, and a handful of hedge funds that are playing the space, all with different approaches and appetite for risk.
And sort of closing on this piece, Roman, I think just touching on a couple of the structures that are becoming more and more relevant, I mean, again, looking at the early days of venture debt, it was a pretty homogenous structure that was offered. It was generally a simple amortizing term loan. In many cases, it was used to finance equipment or servers. And occasionally the term loans were provided more on the basis of enterprise value, usually on the heels of an equity raise. And then a few years ago, we started seeing more lending activity in between equity rounds or even in advance of equity rounds instead of in conjunction with equity rounds. And we saw the advent of the MRR line of credit, which I know is Holly of CIBC's bread and butter. And we saw more patient non-amortizing term loans become more prevalent, and also the revenue-based term loan. And I know Bigfoot, I believe offers that option as one of the solutions.
And then most recently, past 18 months, we're seeing more and more, what we call asset warehouse facilities to support... So basically credit facilities to support a fintech lending business model, or support companies with a long-term receivable or some other esoteric asset that can be financed.
Another newer structure we call... I'm not sure anyone else calls it this, but we call it a forward revenue cash advance. It's almost a riff off of the traditional factoring space. Allows companies to bring forward future cash flows to today. Works well for recurring revenue businesses with either a consistent renewal track record or future contract value. And then the last structure worth noting is becoming selectively more used, is something called an IP-based term loan, which allows a lender that specializes in valuing IP to actually craft a loan against the underlying value of a patent portfolio. And it's sort of a niche part of the overall venture debt market. So I'll pause there, I'm happy to drill into anything else you think would be helpful, Roman.
Roman Villard:
Yeah, I suspect we could host a webinar individually on each one of those structures, because there are so many different options on how to think about financing growth. One thing that I want to follow up on, as you mentioned, there are about 200 institutional folks that play in this space today. I know that the VC market, I'm not sure what the data says, but has grown... the VC market has grown exponentially. The number of equity providers is just off the charts. And so do you see that trend continuing as more and more providers come online? Or where has that been in the last six months or so?
Todd Schneider:
Sure. I mean, as long as tech and software continue to eat the world, that probably continues. And it's tough to predict whether we're going to go through some sort of correction and reset of the economy here, but I think everyone's viewing that the tech is the long-term growth engine of the global economy. So I wouldn't expect that to reverse over the long term. Maybe there's some fits and starts along the way, but there is, I think, a combination of the diversification of business models that we're seeing in tech and also just the overall acceptance from the venture community and entrepreneurs to blend debt with equity. I think there's still a lot of growth to be seen in the market.
Roman Villard:
Yeah. And we'll hit on some of that too, relative to how VCs perceive the services that you all have and what does the connection look like there. I want to shift over to Holly, thinking about CIBC, the bank offering senior lending position. When companies approach you, what are things that they need to be thoughtful of, considering, and what's the right size and stage of companies to really start thinking about working with you all?
Holly Dungan:
Yeah, so I think, I mean, just broadly speaking, anytime you approach a lender, I think one of the key things to keep in mind is just being direct, open, honest, and thinking about the story you want to tell. Really you'll share information with us and certainly one of the things we look at are the financials. So if there's any blips, either good or bad, you want to call those out in advance, just to make sure that you control the narrative around what those are.
In terms of size of companies we work with, I usually target... So I'm based in the Bay Area, it's a very competitive market. I generally stick to companies that are around 5 million in ARR and upwards from there. I think our debt facility certainly get a little bit more creative when companies hit a certain scale, like 10 to 20 million, we can get pretty creative. On the earlier stage, sometimes we'll look at companies that are quickly growing. I mean, there's certainly, I'd say 2 million ARR should be the baseline for us. I think that's our smallest size. And really what it takes to run a lending relationship.
There is a question of what the trade-off there is. Certainly you wouldn't want to put something in place that's too small. These are custom, bespoke loan documents, you are committing to a monthly reporting package, et cetera, and an ongoing relationship there. So there's kind of that, "When does that make sense?" So if we see a trajectory on a company that's 2 million, I'm certainly happy to get engaged. It's been the case in the past.
Roman Villard:
Yeah. And so when you talk about the due diligence process, when you talk about gathering financials, what are some of those levers that you look for within the financials and perhaps what have you seen as potentially a red flag when somebody sends over their financials, and you're like, "I want to dig into this little bit more?" What lengthens that diligence process for you all?
