Alternative Capital Panel
Katya Kohen @ 13Ventures, Diego Berrio @ 13Ventures, Mark Loranger @ Braavo Capital and Aaron Kellner @ SeedInvest
Startup Grad School Stage
Ascent Conference 2020
Katya Kohen [00:00:00] All right, good morning, guys. It’s Wednesday morning in New York, nine thirty, where starting today, our panel discussion about alternative capital for founders, different stages, different verticals. I have great people here joining me for this conversation. And I think we should have a quick round to introduce ourselves and then talk more about the subject matter. So my name is Carter. I’m the managing partner at 13 Ventures. I have Mark here, Diego and Aaron. And with me right now, let’s start with a quick intro and then we’ll take her on and continue.
Aaron Kellner [00:00:41] Sure. Thank you. Good morning, everybody. My name’s Aaron Kellner. I’m a director at Stephen Best. For those who aren’t familiar seed investors, the largest equity crowdfunding platform in the US that is open to both accredited as well as retail investors. We typically focus on working with companies that are in the more traditional seed to series a stage, typically raising a quarter to a half a million dollars on the low end, up to five to 10 million on the high end that we have recently launched or sorry, closed our our largest raise today was a 20 million dollar series B. We have a network of about four hundred thousand entrepreneurs and investors in our network and over the last seven years have funded through our platform over a quarter billion dollars into a portfolio of about two hundred and twenty companies.
Mark Loranger [00:01:36] Did you say, Mark, you were on mute? I think you said Mark.
Katya Kohen [00:01:39] Yes, sir.
Mark Loranger [00:01:41] Yeah.Hi, my name is Mark Larranaga. I’m a co-founder of Bravo Capital. We provide an undiluted funding to mobile apps and mobile gaming companies worldwide. So we serve as a worldwide market that’s about three hundred billion dollars annualized revenue. And we provide two types of funding to those companies. We provide receivables based funding. So funny against reported but unpaid receivables, as well as funding for user acquisition, user acquisition, meaning paid advertising. We provide that based upon a company’s likelihood to earn money in the future. So we fund current and future earnings and we provide that to companies. In more than 25 countries, we’ve originated close to half a billion dollars since we’ve launched. So originations means the amount of money we’ve sent to our customers. And again, we don’t take equity. We charge a small fixed fee and we do everything programmatically. So everything is completely automated, from onboarding to risk management to reporting and collections and making a really seamless experience for our customers.
Katya Kohen [00:02:35] Beautiful. Diego.
Diego Berrio [00:02:38] And yes, my name is Diego Berrio. And the managing partner of 13 Ventures, we are an investment firm based here in New York. We investing in consumer facing companies. Typically between the seed ensues a round. We provide flexible capital and flexible capital. We mean if we go from short term loans, structured and long term loans, revenue based financing and also equity. So you can see ourselves as a one stop shop for every capital needs. And yet we also support our portfolio companies with operations in the same financial management, e-commerce, digital marketing.
Aaron Kellner [00:03:28] Beautiful. Thank you. So since we have everyone representing different pieces of alternative capital, and why don’t you summarize what are the options out there for founders to grow and to find dilutive capital? I would say to grow sustainable.
Aaron Kellner [00:03:48] Happy to and given the time constraints on the panel, I will be going through these quite quickly, so apologize for that in advance. And I think one of the things that is a benefit to founders, especially nowadays, is that especially against the kind of common misconception of venture capital being the be all end all of securing financing for a company that, again, today’s day and age, there are myriad options that are that are actually available. And those options really grow as you and your business grow. When I think about a company and its stage in that type progression, revenue generation is definitely one of the key markers of a company that is progressing through its lifecycle and unlocking more and more of these options for them. I do believe, especially with a more recent rise in things like programmatic decision making and data driven decision making for all types of capital providers within the early stage space, that you can also think about progression in terms of having a more solidified business model, some sort of more just predictability, forecast ability, and even just kind of scanning it down to having there be data points intrinsic to your business that can prove to somebody else that you are, quote unquote onto something. So really at the earliest stages and this kind of goes from the more dilutive to the less as we progress on and as these options expand. But really at the earliest stages of bootstrapping, raising from friends and family is a thing, and that still is a reality for most entrepreneurs. I also think about accelerator programs as a way to not only get a little bit of early capital and guidance for your company, but also potential good introductions to customers, other investors as well. And there are products like donation based or product based crowdfunding, like a Kickstarter Indiegogo that are very much based on raising an initial pool of capital based mostly on an ideal idea prototype for MVP. As you kind of progressed a little bit, you can add things like grants and or other assistance programs. Definitely been seeing a lot more of these kind of like aggregator companies that allow companies, startups especially to more easily tap into grants and other types of programs like that that they might not necessarily know about. Angel groups and equity crowdfunding like seed invest, become more in scope as well and kind of continue kind of along that path and along that lifecycle. I’m a big fan of personally of kind of like slow growth, especially in the U.S., like slow growth company building of being able to actually build your company through cash flow, securing contracts with customers, being able to use those to fund your own growth, obviously, of at least a limited level. And then when you are in a place where you either are generating revenue, have a more predictable business model and or that type of forecast ability, things like factoring invoice financing, revenue based loans and venture debt. So, yeah.
