How I hit $5m ARR, kept control using 3 different debt providers

you were actually a massive inspiration of pushing me to get into founder pass so why don't you start there and I'll do I'll go get your slides give him a round of applause [Applause] yeah thanks for having me this is uh exciting stuff so um so yeah the I guess I'll I'll tell the the or the early founder press story from my perspective which is basically I I've been so I started Badger Maps like 10 years ago a little more and uh and I started doing

debt deals in like 2015 I think maybe 16. and um and debt back in those days if some of you may recall was not as good of a deal as it is today right like the lenders have a difficult time wrapping wrapping their arms around the concept of uh of uh like ARR and mrr they're like that's not an asset that's not collateral like they you know so that or it and and then

lighter Capital came in the scene uh first and they they were heavily they raised a ton of money and you know I forget how much 60 million dollars I'm like big team and so to make the the economics work on that where you're going to pay off your your investors at you know 12 or whatever they take they uh to pay for that big team they needed a pretty big spread on the actual deal right so the debt was super expensive um next then other players started jumping

in and there's also like the there's different types of debt players and SAS right there's like the go loves of the world that's actually their name it's a huge I don't know why but go Lube go love I don't know but it's that's that's that was their branding and uh so they they come in like later if you're like you know 10 million dollars and above and I I think I think you have to have institutional investment to get their money right so that that's kind of the scene is like if you're an early stage

startup there was just nothing at those times and when lighter came on we could like at least we get expensive debt which is better than no debt right and uh because it turns out that's one of the major ways companies lever up and uh all right so I had some over like a five year period I had different experiences with different SAS step providers all these early players and uh and I and I was very I was a very active Shopper of debt you know I was like I would use

everyone that could potentially loan a SAS company money I I had like talked to and knew about because turns out I really needed money because it's like way easier to get debt than Revenue

foreign but uh so over time I kind of gather experiences gather data about this industry and I forget exactly when this happened but Nate was in town in San Francisco where I used to live and uh we were shooting the [ __ ] about the debt industry and and he was really interested in it and poking around at it and he figured out that I had made basically a hobby of learning about debt for years he was trying to pick my brain and uh

and I gave him all my stuff and and and he uh he he went after this market and has really changed it a lot I mean it's uh what did you say in terms product that needed to exist that didn't exist what didn't exist well I mean the products that exist were more expensive for starters but they were also they weren't willing to loan very much right so I think lighter would do like three and I'll get into this in my slides I want to blow my slides but they're they're lighter would do like

three or four x mrr which is like you know I think I was doing like 2 million a year or something at the time and I was like really like you're gonna give me like 300K like I make a million bucks two million bucks a year they're getting a lot of money man like you know because real real companies they'll let you lever up you know pretty aggressively right to one turn or something at least but and so that that's I guess that's the real key difference is how much they'll give

you at what rate and a lot of the lenders also had a really short duration which now I'm really ruining my slides but that's okay oh yeah these are my slides yes beautiful let me create an on -round here right so you guys already sort of heard about like what what you're going to learn from the current debt what to watch out for and then how he used it to scale to 5 million are you comfortable trying how much Equity you've managed to keep today yeah all right how much do you own 65 65 well and the other co-founder owns like 20. and then a third yeah is there a

data there's a there's a there's there's a dad that I've squeezed money out of him too yeah yeah well only one Dad one dad in as well but the point is you've kept control yeah I mean I I think we sold 10 of the company and that was like super early on before I even had thought of debt but that and you've already tried to buy them out um no they they're they're all really smart they're like private Equity guys so they're they're not going to be like oh sure here for two extra so let me let

me pass this out the start here to give everyone contact with where your Revenue growth and then these are your slides that you sent last night perfect Steve that's me you know me man all right it's not like a Coffee Spot up here so that was uh so that's what we're looking at um this is uh this is my little history right here

very smooth right I mean one little hiccup from covid there a few pricing adjustments but like very smooth right who needs debt with a business this smooth I mean why don't I just you know spend within my means