Holly Dungan:
Yeah, well, the primary things that we look for are ARR growth, retention is a big one, and most of our companies are software, so we're certainly looking at gross margins and a lot of the unit economics. Sometimes what we'll see in terms of red flags, I think times the company financials aren't put together in a professional format, or maybe they're not GAAP financials yet. Sometimes what we'll hear is their sort of GAAP, they're partially GAAP, which bears extra explanation of like, "Hey, we're recording a revenue GAAP. Maybe the stock comp isn't in there." That these are things that are helpful to know before we see the financials and think about what we're looking at and trying to reconcile what we're seeing there.
The other thing is, any big blips in anything. I think if you lost a major customer... and this happens a lot in the early stage stuff, right? You got a big customer in the beginning, but really your company went a different direction and towards a different core market because there's more opportunity there. And a big customer will fall out eventually and hurt the ARR base. To call that out, if we don't see it in the first part, is helpful because then you can talk about what happened to the company. You control that narrative. You can say, "Hey, we lost this big company, it was an early adopter, it really wasn't using our core product. Our company's gone this other direction. Here's how we're remediating that. Here's the opportunity that we see. So, while it's a big loss to the ARR, we've got better opportunity over here." Rather than maybe I miss that and our risk colleagues, when I go internally, call it out and I don't know what's going on there.
Roman Villard:
Yeah. I think that's a great point. Because it's so easy. We've all seen financial models that just show this up and to the right curve, just this exponential growth, and there's always a story behind them. So when you talk about being open and honest about where you've been and where you're going, highlighting those things can become more of an asset because you may be reducing your risk by acknowledging it and saying, "Okay, we own this, and we're fixing these certain things to get to a certain destination."
Holly Dungan:
And that's a good point, too. I mean, especially for the bank lenders. What we like to see is the board of proof plan, right? Now is not the time to share the hockey stick or the most aspirational plan, because what we're going to do is underwrite to this plan. And if we go forward on a deal, that's the performance we'll be expecting and tracking you to. So certainly the board approved is usually where we would start with that, just to align expectations between the board and the bank.
Roman Villard:
Perfect. That's great. And you hit on this earlier that I'll touch on. GAAP financials. We see so many instances where there's maybe a hybrid GAAP approach or it's full cash basis, and our recommendation to companies is always to move quickly into a GAAP adherent environment so that when you are presenting financials to third parties, to investors, to lenders, you're ready to go and it's set up in a very consistent manner. So I think that's a huge point that you made earlier. But Rob, want to switch over to you here. You mentioned on a discussion earlier this week, being a client advocate. We're really being beholden to the client's goals, their aspirations, but also facilitating quality information diligence to your credit team. Can you kind of talk about that line that you dance between being a client advocate and then also managing the credit process?
Rob Spangler:
Yeah, definitely. And I think to set the scene a little bit, I didn't include this in the intro, we're working generally with companies at about two to 15 million in ARR. I'd say our bread and butter is 2 to 8, 2 to 10. So that means we're working directly with typically the founder, CEO, maybe a CFO. So I think it's just important to have them recognize that they're working with me, yes, as the conduit, right? But there's a team behind me, there's the credit team. The way we're set up, we're a small team, but there's me, then there's the credit team, then there's the investment committee. I work closely with the credit team, they see how things are going, see how the processes are going.
So it's important to communicate timing, expectations, have clean docs and have realistic expectations around what I can do as the market-facing person at the company, right? I can only do so much. I can set up a deal, I can put something in place that works for you, but at the same time, I have to turn around and essentially pitch it to the rest of my team. And so I want to make them look good, right? I want to make you look good. I want to get this deal done so that we can have something in place that helps you grow. So that's really it.
But at the same time, while it's important to have those things ready, have clean docs, be ready, be timely, I do want to encourage folks to explore, right? Go have conversations with me, have conversations with Holly, figure out what's best for you, what you're a fit for, right? It's a two-way street. So be ready, be professional, be timely, but don't let that hold you back. Go explore, see what's right.
Roman Villard:
Yeah. And since you're dealing with founders, with CEOs, more often than not those individuals have a lot on their plate, often managing various segments of the business at their early stages. Beyond financial acumen, financial organization, how can they be prepared to have that conversation with you, maybe once they've gathered sources of information from other lenders as well?