Katya Kohen [00:06:56] Amazing, and why don’t we go into a little bit more details to talk about ventured that revenue based finance, what’s the difference between to who is it? Who is a good fit for that one or the other? Diego, why don’t you tell us a little bit more about those two? Sure, and the companies or the type of the companies.
Diego Berrio [00:07:19] So let’s take a step back and venture that is it’s basically loans given to companies that are not necessarily at the stage where they have positive cash flows or positive habitat. So we can call it also a startup, a startup that in this case, what is very important, as Aaron mentioned, is predictability. So you need companies need to have a clear model to generate revenues and that can be underwritten by a capital provider. So, for example, business model with subscriptions or companies that are selling through to wholesalers that have accounts receivables, that have purchase orders, all these companies can have access to the Internet. So, for example, if you’re selling to Wal-Mart and you have purchase orders from them, you don’t necessarily need to go to to tap into equity financing to cover those working capital needs. So in that case, the company should definitely reach out to the venture capital venture debt providers and find less dilutive ways to finance their their cash needs. Also, if you have a clear subscription model and you have a clear churn churn rate and a clear track record or traction, you should be able to generate revenue based financing or have access to a reality based financing that says any underwriter will see that there is a source of repayment. And this is basically what is the most important thing, that if you want to take a short loan, that there is an asset basically as a collateral for for lenders to feel comfortable about it. And if there is no collateral, at least that there is a predictability so that the revenue stream is there and lenders will feel, let’s say, that they will trust that there is a repayment schedule coming up.
Mark Loranger [00:09:30] Do you have a question, can you characterize when at what stage a company would be qualified for venture debt traditionally, like what stage of revenue would stage of maturity versus revenue financing?
Diego Berrio [00:09:44] Sure, this is for me, right, Mark? Yes, so we saw it will it will depend, for example, if you if you are a pre revenue company, but you’re having your first purchase order from, let’s say, Wal-Mart or a marketplace that is excited about your product, you can definitely tap into P0 financing, which can be, let’s say, a type of venture that. But I would say that typically typically venture ensured that providers will look for companies that are at least generating around 50000 and Ammara so that there is some and also that there is some level of history about how the company has been generating and growing. Their revenues are definitely other capital providers. Let’s say as as Silicon Valley Bank. They will feel more comfortable providing venture that one’s services have provided capital through a price around the financing round. And this will happen typically, let’s say, between Syriza or Syriza. So there is there is a big array of of venture debt available there. And in some cases, I would say that revenue, of course, is the most relevant thing, as I mentioned. But it it just depends on your revenue. You have X or Y cash available in the case, for example, of traditional revenue based financing alternatives. Are you a company can get up to, let’s say, 30 percent of their of their annual run rate Finance.
Katya Kohen [00:11:29] Yeah, Its great. Thanks Diego. Mark, question for you, since their venture that players revenue based finance, they’re a bunch of hard money lenders, cash, advance type of platforms. How do all these structures benefit the growing companies? And where do you see fintech players like Bravo in the landscape of the capital providers?
