What is Venture Debt, and is it right for your Company? With Lighter Capital

¡Buenos días a todos! Welcome to the "What is Venture Debt and Is It Right for Your Company?" Founder Institute webinar. My name is Ryan Micheletti and I'm Head of Global Operations for the Founder Institute. As some of you know, Founder Institute is the world's largest pre-seed startup accelerator. For the last 11 years, we've helped create over 4,000 companies across 185 cities, leveraging our mentor network of over 15,000 mentors. So if you're an early-stage founder and you're interested in enrolling in a program that can help you achieve traction and get the funding, then we're currently enrolling in over 80 cities around the world right now. Today I'd like to do a quick introduction of the topic, and I'd also like to introduce our speakers. So, you know, funding is obviously something that is very top of mind right now. A lot of startups and companies are looking for funding. One alternative financing model that is gaining popularity is something called venture debt, but it's not as popular as equity financing and some of the things that you as a technology entrepreneur might have seen. So we're going to be discussing that with one of the fastest-growing alternative financing businesses, Lider Capital. So let me introduce the two speakers for today. We've got Mike Lubbers, who's the Chief Credit Officer at Lider Capital, and John Prentiss, who is the Director of the Investment Team. Mike, do you wanna start with a brief introduction on yourself?

Yeah, nice to be here. Yeah, so my name is Mike Lubbers, and as the Chief Credit Officer, I'm responsible for approving and monitoring all of the investments that we make at the portfolio. I joined Ladder Capital about 2 years ago, and prior to that, I was the Chief Credit Officer at Bridge Bank, which is a tech bank down in San Jose, California.

Great.

And John, how about you? You want to go next?

Yeah, my name is John Prentiss. I've been with the company for quite a while, actually just over 5 years. So I first started when we were building up kind of origination efforts as the first kind of business development origination hire. My job is working more directly with customers, and prior to Ladder Capital, I actually worked at Siemens in their corporate venture group in the Bay Area. And in my current role, as I mentioned, I'm working with customers kind of through the underwriting process, working with the companies kind of as they're going through the underwriting process, working with Mike. And then previously I've worked kind of quite a bit with companies in the Bay Area, and now I'm working on some of our international expansion efforts.

Amazing. Yeah, I know Lider Capital is growing very quickly, and we've got a great partnership with Founder Institute Toronto And so this is an international audience. We have founders from all over the world tuning in. And because this is live, we want to get to your questions. So founders, go ahead and introduce yourself to the chat. If you have questions at any point, just pop it in there and then we'll get to this because we want to have this be as interactive as possible. So here's a brief overview of the agenda. First, we're going to talk about what is venture debt, and then we're going to go into what are some of the requirements. And lastly, we'll talk a little bit about how COVID-19 might have affected the landscape. And things that entrepreneurs should really understand before pursuing venture debt as an alternative financing method. So first, I guess, Mike, this question goes to you. Can you define venture debt?

Yeah, yeah, it really can differ depending on the audience. So I'll walk through both how LIDR looks at it and maybe more of a traditional kind of venture debt side. So When I say traditional venture debt, what I mean is typically those lenders are looking— they're focused on VC-backed companies. And they're lending usually based off of the enterprise value of the company. So they're looking at market comps, they're looking at the prior equity round valuations, and they're lending a multiple against that. Typically, venture debt providers can be pretty aggressive in the size of the loan, and they're really basing that off of what they see as the continued support of the investors in that deal. From a repayment side, they're looking for healthy returns from an interest rate perspective. Usually they have equity warrants as well. And they're looking at the possibility of being repaid, not just through organic, you know, principal and interest, but through some sort of an exit on the deal, whether that's M&A or an IPO or even the next equity round into that company. So they can be pretty aggressive. They get healthy returns. And again, they have close relationships typically with the VCs that are in those companies. Lighter Capital kind of takes a different approach, and mainly because we play in the non-equity sponsored space. So we do not require that a company be backed by a VC. We tend to think of it more as growth capital. That's kind of the term that we use. And we're really looking at the metrics of the company to drive our decision whether to invest. So we're looking at revenue growth prospects, we're looking at the level of recurring revenue in the deal, we're looking at the scalability of the expense structure, we're looking at the company's runway and their cash burn trajectory. Because we're not relying on the VCs, we're also not relying on, you know, the next equity round or an IPO or some sort of exit to pay us back. So it's really more about the organic repayment of the loan. And we're not taking equity in the deals. So again, we're gonna be a little bit more conservative from a sizing standpoint. Ultimately, what we're looking for is that that company, our confidence that that company can generate cash flow and be a self-sufficient company, whether or not they ever graduate into taking VC support.