Rob Spangler:
Yeah. I mean, I think it just comes down to having conversations, right? Like I just mentioned. Go talk to me, go talk to a non-bank lender, like myself, go talk to a bank. Maybe you're including equity in this situation too. Go figure out what's optimal, right? Be ready for that conversation and understand where you fit in all of this. Because there are a lot of options, right? There's the whole VC world, there's venture debt, but you typically have to raise equity in order to get that. There are the new fintechs that are out there. Figure out what you're looking for. Are you just looking to smooth out operating needs? Are you looking at a serious growth initiative? What you a right fit for, and go from there.
Roman Villard:
Yeah, I think that's a good point of identifying the why. Why are you raising capital?
Rob Spangler:
Right.
Roman Villard:
Is there a specific purpose for it? Do you have milestones you want to reach? Do you want to fund certain operations? I think that's a really good point. One thing I failed to mention... Go ahead, Rob.
Rob Spangler:
Well, I was just going to say. figure out what kind of company you are, right? Are you a traditional VC backed company? Do you want to go that route? Do you want to have those growth expectations? Or do you want to be on your own terms and maybe take debt, right? Retain more control. Figure out who you are and then figure out the why, right?
Roman Villard:
Yeah, I think that's good. One thing I failed to mention is that for anybody that has questions, feel free to pop those in the chat box down below, and we can get to those. But I think it's interesting, a lot of founders come from a perspective, "I don't know what I don't know." And so it may be easy for those that live and breathe this every day, but for somebody that's exploring an equity raise versus debt, how do you typically advise them... and this is to the group here, how do you typically advise them and what are key considerations when evaluating those two options? And if anybody wants to jump in on that one. Todd, I see you nodding?
Todd Schneider:
Yep-
Rob Spangler:
Todd, this seems like your world, so...
Todd Schneider:
Yeah, I mean, it sort of depends on where the company is and are they already VC backed or not. And generally speaking, if they've already raised and they're already on a growth path, I would say all else equal, if they have attractive options in front of them to raise additional equity, just given the flexibility of equity and the little lack of constraints that equity offers, generally speaking equity is the preferred path to go for a company that's already VC backed and on a nice trajectory. And I know Holly and CIBC can offer fantastic, very low cost, complimentary credit facilities to support those types of profiles.
Todd Schneider:
But then the other scenario is, maybe a company's in between rounds and they're considering raising equity, but maybe they've already tested the market a little bit on the equity side or maybe they've gotten feedback from potential third-party investors and the valuation just... or there's something with the valuation or terms that are just making the company feel uncomfortable. Or they're working through a little bit of a transition in the business. That could be another scenario where having a credit facility provide another 18 to 24 months of runway, allowing the company to regain some of that growth trajectory and then revisit the credit markets then, is another great use case.
Todd Schneider:
And I think Rob, that's a great point, trying to figure out, "Okay, who am I here," and having a bit of a... at least a high-level view as to, "Do I want to toe my way into building this business, and scale it somewhat before I raise a lot of money? Or do I want to try and raise a lot of money right away type thing?" And debt can be a helpful tool if it's the former and you keep things capital efficient, but maybe not the best tool if you're planning to really torque up growth and increase burn and that kind of thing.
So I would say generally, what we don't see is companies in this space finally analyzing the cost of capital benefits versus cons, equity versus debt. Generally, that's not the analysis that we're seeing companies go through. It's generally more of an analysis of, "Okay, how much capital do I need here for the next 24 months? And what will that help me do? And do we really need to step on the gas really, really hard?" And if so, it probably means equity, but if it means a little bit more modest trajectory, then debt, I think, can be a lot better tool.
Roman Villard:
Yeah. And you mentioned those that are already VC backed, that have equity players, may be more prone to seek an equity raise versus debt. I'm curious, Holly, what your experience is with companies that are already VC-backed and how that relationship works?
Holly Dungan:
Yeah. Like Todd mentioned, a lot of times, we're very complementary. I would say the VC partners, the VC funds, and private equity funds, are most often the ones bringing us into deals. Our financing is great for event-driven financing. If you have acquisitions, for example, you're on an acquisitive strategy, you've got the first acquisition lined up, a lot of times you're going to be bringing in equity, but leveraging a part of it with debt, right? So we can come in there.