and the the fact is in reality these businesses aren't that smooth for a lot of reasons right you've got you've got annual deals you've got multi-year deals um there I've got a seasonality problem problem being that people don't buy software in November or December and hardly in the first half of January so and every year that builds up right so you get a lot of that spikiness and then any big deal that comes in makes it more spiky because the big deals come in in the months that

people already wanted to buy software so anyway it allows this to be smooth right takes out your seasonality allows you to without giving up equity make payroll in December which is always a problem so here's uh here's here's my com here's our website in 2012. it's not that different from our website today I'm not gonna lie I mean this design might even be better

you get a marketing team I don't know this there it's definitely better today but you know this isn't bad this is so this is what we looked like in 2012 and I the uh the first way I funded the company was by um well let me let me Zoom you back to 2012 right and and maybe some of you are in situations similar to this today where you've got you know four people on the team and you're and you're making

fifty thousand dollars a month or something and I guess that's probably making twenty five thousand dollars a month then and it turns out the the basic needs of a software company you know the the the the care the food and water that it needs you know engineers and sales guys and product managers they cost more than you can make it first so money has to come from somewhere and so you either have to have money in your pocket already or you know hopefully your mom's rich or

something I mean but I I I I I I was lucky in that I I was able to fund the early parts of the Business Without Equity because I had worked at Google and early enough so I had like a million bucks to to just light on fire basically and become broke again and so that's what I did but in the course of that I managed to build a piece of software I didn't build that the engineers built that there the but I needed to keep paying them and so now it's 20 so I started having it built

in 2012. now it's 2014 and I'm just super broke and uh the company's probably making like 200 and 280k a year-ish it's like 25 Grand a month-ish and uh and and we had four four miles to feed I wasn't feeding myself I was just living on Peanut Butter but uh and my co-founder was leaving because he's a really smart guy and was like he's in private Equity um

and he he was like this thing's just not going to go anywhere man this thing is just toast it's just you know we're not gonna we should just throw in the towel I'm gonna go I'm gonna go work in private Equity again turns out it's a much better job I I didn't say I recommended starting a software company at all I never said I recommend if you can get the million dollar your job in private when you go do that go do it's so much easier it's an easier life um but uh so he he was out the door and

uh and I had these you know four employees one of them I was having spent half his time like do like consulting stuff and that was me so we're making ends meet and then I got this 300 000 deal I've been working on for a long time and the I guess the question here is how do you get a large company to give you three hundred thousand dollars when you're like four Joker guys and we're working out of the back of a dentist office at the time we didn't tell them that

well but uh we so the the key there um we we gave up a really interesting term that uh that they that they took and and what that was was I traded for three years paying three years up front uh it was like three hundred and eight thousand dollars or something I traded away not I promise not to sell the product to their two biggest competitors for that three-year period which they really liked they thought that was

really cool they thought this was a competitive advantage and they were like yeah these guys and they understood they actually they knew that we were like four guys they they they knew they understood their risks and they and they were they were okay with it given that they could keep this away from me from their competitors for three years and and so that's uh that deal basically floated the first you know three quarters of 2015 and then revenues had caught up to uh to what we what our costs were and then you

know the next time we made an extra five grand a month we could hire somebody so that it our first financing was from customers so here's our debt history and and I think the uh if I wanted to zoom out and offer a takeaway it's that you got to shop this stuff around right you gotta dive deep and um and and now if anything with debt I shopped at around a ton and figured out who are the players what are the where

do they fit I should have made a slide about this but with who all the players are but um you know the lighter scale works and and uh which now they're called element uh founder path and then there's those are kind of the ones that I think are the most focused on the SAS industry right now so I started out with lighter because they were first um scaleworks didn't exist founder path didn't exist um and so I bought I borrowed 888 000 or two years in four tranches they were all

about like you know 220 here 250 there this is an RBF loan who knows what an RBF loan is one person revenue-based Finance all right so what a revenue-based finance loan means These suck right there I shouldn't say that they're okay but what it basically means is they take a cut of your revenue on a monthly or weekly