That's a great overview. Maybe you could talk a little bit about the types of companies that are the better fit for venture debt.

Yeah, I'm happy to jump on them now. Oh, sorry, go ahead, Mike.

Oh, go ahead, go ahead, Jim.

Well, I can talk from the perspective of kind of the types of companies that are the best fit for lighter capital, and maybe Mike can talk from the perspective of kind of traditional venture debt. So As Mike mentioned, most of the lending we do is non-equity sponsored, and because of that, I would say our preference is really more for kind of bootstrapped, capital-efficient companies. You know, we're not typically funding your stereotypical kind of hypergrowth, kind of hyper Silicon Valley startup that's raised millions in venture capital. If we look at kind of the profile of our companies, it's mostly B2B SaaS, recurring revenue models, high gross margin. And two-thirds of our companies are actually bootstrapped or angel-funded, so they haven't raised kind of true institutional equity financing that you'll see in traditional venture debt. Another third are equity-sponsored in some form, so maybe they're in between financing rounds or they go on to raise VC after us. But typically it is companies that are a little more capital efficient, and the founder is usually more sensitive to dilution and control.

Carl from the audience asks, or he says, I'm curious to know if your main focus is tech startups. So is it traditionally tech or do you service other types of companies?

It's mostly tech, mostly B2B SaaS particularly. We'll sometimes look at B2C companies too, so other kind of subscription models. So think kind of a Dollar Shave Club kind of model. We'll also look at some tech services. But primarily B2B SaaS.

Yeah, it's really a function of understanding the growth trajectory and the predictability of the revenue streams. And so we found that, you know, for our model, SaaS companies subscription-based models do tend to be a little bit more predictable. So it fits our model. And as John said, you know, maybe the subscription service isn't pure software, maybe there is a product involved. You know, the Dollar Shave Club example. A little bit different expense structure associated with those companies, but that's really kind of the key driver for us is understanding the predictability of the revenue streams.

Yeah, that makes a lot of sense. You know, it's well known that these subscription or SaaS-based companies, you know, this— the predictable revenue stream is definitely lower risk. And what we're seeing is that there's actually higher multiples in terms of returns and enterprise valuation. So Chetan asks, is venture debt an option to get a startup off the ground?

I guess it depends on what you mean by off the ground. If you're talking pre-revenue, that's gonna be a little bit tougher. Although again, maybe a traditional venture debt player would play in that space. However, they're gonna put a lot more reliance on the VCs and the deal at the time and the liquidity that the company has, you know, how much cushion they have going into it. We play in the post-revenue space. So obviously because we're basing so much of it on the predictability of the revenue stream, we need to see, you know, some traction first on the revenue side. We can look at companies that have revenue as little as $15,000 a month and revenue generation for, you know, as few as 6 months. So it's not like we're talking years and years of traction, but I'd say that generally venture debt will become a more realistic option after you've seen a little bit of that traction from a product adoption and revenue standpoint.

So some companies may have already raised a little bit of money to get to that $15,000 a month. What would you say is really the benefit of venture debt versus, you know, going and closing a larger, like, equity financing round? So someone who's maybe like thinking of going the venture debt route, they kind of meet the minimum criteria or they can go and raise like, let's say like a Series C or a Series A. Yeah.

Yeah, really what it boils down to for our entrepreneurs that we serve and the folks who tend to be attracted to the option that we provide is the control factor and it's the dilution. That they don't wanna give up ownership of the company because we don't take equity warrants, because we don't require board seats. We're really leaving it to the entrepreneur to manage the operation. So it's really where that entrepreneur feels the company is gonna be and if they wanna limit dilution, protect their ownership, that's typically where VentureNet becomes a good option. Having said that, there's also just kind of a blended cost of capital involved. And so, you know, what I said earlier, traditional venture debt lender is usually coming in because there are VCs in the deal. At that point, it's just a matter of blending the cost of capital. VCs, by taking large equity ownership stakes, there is an implied significant cost of capital there. So typically a company will be looking at both equity and venture debt as they become sort of a Series C, Series D, a little bit later stage.

And what sort of financing rounds are you seeing? So let's say they, you know, a company's at that minimum $15K MRR. What's the size of the financing that would be available to them? What's the range?

Yeah, typically we look at lending about 3 to 4 times the monthly recurring revenue. So, you know, we can do loans as little as $50,000. Our average deal size is more in the $300,000 range. And then a lot of our customers, we continue to, as they grow, we continue to provide them additional capital. So we have some companies where we've done 10 different loans with them, where we just continue as they grow to provide them with growth capital. But yeah, typically it's in that sort of, for us, it's in that 3 or 4 times range. Again, traditional venture debt, they can look at larger multiples than LIDR would be comfortable with because their understanding of, you know, that they've got a VC kind of backstop behind their debt.