Holly Dungan:
On the VC-backed company side, a lot of times folks will put debt in alongside that round. And certainly, you'll get the best... on the early-stage deals, you'll get the best deal right after you fund that round. The adage of "get debt when you don't need" it is certainly true, but there's a bonus here. You get the best deal when you're flush with cash, but also it gives the bank a track record, time to work with you over time and get to know their company. But you also get to repurpose your equity docs, right? A lot of the information we need is the same. So that's kind of a good point to put it in, even if maybe the runway is longer. And I would say, then when you do come to... maybe you don't have plans to use the debt right away, but you want to start that relationship. When you do come to a crossroads of, "Hey, how do we finance this," your lender knows the business and can tell you what they can do for you. And then you can go explore the equity market. Maybe it's a combination of both, maybe it is equity, but if you have a lender there alongside you that knows your business pretty well, has been seeing the monthly financial reporting, you have a pretty good sense of what you can get done on a debt side.
Holly Dungan:
But I would agree, right now especially, there's certainly a lot of equity looking for a home, but you need to decide is that the path we're going to take, is perpetual fundraising and shooting for the moon? And I think I've seen a few, it feels like founders have a lot more control these days. The terms are definitely more favorable to them than they've ever been. And they're able to say, "Hey, I'm going to take venture money, but I am going to grow reasonably and I'm going to take a slick of debt alongside it to control the dilution that I'm willing to give up."
Roman Villard:
Yeah, that's a great point. And I think it goes back to Rob's earlier statement of educating yourself, know what the options are and make sure you've got the right people in your corner advising you on what potential structures could exist. If it's part equity, part debt if it's one bucket or the other. Yeah, there's so many different creative ways to leverage debt for growth. So being in the cohort with folks like yourselves is certainly a good position to put yourself in. I want to jump to common pitfalls, landmines, maybe anecdotes that you guys have related to situations that maybe blew up or did not go so well and ways to avoid those circumstances.
Holly Dungan:
I can jump in. I might have some unique experience. In a past life, I did some advisory work on early-stage companies that were winding down, working for a bank, a Silicon Valley bank, just for a short stint on these types of deals. And I think in two cases, in eight months that I was on this team, I saw companies that... early-stage CEO founders that had outsourced accounting teams and maybe not well versed in SaaS companies. And the account GAAP accounting for it, and were preparing reports for the founder CEO to rely on to run the business. And for whatever reason they weren't correct and they almost ran out of money. Certainly, a CEO founder in the early stages has a million things going and might not have the time really to get to know and understand financial statements, especially GAAP if they're there. But one thing is to just watch the cash in the bank account, right? He or she should have access to that and watch it and does it make sense for what you're seeing in the business, what you know is going on in the business? And goes back to your point, Roman, is having the right people around the table, people that know the business, people that you can trust to be advisors and watch out for the things that an early-stage founder really is not going to necessarily have time to do.
Roman Villard:
Yeah, that's great.
Todd Schneider:
And I would just add a few other things here. I mean, I would definitely promote the fact that track record matters in terms of lender track record. So know your lender, who are you partnering with, who is proposing the term sheet. And there's a lot of newer folks out there, and they're all... in many cases, they're capitalized very differently. Some of them are not capitalized with committed capital at all. And sometimes that can work, too. But assessing if that's the case before you sign term sheets and really understanding that the capital base and the stability of that capital base behind that lender. And also, I know sometimes companies are moving fast and they don't love doing this because of the other things on their to-do list, but with doing reference checks prior to signing term sheets is important. Particularly if it's a newer lender that maybe he's only been around for a year or two, and doesn't have a 20-year history working with your VC syndicate, for example.
And then just another plug on financials, pulling things together. I mean, in some cases I think raising debt sometimes involves a little bit more rigor on the detail or the granularity of financials that are delivered to the lender in terms of the underwriting process. And just underscoring that, even with the forecast, I mean, three statement financials are pretty critical, particularly as companies are scaling to mid and later stage. And in many cases, the three statement set of financials for the forecast are not as important or required for raising equity, but really critical for debt process. So just a couple other thoughts there.
Roman Villard:
Yeah, that's good. Go ahead, Rob.
Rob Spangler:
Yeah. So we get asked often from companies, "Will taking debt impact my ability to raise equity down the road?" And I think that's something that a lot of founders and operators think about when exploring this option versus just going equity. And what we've seen is the answer is absolutely not. Most of our portfolio companies come into a facility with us and then eventually raise equity. I'd say most do. Or refinance into a bank once they mature. However, I think that the caveat there is to not raise too much debt, right? And that might sound weird coming from myself in this seat, but it's very, very true, right? You don't want to overextend relative to your valuation. If you and your revenue and ability to service that debt, if you're a 2 million ARR company coming in asking for six, that just doesn't work, right? You don't have the revenue profile or the valuation to service that, to back it up, to raise equity down the road to pay it off. So I think it's just important to remember that debt can be... growth debt can be an incredibly powerful tool if used appropriately if used in moderation.