basis the reason they kind of suck is because it's very hard to plan around you don't know exactly you don't know how much you're losing how much you're going to give up every month the good thing about them there is a good thing about them if if you if I'd gotten a big revenue-based loan right before covid that would have been great because then you know Revenue hits the skids you pay you end up paying back less so you are nicely aligned with them but if you grow quickly then these

loans can become really expensive like on a on a percent basis probably like 25 percent but if you know things hit the skids you could pay three percent interest right like they just they want to get their money back someday right so they're there the the you're better you're better aligned I guess with your lender but it is they're annoying and that they're they tend to work out in their favor and be a little more expensive I think for me it worked out to be about 18 because we weren't that good at growing but if we had been good at growing it would have been a lot more expensive

so um key terms to watch out for and I'll go over this uh a slide on this later but one of the key terms to watch out for these guys had a term in there that I don't think is too uncommon but I didn't catch it I mean I went over this contract with a fine-tooth comb but didn't catch this they had a term that if we wanted to exit the loan early like after two years it was a four year loan if we want to pay it pay it off after two years and take our money somewhere else we had to pay them all the interest

as if we had been there for four years which is like [ __ ] off so so uh the uh the way I got around this was I did another tranche with them so my last trunches and I basically just did because I wanted to renegotiate the terms and I was like okay I'll do another 250k with you but we're gonna have to renegotiate the terms and so I got that term Redline because you know I think they knew it was worth [ __ ] and I don't even know if they put that

in today but that's that's a key term to to keep your eyes out for unfortunately these documents are like 40 pages long with with a lot of these lenders so key thing to understand about them they would loan to about 4X mrr and these guys that tends to be not super negotiable because um it's what they've promised to their to their LPS so the it's the and if obviously if you're loaning 8X mrr

compared to two XMR it's way more risk right it's way harder for a company to pay back it's pretty easy to pay back it's pretty hard to imagine that a company couldn't pay back a loan of Forex mrr over four years I mean you'd have to be shrinking basically right so their their rules were such that they can only go to that level story short scaleworks offered me a better deal so better deal in terms of more money and also a better deal in

terms of Cheaper money and uh I I told lighter hey here's these guys are offering me can you can you match it and they were like we can't we can't break the four so I went to scale works and they went to six if I recall um I borrowed 1.5 million dollars over three tranches from them um and the more tranches you're getting the better right because you're matching your spend with with uh

with I guess uh well the the more you can match your spend with the money that you're bringing in the lower your ultimate cost of capital is going to be because you're holding the money in your bank account for less time so you know in a perfect world you do a little loan every month for for whatever whatever you're paying for and the what I've always done with this with these loans which is not like you know the smartest thing to do with loans like the smartest thing is like oh I've

I've got this funnel over here Google ads and I pour you know 20 grand into it a month and 25 Grand comes out the bottom so of course I should do that every month that's like the perfect thing to do with debt what I was what I've always done is I've basically had five extra Engineers because I've had this debt and I've had them for since 2015 right the team's always been five extra Engineers bigger because of debt so you know and frankly you know early on I would have had I had seven

Engineers instead of two so it was super material now it's less of a big deal but Engineers is actually still a big deal you get a lot more done so um even today you know this stuff is super useful um so the terms on the scaleworks deal was a four-year deal 17 APR so a little better still for a year we should talk about terms as well the problem with a shorter Term Loan is it creates a ton of risk because they

don't and a lot of the debt providers that make loans to SAS companies want to do like a year or 18 months super risky because I mean especially right now as we're seeing like the the finance Market's not stable right like you can you can very easily run into a circumstance where the interest rates are going up and they don't want to do another deal or think they feel things get risky if you're if you're counting on that money because you've made a longer term investment and almost all the Investments we're going to make are

at least a year and a half two years payback um and you need you need a Time Horizon longer than your actual payback or else you're basically just putting the money back in that you borrowed right you're you're not actually to you need you need time all our costs are for the most part monthly costs and so you need to take the money in spend the money over a year year and a half and then get value out of it create more Revenue your mrr goes up and then