That's great to know. For the founders on the call, like, what sort of strategy are you seeing that founders are using when they're pursuing venture debt? And what I mean by that is like, If they have $15K MRR, they're potentially gonna raise like a Series C or they're gonna go on and raise venture debt from Ladder Capital or somewhere else and they can get up to like $100K to $300K. At what point do they really engage on the venture debt side? Is it to like bridge them to a larger round? Is it just to like increase the revenues of the company and use that money towards growth? Like how are the founders really leveraging venture debt?

Yeah, primarily it is to boost the revenue and it is to, I guess, push out that equity round because if you have stronger growth trends and more kind of validation of your product path, typically you're gonna see a better valuation. So usually our entrepreneurs are coming to us as a way to stall the next equity round and grow the company as quickly as they can, as prudently as they can, to drive up that valuation. So we have plenty of customers who it's very much their intent to get to an equity round, and that's what they use Venture Debt to do, is to get them to a better valuation. We have others who have no intention of going the equity route. They want to keep 100% ownership. That works too. And they'll just continue to use us as growth capital along the way.

Yeah. Let me comment on that briefly too. I think it's pretty common. We start working with a company about $1 million in annualized revenue and we'll work with them to get them up to kind of $4 or $5 million annualized recurring revenue. And that's the point where they'll go back out to the market and start looking at equity financing options. So we'll start looking at that Series A and ultimately, right, higher run rate, higher higher growth rate, you're just gonna get better terms and valuation is usually kind of a thought process. I think especially in this environment where the VC market is kind of stalled and terms are not looking that favorable from the entrepreneur's perspective, it's a good way to push out that equity round.

Yeah, that's a really good point, an interesting strategy. And Keith from the audience asks, how is venture debt different from normal bank loans for business expansion? Maybe you could talk about like the terms.

Yeah, well, it's perceived as being higher risk. So you can assume that you're going to be paying higher interest rates than you would at a bank. A bank ultimately, and I come from the banking world, you know, you're looking at low interest rates for two reasons. One, a bank's cost of funds is the deposits they have on hand. So their cost of capital is really low. But two, they're not taking much risk because it's ultimately not their money that they're lending. They're lending their depositors' money. And that's, that's why the whole kind of Federal Reserve System oversees banks, is to make sure they don't get over their skis. So venture debt providers are playing at a different risk level. And so you're going to see much higher interest rates. And that can range from high single digits, you know, all the way into the 20-30% range. So that's the primary difference. On the risk front, probably the primary difference between a traditional bank loan and venture debt, banks usually look for companies that are profitable and usually, you know, cash flowing, whereas venture debt is again looking more to the future and lighter capital is looking at the growth trajectory. So the risk usually sort of manifests itself in the fact that these companies are burning money as opposed to cash flow. So oftentimes they just don't quite qualify for a traditional bank loan yet.

Yeah, it makes sense that, you know, you'd have to have a strategic partnership, right? Where the person actually understands like high growth and technology entrepreneurship. There is that inherent risk. So that does make sense. We're getting a lot of questions around COVID-19, and there's also some international entrepreneurs asking about, you know, their markets and seeing if there's any other, you know, requirements for them. So let's transition to topic 2, which is basically what are some of the requirements. So we've already kind of gone over like the monthly recurring revenue, the types of companies, and the types of— or the amount of financing that these companies can raise. Are there any other revenue growth metrics that you're looking at? So aside from like the total monthly amount that they're making, are you looking at like trends?

Yeah, yeah, absolutely. We need to see that the company is growing. I mean, that's first and foremost. So it's, you know, positive growth trajectory. We're also looking at revenue churn and revenue concentrations. So, you know, is the company Do they just have one customer or are they spread across a bunch of different customers? And what's the stickiness of the product? So that speaks to sort of our ability to predict where those revenue trends are heading is understanding historically the renewal rates. Obviously, if you're smaller and you've, you know, you only have 6 months of revenue traction, you're probably gonna be more concentrated and probably haven't gotten to a renewal cycle. Out with your clients. So we can look at those deals. It's just, you know, that's gonna factor in how we structure it both from a size perspective and from a pricing side. So that's primarily what we look for on the revenue side. And then I think the key point on the expense side or on the cash flow side, you know, I mentioned we're looking at runway and we're looking at the burn trajectory. Ultimately, we're doing the same thing. We're forecasting, you know, where is this company going to be from a cash flow perspective. I mentioned up front, you know, ultimately, the exit needs to come from the organic cash flow of the company. So we're looking at, you know, that trajectory of burn, and we call it the path to profitability. If we can look at the trends and say, hey, this company is growing at such a rate and their expense structure is scalable, they're gonna be profitable in the next 6 months, 12 months, 18 months, and we can get comfortable with that path, that's ultimately how we make our decision, our credit decision. Having said that, we know that companies, as they continue to grow, will want to plow more money into sales and marketing. So we know the reality is that companies have more of kind of a stair-step burn where they'll, you know, they're trying to trajectory will be positive and then they'll put more expenses in and, you know, and their burn will go up short term. Oftentimes our money coming into the company creates that near-term kind of increase in the burn trajectory because they're using our funds to invest in sales and marketing. So we do understand that, we do think through all that, but ultimately and most simplistically, we need to see that the company has a strong scalable growth trajectory that will eventually get them to cash flow breakeven.