And then the other thing on my mind, when it comes to pitfalls is just weighing the pros and cons of going in every direction. And I know we keep talking about this, but operators often look at equity investors and think, "I'm going to get so much out of this," right? They know the industry, there's going to be so much value add, right? But oftentimes the operator knows more than a VC. That's just the case, they're the industry expert. And I think it's important to recognize that and remember how well you know a market and how you don't have to lean on expertise from others. You can potentially do it yourself and really go grow. You can still grow without going in that direction.
We've seen a lot of companies talk to us and we've put something in place that we think is a really good fit for where they are and how well they know a market. And then they say, "Yeah, we're going to go this route and we're going to raise equity." And we ask what the valuation was and what they're raising and the 40% dilution, just right then. And it's hard for us as lenders to see that happen, right? Because we think they can do it without taking that kind of dilution. Consider taking us in parallel with that. Bring them on as that value add, but do it... financially engineer it in a way that makes it good for you, not just the investors.
Roman Villard:
Yeah, it's interesting, some of your conversation points brought me back to a... we did a first-time fundraising panel with some folks in the VC world. And one of the comments, as far as recommendations to founders was to know your market. Make sure there's a good founder market fit there because the moment you run into an investor or lender who knows your market better than you do, you might be upside down. And that research is free. It's free to reach out to people to build relationships, to understand the market, the landscape of debt things like that. And so it's talked about often, but certainly is quite. We hit a lot on financials and being prepared financially from a GAAP perspective, when assessing debt options. When you move forward, what should a company expect, or what should a founder expect when it comes to monthly reporting to debt covenants? And how does that differ from a bank to a venture debt specific offering? Holly, if you want to hit on that?
Holly Dungan:
Yeah. I mean, I can cover it from the bank side. So once we close a deal, there is a monthly reporting package that's required. In some of the later stages, maybe on the public companies they get to be quarterly, but for most of the vast majority of the portfolio, it's monthly. It's due 30 days after month end to give companies time to close out their books. And then usually it's a package of the financials, it's a compliance certificate saying here's the covenant calculations we're in compliance, both with financial covenants, but also the reps and warranties and affirmative covenants, et cetera. Call out any sort of litigation that might be going on with the company or any significant company updates. And from there, internally, we'll collect those packages each month and track the company to the plan we underwrote to. Depends on how active the client is, if... some of my clients we talk to quarterly because that just seems to be the best cadence. There's not a lot that changes in those inter-quarters. Certainly they're free to reach out whenever, but for most companies, I think a quarterly cadence works in terms of getting a business update and just making sure that we're on the same pace as the company.
Other companies, earlier stage companies or companies maybe that have been off-plan and are remediating a situation, we talk to probably a little bit more often, more like monthly. And of course, plans change. We've underwritten deals and certainly things have changed from inside control and outside of founder's control. And so it's just really important to be communicative with the bank and call it out earlier than later. Of course, it's nicer for us to hear it in real-time versus waiting for a 30-day lag and seeing it in the financials. And then those financials don't only come to me, kind of what Rob was saying, I'm the conduit, but certainly, there's a big team behind me and those financials go to a big team and it starts to... if there are big variances to plan, the questions start to roll in and it's best if I've already prepared books for that. So that's what it's like on the bank side.
Roman Villard:
Rob, any thoughts on your side?
Rob Spangler:
Yeah, so I mean, we're still lenders at the end of the day, we do have some covenants, light covenants, minimum cash requirement for example, an advance rate for example. And we're constantly monitoring that. Typically we have read-only access to an accounting system. We might have read-only access to the banking system, and our credit team, they're constantly monitoring that to make sure that everyone's in compliance. We, I think, have less requirements than a bank, but that's life as a non-bank lender. And generally, I think while I'd love to say that we have a ton of value-add, again, I think one of the best things about our offering is that we provide capital and then we kind of get out of the way, right? We let companies go do their thing. Go heads down, go put this to work. We offer to talk from time to time, I'd typically quarterly is our cadence. Unless again, there's sort of something we're monitoring or tracking or some issue. Then we might speak more often. But yeah, that's how we work.
Roman Villard:
Yeah. And Todd, are you seeing any variance in how covenants are put on companies raising debt from the various buckets you guys analyze? Then I've got a follow-up question to that, after your thoughts on covenants.