you're paying back the loan for the next you know two and a half years with that increased mrr and if you came out ahead it was a good idea to take the data to come up behind it was a bad idea but if in a fast-growing SAS company it's always a good idea our our our returns way higher so you it's it's always basically even even fairly expensive debt is always a really good deal because if you're if you're a return on that capital is 50 or 60 and it costs 16

you're way way ahead

it sounds like you're using it for product absolutely did that bother you at all what was that well like I said it's not it's not the the I mean the perfect place would be like ads or something where you get a quick payback I mean product development it's even worse than like hiring sales people because sales people pay off in in my opinion at a sales or marketing or anything on the revenue side pays off at a pays off faster but at a lower

ultimate rate um engineering resources and actually making the product better creating that extra feature that wins you extra deals pays off at the highest rate but over a longer period of time and that's why it's so important that you don't get the short-term loans that I'm trying to think of the the companies that do that are really big up like pipe and there's a bunch of companies three quarters of the SAS lenders are like they want to do one-year deals which you

can't invest in in human capital over one year it doesn't pay even a sales person doesn't pay back fast enough because it's not just time to break even it's they had to you had to invest the money and then you start pulling money out and you need time to pay back from there for it to for it to actually make sense so your question was what was the exact term of the lighter was four years all these are four-year loans so and most of your product Investments go

pre-revenue before you started you know throwing sales at it and actually seeing that really adds to your time yeah this is important right like it's well first of all you can't get this kind of debt unless you already have Revenue this is all these are all revenue based debts you know it's very hard to get loans you got to get Equity Capital if you have no Revenue um but I think a Founder needs to start selling

before you have the product so you the the you know so before you invest in a sales team before you hire your first sales person and before the product's even built some someone on the founding team like they have to have ownership they have to have con like control they have to have a seat at the table needs to be out in front of customers pushing your message and and it can be and and I'm talking about hundreds of people like you have to be you know who you're you think your ideal customer profile is you've got to get out and get in front of those guys and like really

um you know hey this is the thing I'm building I think it's I think I'm building it for you if that's true would you would you buy it for this much money and that's really important to buy it for this much money part because if everyone no one's ever going to tell you that you're that your baby's ugly right they're all they're all going to tell you you have a beautiful baby but if you ask them hey would you actually adopt the baby they're like oh no I mean it's a totally different ask

so so I think it's really important to that you you're selling this stuff before the product when the product comes online you you should have a whole bunch of people that you've already talked to and are all lined up saying not in there they've already nodded their heads and said yeah I would pay you and I would pay you that much money for this product if you can build it you can come back and be like hey here it is all built and they won't all buy it but some some healthy percentage should uh and and that's so as soon as the thing comes online you basically start selling

it in its most basic form all right so my my current debt situation I switched to founder path about a year and a half ago a year ago yeah all right Nate's a dick [Laughter] so so uh I borrowed 225 million over six

tranches uh and and once again more tranches is is better because that that drives down your cost of capital it was a i s you know switched here because it's cheaper so 17 to 16.3 percent doesn't seem like a big difference but actually when you're talking about like you know two and a half million bucks that adds up and uh and uh let's see they he would also loan more money so scale works is at 4X mrr

he's at 8X mrr and uh they might even go higher than that they haven't told me he hasn't told me no yet my uh but if it's a very fast and painless process with him I mean I because he can he's always he connects into all your data right you can see my profit well in my bank account and my stripe and all these things yeah it really so you you're going you're walking us through the structure but I

was thinking more about the decision making and the strategy which is the folks I've generally been around have all been in the VC uh racing around sure the the time for making this decision of going who I am dead versus going to BC route seems to be one that you'd have to make early on and now we get to see a lot of convertible notes so safe notes and all of those sure so so there's

there's this spectrum that exists now when do you think this decision of going the equity around me should be taken and if you were to reflect on your own decision making would you go this route or would you prefer to go the other Outlet I think the that the rule is debt before Equity if you can get it it's cheaper Equity capital is super expensive you can't get debt until you already have Revenue once you can get debt you should get debt you stack equity on top of it but even if you just push your the

equity round back six months you're you get a bigger valuation you you you know if you if you can push back the need by using debt or and it's not just on the on the a round you can do the same thing on the C round if you can you know before you're if you can push your C round back because of debt you want to do that so you basically always I'd say if rule of thumb always debt before Equity if you can get it and it's like not