Nicholas asks, what is the maximum cash burn rate percentage that you generally invest in?

Yeah, that's a good question. Typically, I mean, we can look at deals that have a burn as much as 100% of revenue, but again, it's a combination of point in time and trend. So if it was 100% and last quarter it was 200%, that's pretty solid. If it was, you know, 50% and now it's 100%, that's a different story. So we tend to look at the combination of point in time and trajectory.

Okay, that makes sense. Mustache asks, you mentioned you're looking for growth trajectory as a primary metric. How are you taking into account the likely 1 to 3 quarter COVID hit that's taking place right now?

Yeah, yeah, it's challenging. I mean, it's challenging for everyone and we're no exception. The reality is we need to be pretty selective right now. There are still good opportunities out there and we're still lending, but we're probably not going to lend at the same clip that we were previously. It's, it's, it's interesting. We're You know, we're using historical growth trends to help us predict the future. Well, now we're in a moment where it's really tough to predict the future. Having said that, there are plenty of companies and plenty of industries that are not as impacted by COVID or even necessarily the recession risk. Easy examples would be, you know, healthcare and, you know, anything that's work productivity apps or online education apps. So there we are seeing a segment of both our existing portfolio and our prospects that still are growing at a healthy clip. We also have a lot of companies that may have grown at, you know, triple digits in the past, and they are seeing a definite impact from COVID but they still expect to grow at a more conservative rate going forward. If we have a company that's sort of, you know, flat, there's a possibility we can make sense of that. But unfortunately, where we are right now, if we've got a company we're looking at and, you know, near term they're gonna see sort of a negative trajectory, it makes it a little bit difficult for us to jump in there. Or if we do, we're probably gonna jump in pretty conservatively from a size standpoint and need to see that that company has a pretty strong liquidity backstop.

So we're getting a lot of questions around like metrics outside of just financial. So we've got a couple questions here. Are there any other metrics you look into such as like the strength of the team? What about, what are some of the key metrics or KPIs that you look into such as churn or CPCs? Any other aspects outside of the cash burn and then the MRR that we've already discussed?

Yeah. So, you know, it's whether you're a traditional banker or a venture debt lender, you know, the key to any good loan is the management team. And so absolutely, we're, you know, we, you know, the first and foremost, we ask about the entrepreneurs and what's their background and, you know, why are they passionate about the company that they're involved in now? What's the skill set of that management team? So that's absolutely, you know, a key component to any underwriting. It's tough to put a metric on that. We don't necessarily say you have to have X number of startups or, you know, X number of years experience. That's still very much a qualitative aspect of our underwriting. As far as other quantitative metrics, yeah, churn is by far— I mentioned churn and concentration levels. Those are definitely items. We also do, you know, kind of related to the management side, we do want to see that the management company has a significant ownership stake. That's really about, you know, sort of the commitment that everyone's gonna have to get the deal to a cash flow breakeven standpoint. So we typically will look at that. We'll also look at, you know, things that are a little bit lower on the scale, like the strength of their accounting, the strength of their, you know, historical reporting and, you know, their ability to, you know, to forecast and kind of stay on top of the numbers. So it's a combination of a lot of qualitative factors as well as those key quantitative factors.

So since there's a lot of international founders on this webinar, let's go a little bit into geography. So, you know, right now I know Canada is a strategic market for you. In fact, you know, from Founder Institute's perspective, Canada is on fire right now, right? There's some really, really strong companies coming out. In fact, Sunil, who you know very well, and I are running our Silicon Valley and Toronto virtual programs concurrently. We're partnering together to create a superhighway between Toronto and Silicon Valley. What— are there any geographies that you're specifically looking for? Is it just North America? Are you looking internationally?