Todd Schneider:
Yeah. I mean, a common covenant package that we'll see in venture will be a minimum ARR, minimum revenue test, with some sort of cushion to plan or maybe it's just a flat, minimum ARR number, just making sure the company doesn't go backwards. So that, paired with a minimum liquidity covenant, just to make sure the lender has at least some warning before the company is about to run out of cash or getting low on cash. That's pretty common. But many lenders do not require any covenants. And it really depends somewhat on their underwriting philosophy and risk appetite and also structure.
Todd Schneider:
So some lenders use structure instead of covenants to govern the loan. So what I mean by that is requiring that the loans start to be principal repaid pretty materially, starting in month 12 or month 15, for example. So that kind of companies generally don't want to see cash going back to lenders, especially if they're in growth mode. So that sort of forces an implied governance. Or sometimes it forces a discussion around how's the company doing, and in a lot of cases, the company will ask for an extended, interest-only period and it gives the lenders a checkpoint there.
In terms of trends, I mean, I'm not sure we've seen dramatic trends in terms of evolution of covenants or looser covenant. Maybe some of the newer lenders, especially more the fintech players that are starting to play in the space on the software side. They're offering rapid financing with no covenants and it's unsecured. But they generally are pretty conservative in terms of what they're willing to offer. And they do have other ways to govern the loan in terms of re-underwriting a loan every single time that the company wants to draw, for example. So that's some of the things we're seeing.
Roman Villard:
Yeah. And you mentioned that a lot of these hurdles are put in place to ensure that a company's not going backwards. So in the event a company does start going backwards, and things aren't moving according to plan, what happens? How does that conversation start? And what are maybe additional covenants or milestones put in place when that unfortunate circumstance does come up?
Todd Schneider:
Yeah, I'm sure Holly has some good examples of this as well, but that goes back to know your lender and who are you partnering with. And for vast majority of lenders that are playing in venture, they're lending against a business that's the primary value, the underlying value of the loan, is the value of the business. I mean, there's generally not a ton of assets here, or if there are that the loan is usually larger than the asset is. If things aren't going great, it can be very difficult for a venture lender to sort of monetize the loan without being a lot more constructive and working through constructively with the management team. As opposed to, which they have the right to do, calling the loan and forcing repayment. But generally that's not a great way to get whole, and separately, that's not going to make a lot of friends with anyone on the board.
Todd Schneider:
So generally, everyone gets in a room and talks about why was there a miss? Why is the company going backwards? What's being done to rectify? And the lender is thinking about, "Okay, am I still comfortable with the exposure I have here based on those conversations?" And sometimes there needs to be a solution. That could be a little, extra equity that's kicked into the business to help them work through the issue, or it could be some sort of restructuring of the loan combined with some economics to the lender as a result.
Roman Villard:
Yeah. Holly, how do you guys think about that?
Holly Dungan:
Yeah, I think Todd covered it, that... kind of going back to what I was saying about being open and direct and calling out issues ahead of time. I think that gives us plenty of time to work through those issues. But ultimately, if you're burning cash, there's a certain amount of cash on the balance sheet, there'll be a point in time where you need to make a decision of what to do with the company, right? I don't think anybody wants to just hit the wall. So the earlier you can start those conversations and set expectations around, "Hey, here's how we're thinking about it. Here are the inflection points we need to get to, to be able to raise equity. Maybe it is bringing in a little bit of equity to solve the short-term problem, and maybe it is restructuring the data. It many times is a combination of things. And I would say, like Todd mentioned, it's everybody's at the table talking about it. It's the investor, the management team, and the lender, a lot of times working to find good solutions to it.
Roman Villard:
Yeah. One thing that didn't come up when talking about covenants are financial audits and reviews. And I want to ask about that because I've come across a number of companies, at a very early stage whose banks or lenders are saying, "We need you to be audited." And to me, it's a little perplexing at the early stage. And so I'm curious, what is a typical size and stage of a company where you might see that requirement come in for a financial audit? And then what flexibility does a company have in perhaps pushing back on that, or how does that conversation happen when there may be an audit or review requirement?