30 right it's both yeah absolutely you could do you could if you had some first in a SAS business VCS hate giving you money before you have a million bucks in Revenue anyway right but it it's 250k in Revenue a year you can get a small loan right and so you've probably done a couple tranches before you before VCS even come in and then you do your VC round start spending that money a year after you get that round because it should take you two years before you

raise again year after you get that round you you stack on as much debt as you can and then hopefully push back the B round and you can do that every time and and as you grow you can always bring in more money one last fall out there so if things go south um with the money yeah this is not that there's no uh there's what do they call it I'm I'm not yeah I'm not this these aren't none of these are personal guaranteed loans so it's not like going

to you know First Republic and they or you know Silicon Valley Bank they'll they'll make you PG that dashboard which I thought was just be useful for people to see so they would give me um they would give me two million almost 3 million in debt and I've taken 2.2 so I could get that like I could get that just by going in and pressing this button

and what I what I've actually been doing is um emailing them and saying Hey I want exactly this much because I don't that there I don't want just all of it I want you know I want to trunch it out that's why I've done six tranches with them last year and a half

oh here there's if there was a slide to take a picture of it's this one because you gotta checklist this if you ever get debt are there liquidity terms this means like hey I just I just uh I just brought a million bucks from you a one of my terms is you always have to have a half million bucks in the bank it's like well thanks so you actually loaned me a half million bucks but I'm paying for a full million I appreciate that

um are there any ebitda or mrr covenants like meaning like did your if you if you slow down in growth or if your profitability drops you owe all the money um that's that's actually more common to think uh can they demand you pay pay them back faster for any reason that that providers love to give you an umbrella when it's not raining and take away the umbrella once it starts raining is perfect so they they when times are bad they'll often demand you pay back

faster and they'll have terms in your contract like oh on page 64 didn't you see that because this because you're growing more slowly now you have to pay us back faster you're like well that's perfect timing um any this is the one that I got the early payback penalty like I couldn't leave and I couldn't leave and swap them out without paying them all a big penalty and that's that's a negotiable term because it's total BS short-term loan is dangerous we talked about that they can control your use of

proceeds what I've seen is you can only use this to spend on marketing so you can only spend on ad dollars with this money and it's like well I'm already spending money on ad dot I don't I need them I I need the money for any money for I don't but that that's and they give you like a card I forget which one this was they gave you like they would give you like a card that you can only a credit card you can only use the number for uh marketing super annoying terms matter there's go through all the terms

very carefully uh you know have your lawyer friend look at it because some sometimes terms can be tricky prepayment penalties is one to watch out for um there's a lot of there's a lot of like fluffy ways that people are describing loans today yeah okay one more minute guys there's a lot of fluffy ways people are describing loans today you can cut through the fluff by converting it all to eight to aprs like they'll they they talk about

loans in a lot of different ways if you're taking them out of money and paying them back it's all the same it's a loan you can convert it to an APR and that is all I guess my only point we'll hear was this is hard um forget about your hobbies you're not gonna be a good friend son daughter mother you got a ruthlessly prioritize identify the things that really matter to you and only do those things it's not a good time to have a work-life balance

getting these trains out of the station is really hard but once these trains are in motion they're super hard to stop so that those are my my bits of wisdom

how much do they look at those things there's just pretty much depends on the lender so some some lenders I mean ultimately what you want to do is be making 10 million bucks a year and and two two million in profit and then you can get some real cheap loans but and because a lot of lenders look at ebitda and and make loans on that and those are cheaper better those are cheaper loans but I mean it's hard to make two million dollars a year in profit and the reason they do that is because it's like oh well if you're you're taking too many Bucks a year in

profit even things go kind of sideways you're still going to pay your loans back so these are all for earlier stage companies these are all mrr based loans other case um if you're profitable I haven't gotten there yet but but

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