Yeah, it's—

it's—

yeah, oh, sorry, go ahead, John.

I'm sorry.

Oh, I was just going to comment on that. So, um, historically we have been focused domestically, just the US, although we will lend to foreign subsidiaries. So it could be a foreign company with subsidiary in the US that we can lend to. And we're starting to see a lot of good opportunities abroad, and we've gotten a lot of interest from international founders. So as of end of February, end of March, we have expanded to Canada. So we're also doing lending in Canada right now. So that's one market we're seeing a lot of good opportunities. And then we're also looking at Australia too. So Australia is another market that we're launching into. New Zealand may also be part of that. And then maybe UK later this year. I think really the focus is probably gonna be these markets that are also English speaking for the time being. And I think, you know, once we look at the UK, we'll probably look at broader kind of EU and Europe as potential international markets.

[Speaker] Yeah, we have a strong relationship with Silicon Valley Bank. And so, you know, part of it really is understanding, you know, who we can team with Founder Institute, Techstars, Silicon Valley Bank, other partners, and kind of understanding their footprint and how we could kind of leverage that. From a legal perspective, that's also important. So the countries that John just mentioned, from a security standpoint, from a collateral security standpoint, And just from a legal system standpoint, there's a lot of similarities there. UK, Australia, Israel is interesting. So yeah, what we like is that the geography may differ, but the market is basically the same. You have— and that's one of the beautiful things about SaaS, you can be anywhere and you can develop these software products and bring them to market. So, you know, we really look at it more of the logistics side and more of the documentation side that drives our decision on which countries to choose first. But from an underwriting standpoint, kind of the core underlying metrics of the companies, you know, we're pretty hopeful that that will stay relatively unchanged regardless of what geography we're in.

Yeah, I think that makes a lot of sense, looking at the fundamentals of the business versus geography. I'm sure like if a company has gone through Techstars or Founder Institute, that it probably does have an effect on your decision. So I'll keep that in mind as we continue to partner together. So let's talk about the elephant of the room, right? COVID-19. So what impact have you seen from COVID-19 on your portfolio companies?

Yeah. So it's very much, you know, in flux and, you know, I'd be lying if I didn't say it's It's the majority of my time right now is following up with our clients and understanding their impact. We've reached out to everyone in the portfolio. We've had direct conversations with over 90% of our portfolio. Rough numbers, about 80% are impacted in some negative way. And that's a wide range. So that's, that could be, you know, somebody who's just expecting it to have an impact on their pipeline. All the way to companies that have had essentially a shutdown of operations. You know, I mentioned companies that were dealing in industries like healthcare and edtech that, you know, may weather it a little bit better. We have other industries that service restaurants or, you know, they provide software solutions for gyms or, you know, other on-prem industries. Needless to say, those companies are severely impacted. So we're looking at them individually, case by case. You know, we're trying to figure out how can we help them from a payment perspective. We're looking at those deals individually, case by case. We're seeing some interesting things on how the companies are responding. First off, Almost all of our customers qualify for PPP, which is the SBA financing route. And we've seen about, so far, almost 40% of our population has received funds and probably closer to 70% who have actually applied. I think the number is actually higher than that, but there are a few folks that we haven't, you know, individually confirmed they've applied. They've approved, they've applied. So that's certainly gonna be helpful to helping weather the immediate COVID quarantine scenario. Then you need to focus on the economic, the longer-term economic impact. In general, our companies are being very proactive at looking at what the impact on their pipelines can be, maybe payment delays with their existing clients or increased churn. A lot of companies are being really diligent on what sort of investments they're making in growth prospects. And then, you know, unfortunately, a lot of companies are having to make some difficult decisions around staffing. You know, from our perspective, the investment thesis we have is that these companies are very scalable. And of course, you know, we're historically looking at that on the upside. We're seeing scenarios where that scalability is helping these SaaS companies in a downside relative to a lot of other industry types. We've actually seen a few, it's pretty anecdotal, but they've almost entered what I'd call hibernation mode from an expense standpoint, and they're still servicing those subscription revenues, but you know, everything else is sort of at a bare minimum. And that's really interesting. That's something I think that the SaaS community can do that, you know, almost no other industry can. And so it's, you know, those unfortunate situations, I think, you know, those companies are just gonna try to ride it out. So it's a combination, you know, what's their liquidity cushion, what's their expense structure, what's their access to capital, How can we help? How can we play a part? It's really all hands on deck at this point.

So we're getting a lot of really great questions from the audience. Juan asks, are venture debt companies looking for startups that are using COVID-19 to their advantage? So we talked about sort of like this, like post-COVID applications. And do you have any examples of what some of these companies could be?