Holly Dungan:
So from the bank's perspective, I'd say yes, of course, early-stage companies aren't always getting audited. We prefer to see an audit or a review by an external third party. It just gives us confidence in the numbers, kind of going back to on the debt deal, the numbers need to be a little bit tighter than on an equity deal. They're looking at different forward-looking metrics, we're looking to make sure the company is reporting its financials correctly and we can really on the financial information. So certainly at least a third-party review is helpful. I think on the earlier stages of debt, on the smaller sizes, that's where we start to make accommodations. And/or if we know the equity provider maybe did a deeper dive into the financials, or we can lean on that relationship a little bit. But I'd say it's kind of a debt size situation and then how we feel about out the quality of the overall financials too, right? Like we say, on some of those early stages, they're hybrid, we're not really sure what we're looking at, that's where it would make it more uncomfortable. Whereas if we have a very experienced, either CFO or CFO team in, then we can see the story in the financials. Those are some of the things we think about. But certainly in the later stage, yeah, an audit is preferred.
Roman Villard:
Sure.
Holly Dungan:
When you start getting upwards of 20 million, 30, 40, $50 million facilities.
Roman Villard:
Yeah. And I heard you say, it's certainly helpful to have the reviewer audit in place. I didn't hear required. And I'm curious, of course it's helpful to have that, but if a company, an entrepreneur is saying, "Well, I don't want to spend $20,000 on audit. I want to pour that into sales and marketing and perhaps product." Is there an easy benchmark to identify when you may have to require that type of audit or review?
Holly Dungan:
Every deal's a little bit different, I would say. I mean, I think you'll find it's different at different lenders too, to be honest.
Roman Villard:
Yeah.
Holly Dungan:
And exceptions. There's always exceptions to every rule.
Roman Villard:
Yeah. Yeah. Rob, did you have anything on that one?
Rob Spangler:
Yeah, I mean, I was just going to say where we play, we hardly ever see audited companies. It's sort of the question, are you bank backable yet? If you have that institutional equity partner, if you got audited financials, then you might be ready for a bank. If you're not, or you just went a different route, then that's why you come to us, right? We're not lending deposits, that's a key difference. There's just a different risk tolerance there. And in terms of just the size and maturity of a company, we're generally earlier than a CIBC, for example. So very, very rarely see audited financials.
Roman Villard:
Yeah. Yeah. It's not common and it's expensive and it's a thorough process that may be difficult to manage for a smaller company. So I've got two questions left here with the time that we have. The first one, I want to hear about the success stories. We talked about the landmines and the pitfalls, I want to hear about circumstances that turned out really well to leverage debt in the right way. So we'd love to go around the horn here to hear a couple of those anecdotes of companies you all have worked with and seen great success leveraging these types of structures.
Rob Spangler:
Happy to lead off. Yeah, I mean, so outcomes are what we're all about. It's why we're here. It's why we're doing this. It's why, frankly, it used to be, we started doing this in 2017 when this kind of lending was... not unheard of, but very, very rare. And it's because of these outcomes, these great outcomes that people are starting to come to us, right? Rather than the other way around. We don't have to do as much educating while we still do and like educating, we do a lot less of it these days. And it's because of those outcomes.
I mean, a typical example is a company comes in at 2 million in ARR and they want to get to four or five or six before they raise an equity round. One of the best examples, a company that we started working with in 2018, they deferred, deferred, deferred, didn't raise equity, didn't raise equity, bootstrapped essentially, up until a couple of months ago and raised a $69 million round, just deferred and deferred and deferred. And that's obviously been a great outcome for them. We upsized our facility at least once along the way, gave them access to more as they grew. And that's what we're trying to do, right? We're trying to find companies that have a mature revenue model that are at scale, but we want to get them to that next event while avoiding as much dilution as possible, while not compromising growth. So that's why we're here.
Roman Villard:
Yeah. That's great. Todd?
Todd Schneider:
Yeah, I mean, one example, and we have a bunch of these where companies are using debt pretty strategically for certain specific reasons, or just working through a pivot or maybe it's just they don't want to raise equity right now or ever. But one example of that ladder use case would be inDinero, they're a tech-enabled software platform in the accounting space. And we helped them with a small credit facility when they were around 10 million of revenue. We helped them with a little bit larger credit facility when they're around 15 million of revenue. And the founder, Jess, had really just raised high net worth angel money and seed money to... brought in modest equity along the way. And we helped them again, raise a little larger facility when they're about 20 million of revenue and working with her again. And I think the punchline here is she's been able to... she's kind of done it in her own way. I think it's not always been super easy, but a lot of blood, sweat, and tears, but she's kind of been able to scale her business without raising true institutional equity. And she's got a business that's quite now, and she's kind of blended debt, or leaned on debt more heavily than 10 years ago. You wouldn't see companies doing that. So it's been a neat case study.
Roman Villard:
That's great. Holly?