Mark Loranger [00:11:52] Sure, so I think just the one important point to make that I think I think Diego and maybe Cattery also mentioned it with with non dilutive funding, whether it’s debt or revenue based financing, the the most important thing for for a company to be qualified is that they’re generating a generating revenue. And there’s a clear way for that to be repaid in a not too distant future timeline. In other words, equity is for risk investment where there’s not a clear path to repayment, but there’s a huge upside with any form of non dilutive funding or revenue based funding. There needs to be a form of repayment and that needs to be relatively well understood by the platform that is providing that money. Whether it is a veteran debt player who understands that Wal-Mart pays its invoices in the details example, or a specialized vertical player like Brabo, for example, that really understands a market very well and understands the dynamics of businesses in that market. In the case of sort of the type of businesses that that are providing funding in our category. There are things that are consistent themes. One of them is, is access to data that helps the provider, the finance provider, understand the business performance. So access to data is really critical. If you don’t have access to data in a scalable way, you can’t provide low cost funding historically. And I asked the question about stage and scale, historically more customized or bespoke financing companies like venture debt providers or banks. There’s a certain transaction cost to understanding the information. And so you can’t actually get that type of funding to have scale when you’re dealing with a platform finance partner like Bravo or some of the other companies in the market to do this receivables financing. Usually the benefits are that the company can do a transaction very quickly and it can do it for companies that are very early stage. As long as there is some revenue to justify the need for financing, there’s a good argument to take it. Now for us, we focus specifically on companies that have a plan for growth or that are growing. We can see growth through the data. We can see that through how our customers, our borrowers interact with their end users. And again, in the case of any sort of platform finance company like Bravo, there is an ability to understand, is this company growing over time and are they creating revenue from the investments they’re making, generally speaking, for digital platforms, whether it’s companies that are selling on Shopify mobile apps and games, companies that have B2B staffs, for example, you can see how a company grows by how we invest their money. Typically, we look at that as well as most other platform owners to see how they’re generating revenue. So it’s just not about understanding revenue itself, it’s how revenue is being generated. And for any digital business, I’m going to assume most of the audience are companies that are tech companies right now. 10, 15, 20 years ago, tech companies wouldn’t generate revenue until they invested tens of millions of dollars getting a product to market and finding how to distribute it. Now, tech companies, whether it’s to see businesses, whether it’s apps, Twitch, Twitch, streaming producers are making money just by Twitch streaming. You’re creating value really quickly and you’re you’re able to recoup that value in the form of revenue by selling products or services or impressions, for that matter, almost instantaneously. And so when you can create revenue, you can create a form of repayment. It’s always wise to use non dilutive funding, whether whether you’re done alone or in combination with equity, because it stretches out your budget, it increases your ability to reinvest in growth. And generally speaking, if you’re reinvesting growth, you’re building a top line that revenue and you have more money or more equity for that matter, if you raise equity to invest in product people, those things that create long term value. So so the equity is for the creation of long term value that won’t be realized in the next six months, that maybe over the next six years and non dilutive funding is usually for creating short term value in the form of new users and new revenue growth. If you have new users, you can optimize your product, you can optimize experience. And that’s the way to think about sort of the the way these things work in concert with one another.
Katya Kohen [00:15:51] Beautiful. So thank you for giving us a broader picture and perspective how that would benefit the companies. The question I have, you know, everyone knows them. Covid hit most of this year. We’re kind of backing up that from the deals that were reluctant to structure new deals. How about alternative capital? Did you guys still get financing, providing capital to startups? How did that like for you, Diego? I know I know you. I mean, I know we’re focusing on e commerce and the Congress has been growing. So did the investor in covid the most back in March, or how did it look like for the company?
Diego Berrio [00:16:33] Yeah, Definitely, we definitely stayed active during during covid and here’s where being flexible and having, let’s say, different different products makes makes sense. So when we saw that the market was drying up, we we first help our portfolio companies to enter and the cash preservation or cash austerity cycle where they were very, very self-aware of their expenses if they needed to, to reduce their burden. They we helped them with that. And I think that that that those periods of difficulties also are are good in the sense because it helps to cut the fat. Let’s say in some sense, we we continue providing short term and mid-term loans. We definitely thought that given that it was very difficult to have a long term forecast, we we we stopped the long term financing side. But but we saw a lot of like a big spike on on, let’s say, revenue based financing and long term in the short term, sorry. Also accounts accounts receivable financing, purchase order financing and inventory financing to those companies that have again, clear a way to predict their behavior. And as Mark said, data is is very relevant. And so, yes, we we did we did detective work.
Katya Kohen [00:18:05] Mark, How about you guys? And then we’ll start ramping up because we only have about five minutes left.