Yeah, John, you might be able to help out on some examples, but we definitely do. I mean, you know, the other 20% of our portfolio is actually expecting an uptick or seeing an uptick. And again, the spaces where that's most obvious are on probably the healthcare space and the online education space. And so, yeah, we have a lot of entrepreneurs who are seeing this as an opportunity. And if we're looking at those companies, you know, those are gonna be the easier ones for us to make sense of from a growth trajectory perspective going forward.

Yeah, we're seeing the same thing across our portfolio. In fact, one of the things that we've done is we've advised our companies to make sure that they have sort of their like post-COVID-19 narrative, right? Which is there's the world before COVID there's the world during COVID and then there's the world after. And you want to make sure that whatever you're building has the narrative built into it. Otherwise, it's not— it's just not going to land with customers and investors and people, right? So the world has fundamentally changed. So let's move on to some other questions. Hussein asks, what's the likelihood of investing in hardware-focused companies?

Yeah, so we haven't traditionally done that yet. There have been a couple deals where we've had a hardware-software combination. It's, you know, and I, my experience at Bridge Bank and prior to that on the traditional banking side, you can obviously make sense of those deals, but the, the lighter capital model, because there is the inventory side of it, there is the cost side of of maintaining and creating that machinery, those hardware pieces. It just creates a different expense structure. So it impacts kind of the scalability of the company. So that you could deal with that. You just have to size it a little bit differently. You'd probably wanna size that loan or that investment off of gross margins as opposed to revenue streams. You'd want to understand the stability of the sourcing of the materials for the hardware piece. And you'd have to really understand the inventory cycle. So it would— it's a little bit of a different model. It's certainly something that, you know, traditional banks do all the time. But again, they're looking at, you know, that company being profitable. I should mention, you know, tech banks like Silicon Valley Bank or Bridge Bank or others, They'll look at those companies all the time and they're doing it for the reasons I mentioned, as well as, again, what's the VC backing of those deals and sort of the liquidity cushion. So it's a possibility. It's not something that we're deep into right now, but, you know, we're always looking at ways that we can expand our model and sort of tweak it into different markets and different revenue streams.

Jaquise asks, how are directors at companies more liable with venture debt than using venture capital? Do they have to personally guarantee the loans?

Yeah, great question. So traditionally, both traditional venture debt and certainly lighter capital, we do not require personal guarantees. Traditional venture debt, again, because they're relying so much on the VC backing, You know, oftentimes you're not looking at it, the owner of the company, the CEO or the management team of the company may not have a significant ownership stake because the VCs are already in the deal. With us, that is one of our main differentiating factors is we're looking at companies that most of which are bootstrapped and most of which are still majority owned by the founders and we are not requiring the personal guarantees. If you did, you know, oftentimes our competitors or other lending sources will really underwrite to that personal guarantee. And sometimes that makes sense for the entrepreneur. The folks that choose Lighter Capital like it because they're not personally liable. It's more about the company standing on its own two feet.

Sienna asks, "What is the average interest rate and repayment period?" Yeah, so it's a pretty broad range.

You know, we'll look at deals that are anywhere between 13% to 30% from an APR perspective. Most of our deals right now are 3-year facilities. We technically can go longer than that, 4 years, Right now, the overwhelming majority of our deals are 3-year terms.

James asks, who regulates venture debt at the federal and state levels?

Yeah, that's a good question. It's, you know, it's certainly not as regulated as the banking industry. You know, as sort of a side note, just, you know, looking at the industry, I think part of why you're seeing the advancement of non-bank lenders or alternative lending sources is, you know, it's a function of that regulatory environment. Having said that, a lot of— most states have laws around maximum interest rates or other limitations on how any lender can operate in that state. So Ladder Capital certainly plays by the rules on all those different regulations from a statewide perspective. If you're asking my opinion on where this goes, I obviously expect that regulation will become a bigger part of the alternative lending landscape in the years to come, for obvious reasons. But right now it's significantly less regulated than banking, traditional banking.

So let's do a last call for questions. I have a couple others here that I'll ask, but make sure that if you're listening right now that you put in your questions. M. Smith asks, do you require spending to be approved in order to disburse the funds?

No. And there are, there are some folks, there are some competitors out there that will tie advances to, you know, ad spend or other kind of sales and marketing spend. And that's, that's certainly a viable model. Lider Capital's approach is once the money is approved, the money is, is provided to the entrepreneur and they utilize those funds the best they can. You know, obviously when we're underwriting the loan, we wanna understand what the intended use of the funds are. That's ultimately just a way for us to make sure that we match the structure to that use of funds so that everything makes sense, both from our perspective and the entrepreneur's. But no, we don't have per-advance limitations on use of funds.