Holly Dungan:
Yeah, I think kind of similar stories here. A lot of times I think it boils down to who you're working with as your lender, but one case in particular I had the opportunity to work with a fairly early-stage company. We put in a pretty simple deal after their Series A, and worked with a company for only six months. And they had a new CEO who had come in, so it was a little bit of a fresh start for them. And they were looking to upsize their credit facility. And because we had the six months of experience with them we couldn't quite see the growth yet on the P&L side, but we went in-depth through the pipeline and you could see the company had quite a pipeline with a very high likelihood of closing.
And certainly a lot of companies might approach their equity players for this. And I think they did, and maybe this equity player was approaching an end-of-life situation. I can't remember if it was end-of-life or just maybe they were reserving funds. They were at the top of their allocation there. So we were able to step in and provide that bridge to close that pipeline. And the next round was... could happen six to nine months later when the company was, I think probably 50% ARR growth and really had brought on five marquee logos that really helped them get that next valuation bump.
I think it boils down though, to working with a lender who's willing to take the time to understand the business. If you don't have a relationship, if you're not able to actually have somebody that is willing to get in your corner and understand the business and maybe peel back the layers a little bit more, that could be tough if they don't have the capacity for that. The second thing I'd say too, is just we also, from a banking perspective, many times your bank will bring more than just debt. We will have the relationship on the deposit side so we can help the business on that side of things too. But also certainly helping founders think through their liquidity options, et cetera, we have the resources around us to do that.
Roman Villard:
Yeah, that's good. And then one thing that I know in particular about this group is that anybody on this call is willing to take the time to educate, to learn the business, and to make recommendations, and really sit in that advisor seat, just to help be an advocate for they're talking to. So highly recommend finding Rob, Todd, and Holly on LinkedIn, connecting, utilizing them as resources. And I'd like to wrap up with one final question that I'd like to end with. And that is, what's the number one bit of advice you would give to a CEO/founder/entrepreneur, who is seeking debt to grow their business? And let's start with Rob.
Rob Spangler:
Ooh, that's a tricky question. I'd say, reach out to someone like us, get educated. And then reach out to an operator who's used debt before in their business. Figure out do they regret it? Did it work out? Figure out was it annoying having to serve service the debt every month? Did it actually help with... get you to that next level without taking on dilution? Talk to others. Like I said, we've been doing this now for several years and there are case studies out there. We'd be happy to introduce you to some of our prior portfolio companies. I think I can still call them portfolio companies. So yeah, go get educated and then figure out where you fit in all this.
Roman Villard:
And a quick plug for the third part of this series, it's operator focused. And so come back and listen to that one. You'll hear from operators who have had great, and maybe not so great, experiences with debt. And so I think that's an awesome point, Rob. How about you, Todd?
Todd Schneider:
I agree. I don't think I have too much to add there and I think anytime a company might be considering its next raise or has some sort of strategic initiative or acquisition offer opportunity. I mean, always thinking holistically about the spectrum of options that might be available to finance is the right way to think about it in this world. There's just a lot of different ways to do it. Equity, debt, a lot of flavors of debt. So I think just keep an open mind and start broadly. Always happy to help companies think through that.
Roman Villard:
Yeah. So we've got the know your market, reach out to folks, educate yourself, have an open mind. Holly, what's your number one advice?
Holly Dungan:
I hamstrung myself by getting the last card here because I would say all of those things, and kind of what you said, of course. I think most of the lender are really happy to hear the stories. That's the best part of the job, is hearing what founders are going through and what companies they're building. So I'm always interested to hear the story. Sometimes I'm not able to help, which is unfortunate, but I think most of us are trying to build a network of other folks in the industry. If I can't help, maybe Rob can, maybe they should consider talking to someone like Todd. I can give the view from the bank view and maybe other banks that might be interested, but I think for the most part, it is exactly what they said. Reach out to peer groups, people who've done this before in your position, and then try to talk to an open range of lenders to get a viewpoint from them as well. They might be able to say, "Hey, not today, but if the company looks like this, that's when I would get interested in it."
Roman Villard:
Awesome. Well, I thank you all so much for joining this discussion. Holly, Todd, and Rob, really enjoyed it. I believe it's been valuable to start helping folks think through where to go, what to do, and how to start thinking about debt. So thank you very much for your time. And for those of you that have stuck with us through the end, thank you. This session is recorded, and so we will send it out after we wrap up here.
This Q&A panel on alternative capital from the capital provider perpsective occurred on November 11, 2021.