Mark Loranger [00:18:09] Yeah. Yeah. So quickly, you know, we we certainly are focused on a vertical that in many ways was was in a position to help people get through the challenges of coronavirus. So our customers are mobile gaming companies, our customers are meditation apps. Our customers are, you know, productivity and entertainment. Right. Education apps. So in many ways, it was really rewarding about the experiencing coronavirus, as painful as it was for for people all over the world was to see in our case, our customers were actually helping people get through the situation. And as a result, we wanted to continue to support them in any way possible. Of course, like any responsible lender or investor for that matter, we had to think about the circumstances in the market and be mindful of of areas of risk. We didn’t know how consumer behavior might change three or six or nine months down the road. But certainly for us, you know, the month of March, April, May, June, when things are really, really bad and everyone was stuck at home, we saw really increased engagement among all of our customers, between our customers in the end users. And therefore, we were able to provide capital when they needed it and had some of our biggest amounts ever. From an origination standpoint. The benefit, again, similar to what you mentioned, is if you can shrink the window under which you’re expecting things to happen, which is the ability of a sort of an on demand financing company can do that. You can service the company’s needs, even managing sort of a risk environment, which is much harder for longer term investors. You know, longer term investors, the longer the duration of that that timeline in which you expect to recoup anything, investment returns or even loans repaid in a time of uncertainty, it’s really hard to price and predict uncertainty. It’s hard. It’s impossible to price uncertainty. Right. And any type of investing is really measuring uncertainty and trying to place a value on it. And so for those companies like us and other financing businesses that can shrink a window of repayment, you have the ability to continue to to support your customers while also managing risk.
Katya Kohen [00:20:17] Beautiful. Aaron, what is your perspective, what are the tips you would give to the founders to summarize and wrap up the panel? We only have four minutes left. And what’s your advice?
Aaron Kellner [00:20:30] Yeah, I mean, I think that there’s been a lot of good stuff you said so far. I think that one of the things that really resonated for me just because of the way that we look at companies, even from that equity investor perspective at the earlier stages, we really like to read the tea leaves in the numbers. One of the things that I always like to say is that every company is going to be a unicorn based on their pitch deck. But give me an income statement, balance sheet, cash flow statement and cap table. And I can tell you the story of the company without without the founder pitching me anything. And I do think that even for us, some of the things that are glaring, especially for entrepreneurs that are either newer or at the earlier stage, is, I think, kind of taking for granted. And again, this is even coming from an equity perspective, the equity investors perspective, like really being able to drive home like that. Those fundamentals of the business, those data points that have been kind of talk about whether it is things like customer acquisition, the way that you were investing in growing your business, generating revenue. And for us, we are very we, myself included, we kind of draw our experience from professional investing, private equity and investment banking. So we do tend to look at numbers, I think a little bit more than, let’s say, a traditional West Coast venture mindset would would typically represent. But I do think that when there are these elements of the business, these data points, whether, again, when it comes to things like just like return on ad spend versus LTV, how your how your margins are trending, where you’re investing and actually really showing the data points that are moving to an outside investor, again, whether its debt or equity that you are an effective steward of investors, capital of others, capital or even of your own is really the best way to get other people to come on board.
Katya Kohen [00:22:20] Beautiful. I think we have two minutes left and maybe you can give some ideas where the founders can find this type of alternative capital providers or anyone else want to jump to give the last tips.
Mark Loranger [00:22:35] So the Congress well, you know, I think there’s a platform called the DVC that has assembled a pretty good network of alternative funding options, and ABC does a little bit of investing on their own under their model. But they also act as a sort of an intermediary for businesses where there is specialization. So if you are a company that is looking for options available to you, that’s a good place to go. I mean, you can also do Web searches for non-negative financing, financing for businesses like mine, whether it’s e-commerce or mobile apps, for example, or invoice financing for marketplace sellers. Right. Invoice financing for Amazon sellers. If if that’s what you’re doing. I think that simple Google searches at this point because companies that are in our space are starting to mature a little bit, you should be able to find what you’re looking for. Three or four years ago, you couldn’t find anything new when you when you entered searches like that. And now that as businesses like Bravo and some 13 ventures and everyone else has been around for a while, you know, there is a presence online. And typically, if you’re looking for something, you can find it that way as well.
Katya Kohen [00:23:41] Beautiful. Well, thank you guys for the time today. I don’t know how much time left to discover any additional questions. Thank you for the time. And hopefully we can meet on another panel to talk more about the alternative and why it’s good and great comparing to traditional bases.
Mark Loranger [00:24:01] Thanks Katya. You did a great job also.
Katya Kohen [00:24:03] Thank you guys.
Diego Berrio [00:24:04] Thank you very much. Bye bye.
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