So, you know, when you go and raise capital from, let's say, an investor, whether it's an angel, seed investor, there's usually other kind of soft support provided, right? Introductions, those types of things. Ron asks, are there any other soft support provided when going the venture debt route? Networking, board members, key hire, or is it just purely the capital?

Yeah, John, you want to take that?

Yeah, yeah. It's kind of, it's a really good question. The interesting thing about our financing model, even compared to other venture debt lenders, is we don't have any sort of kind of board observation seats or anything like that, or a board seat like you'll see with some other venture debt lenders. So our involvement with a company is kind of on an as-needed basis. So honestly, I have some entrepreneurs we work with where they view us purely as a financing source, and the extent of our relationship is kind of the monthly servicing and payment, and maybe they want additional financing and that's it. There's other companies where we're providing introductions to other capital sources. So VCs would be a common one, introduction to banks. So maybe they want to talk to someone at Silicon Valley Bank, they want to talk to a strategic partner like Salesforce, that sort of thing. So it's kind of on an as-needed basis. I would say we're probably most helpful in matters of kind of finance and financing sources is generally, although we are kind of starting to build out those sort of value-add services. So once a company becomes a wider capital portfolio company, you have access to a number of programs and discounts. So we can provide discounts on AWS cloud computing or Carta and those sort of services. So that's definitely another added benefit.

Steve asks, how do I go about finding the right venture debt provider for their business?

Well, I think ultimately it's, you know, there's some research out there, you know, getting a few competing term sheets and kind of understanding what the underlying sort of credit thesis is from the different venture debt providers. So that you can kind of compare and contrast. Everybody's gonna look at it a little bit differently. And there are some, you know, some competitors and/or other firms in alternative lending space, you know, someone mentioned that the idea of paying for ad spend, you know, there's some that like MCAs is a product out there where it's pretty granular and it's very short-term in nature. You know, we've found that entrepreneurs sometimes they struggle to, you know, pull those deals apart. They may see something on the website that says, hey, just pay us 5% fee and then that's it. And, you know, our perspective is helping to, you know, trying to help the entrepreneur understand you really need to look at cost of capital a little bit more broadly. If you, it's 5% fee, but you're paying that loan back in 3 years, 3 months, that's really a 20% APR versus, you know, maybe another loan that has a 10% interest rate. So I think it's getting a breadth of options on the table, term sheets on the table, and then trying to boil those down from, you know, first of all, a cost of capital standpoint, and then trying to match that up with what's your What's your planned deployment of the funds? Over what time period are you gonna deploy the funds? And what's your expected return on the investment from deploying those funds? So if you're out there and you're gonna hire a sales manager, that person's gonna cost you $150,000 over the next 12 months, and you're gonna see the benefit of incremental sales 6 months from now, probably doesn't make sense to take out a $150,000 loan that you're gonna have to pay back in 3 months because you're not gonna see the return on the investment by the time you actually have to pay it back. So that's sort of a roundabout answer, but I think, you know, the point is if you have a few of those term sheets in front of you, it's trying to break down the repayment structure and the interest rate structure into as much of an apples-to-apples comparison as you can.

Greg asks, how do venture debt firms deal with lumpy monthly recurring revenue? So ones that might not be consistent, like maybe it's growing, maybe it's not. Does it sour them on providing capital?

Yeah, I think it's a challenge for firms. Later Capital, we have plenty of deals that are lumpy or seasonal. And in fact, you know, our original loan product, revenue-based financing product, is actually pretty appealing for companies that have lumpy cash flow or have seasonal cash flow. The revenue-based, in a nutshell, the repayment of that loan is a percentage of the revenue you're generating. So if in any given month you've got, you know, little revenue coming in because it's lumpy, your payment's gonna be small. You know, when you hit your renewal season or, you know, your seasonal peak, you know, and you're more cash-rich, the payment is tied to that. We look at, even if we were to offer a term loan with fixed repayment terms, we can make sense of the lumpy deals. Again, we're looking at it over a 12-month period. We're looking at, you know, longer-term trends. We're looking at renewal cycles. We're looking at, you know, the churn rate, how long have, you know, the company's been with you. So we can definitely make sense of it. And a lot of our companies fall into that category. It's just, it's just one, one additional variable that needs to be taken into consideration in the underwriting process.

So we'll do one more question from the audience. Do you have a minimum spread of customers or concentration limit? For MRR? We do.

It's, it's, so we're typically looking for at least 10 customers and we like to see that your top 1 customer is below 30, 40%, your top 3 customers are below 50, 60%. So those are really kind of the minimum hurdles. So, you know, if we got into a deal and we did see a company that had, let's say, a 30% concentration, we're certainly gonna wanna better understand how long they've been with you, what are the terms of the contract, is it an upfront annual payment, and, you know, is there a contract? You know, we'd wanna understand the stickiness of the product. Churn plays a bigger part, obviously, in a deal that has a higher concentration. So at the end of the day, yeah, we have some kind of, you know, minimum hurdles that we need to clear from a concentration standpoint. And then it's really just understanding case by case what the relationship is with those high concentration customers.

So do you have any final closing tips for founders at this time? You know, an example would be like, what are some of the big misconceptions that founders have about venture debt? Or maybe how entrepreneurs can prepare their business for venture debt? And start the process?

Yeah, I think one of the misconceptions, or at least, you know, on the Lighter Capital side, it's because we're not playing in the upside of a deal. A venture capitalist, you know, their returns are ultimately gonna come from a few of their deals in their portfolio. And so they can take much bigger bets on the future. And that's why you will see venture debt in companies that, don't even generate revenue yet. And in venture debt, again, if you're talking the traditional venture debt, it'll start to skew that way versus, you know, lighter capital. We're not going to see this super return because a company goes public. We're ultimately just gonna see the same repayment terms. And so we're gonna be more conservative. What that means is we're using a lot of the history of the company to predict the future. So whether it's a misconception or not, maybe not, but we're— it's not going to be typical that we'll come in and say, hey, you've got a great idea, you know, you want to go build a product that maybe someday will be released. That's more of an equity risk. That's more of a capital risk as opposed to a debt financing side. I think the other takeaway, you know, I mentioned on it briefly, I mentioned it briefly, this is really a lifecycle, you know, it's kind of understanding where you are in your life stage. And certainly where we play is more in the early stage side, whereas your traditional venture debt, you know, the higher multiples, typically that will skew a little bit later stage. And I guess the point there is what's right for you now might not be, you know, right for you later, or, you know, as you grow, you may have additional optionality. So it's a combination of kind of where you are in your life stage. And then again, what are you planning to use the funds for? How are you planning to deploy those funds? You know, we didn't really talk about working capital too much, but, you know, again, growth capital. If, you know, most of our deals we're lending into, they are putting the money towards sales and marketing. That has an incremental impact on cash flow, but it may take a while. And so it's really kind of matching up how you're gonna deploy the funds, how much you need now, and matching that with the repayment terms that you would be offered. From a venture debt provider. So it's kind of, you know, a simple concept of matching the sources and uses. That's my kind of credit take on things, but that would be one of the takeaways.

Yeah, let me also kind of add on. I think in the market, there is often kind of a lot of misconception about venture debt. And people think, no, it's too expensive. They're comparing it to their mortgage, right? They're looking at the rates. People really need to think about it as a way to delay an equity financing, retain equity ownership as much as possible, because obviously the cost of equity capital is going to be much more expensive than the cost of debt capital. I would also say, and this is just anecdotally talking to companies right now, or our clients, I think the startup funding landscape is about to get a lot tougher for the next kind of foreseeable future, call it kind of 6 months. You know, I have a lot of companies that are actually in the process of securing a Series A, or they're going to close on an equity raise, and the VCs came back and actually pulled the term sheets, right, because their LPs are not willing to commit capital right now. So I think it's going to be really interesting to see kind of what unfolds in the next 6 months. And we're definitely advising clients to be conservative, pull back on the hiring, you know, don't increase the spend during this time, conserve as much cash as possible, because I think the company was planning to raise in the next 6 months, it's just gonna be tougher than it was, you know, call it even 2 months ago.

So one final question here from our good friend Alex in Bucharest. Are there any readings about venture debt that you would recommend for people to learn more?

Yeah, I would definitely— I definitely will send a link to our website. We've got plenty of articles, and those articles then connect out to to multiple others. To John's point on the last question, we have a cost of capital tool on our website that I think is pretty helpful to illustrate what John just mentioned, which is, you know, when you're looking at venture debt, it's a way for you to boost the valuation and maintain ownership at the same time. And the alternative, you know, from a true equity standpoint, has a much different and usually much higher cost structure. So we'd certainly reference folks to the website. And Ryan, we can also shoot you some links that you can share with the folks online.

Yeah, that sounds great. So just for everyone on the call, you'll get a copy of the webinar in the next few days, probably within the next 48 hours. So I want to thank everyone and thank our panelists for joining us today. This is very informative. If you are interested in learning more, just check out the links that we send in the follow-up email, and we look forward to helping everyone here build their companies. Thanks, everyone.

Thanks.