Decision Vision Episode 165: Should I Pursue Non-Dilutive Funding for my Start-up? – An Interview Lauren Cascio, Gulp Data
Lauren Cascio, President of Gulp Data, was host Mike Blake’s guest to explore if start-ups should be looking for non-dilutive funding. They discussed the difference between non-dilutive and dilutive funding, different types of non-dilutive funding, risks and restrictions, the companies it works best for, and much more. Decision Vision is presented by Brady Ware & Company and produced by the North Fulton studio of Business RadioX®.
Gulp Data provides non-dilutive funding to early-stage companies using their data as collateral.
Unlike other sources of funding, Gulp Data recognizes your data as an asset. Use it as collateral for your loan – they make a secure, temporary copy that is held in escrow and released once you’re done. Gulp Data provides the capital you need now, at a lower cost, and without the hooks.
Gulp Data ensures you keep your equity and your board seats. They aim to close loans with minimal touchpoints and in less than two weeks.
Lauren Cascio, President, Gulp Data
Lauren Cascio is the founder of Gulp Data, a company providing non-dilutive funding using data assets as collateral. She also recently founded aKinned, a seed fund backing healthcare in Africa. Prior to her recent move into funding, she co-founded abartysHealth, a growth stage health-tech company, where she ran product, data, and development for six years. She is a proven angel investor and an active tech ecosystem builder, successfully advising and mentoring dozens of companies through go-to-market, data monetization and fundraising.
Mike Blake, Brady Ware & Company
Michael Blake is the host of the Decision Vision podcast series and a Director of Brady Ware & Company. Mike specializes in the valuation of intellectual property-driven firms, such as software firms, aerospace firms, and professional services firms, most frequently in the capacity as a transaction advisor, helping clients obtain great outcomes from complex transaction opportunities. He is also a specialist in the appraisal of intellectual properties as stand-alone assets, such as software, trade secrets, and patents.
Mike has been a full-time business appraiser for 13 years with public accounting firms, boutique business appraisal firms, and an owner of his own firm. Prior to that, he spent 8 years in venture capital and investment banking, including transactions in the U.S., Israel, Russia, Ukraine, and Belarus.
Brady Ware & Company
Brady Ware & Company is a regional full-service accounting and advisory firm which helps businesses and entrepreneurs make visions a reality. Brady Ware services clients nationally from its offices in Alpharetta, GA; Columbus and Dayton, OH; and Richmond, IN. The firm is growth-minded, committed to the regions in which they operate, and most importantly, they make significant investments in their people and service offerings to meet the changing financial needs of those they are privileged to serve. The firm is dedicated to providing results that make a difference for its clients.
Decision Vision Podcast Series
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Intro: [00:00:01] Welcome to Decision Vision, a podcast series focusing on critical business decisions. Brought to you by Brady Ware & Company. Brady Ware is a regional, full-service accounting and advisory firm that helps businesses and entrepreneurs make visions a reality.
Mike Blake: [00:00:25] Welcome to Decision Vision, a podcast giving you, the listener, a clear vision to make great decisions. In each episode, we discuss the process of decision-making on a different topic from the business owners’ or executives’ perspective. We aren’t necessarily telling you what to do, but we can put you in a position to make an informed decision on your own and understand when you might need help along the way.
Mike Blake: [00:00:46] My name is Mike Blake, and I’m your host for today’s program. I’m a director at Brady Ware & Company, a full-service accounting firm based in Dayton, Ohio, with offices in Dayton; Columbus, Ohio; Richmond, Indiana; and Alpharetta, Georgia. I’m also managing partner of the Strategic Valuation and Advisory Services Practice, which brings clarity to the most important strategic decisions that business owners and executives face by presenting them with factual evidence for such decisions. Brady Ware is sponsoring this podcast.
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Mike Blake: [00:01:32] Today’s topic is, should I pursue non-dilutive funding? And probably if I were more detail-oriented, I’d say should I pursue non-dilutive funding for startups because that’s really what this is talking about. And, I wasn’t able to find data for the entire non-dilutive funding market, but just the revenue-based financing market, which I’m sure we’ll touch upon today, is expected to reach $42 billion globally by 2027 according to Allied Market Research.
Mike Blake: [00:02:02] And revenue-based funding is fairly novel. I’ve actually had a couple of clients that have used it and there are now, in effect, providers of capital that will lend you money based on your expected revenue coming in. So, in a way, it’s kind of like purchase order financing. But instead of doing that with equipment, it’s generally made available to software as a service company.
Mike Blake: [00:02:30] And it turns out it’s a not very visible market, but it is a much larger one that I think most people realize. And I’ve never met a startup yet that isn’t interested in the question of how to fund their business. So, we leave no stone unturned here on the Decision Vision podcast, and I hope that you’ll agree that this is a useful topic. And, I’m really happy to have somebody on that knows a lot about this topic and really a lot about the venture game as a whole. She’s just going to be a fabulous guest and a fabulous interview today.
Mike Blake: [00:03:04] Lauren Cascio is founder of Gulp Data, a company providing non-dilutive funding using data assets as collateral. She also recently founded aKinned, a seed fund, backing health care in Africa. Prior to her recent move into funding, she co-founded Arbutus Health, a growth-stage health tech company, where she ran product data and development for six years. She is a proven angel investor and an active tech ecosystem builder, successfully advising and mentoring dozens of companies through go-to-market, data monetization, and fundraising. And joining us as our first guest from Puerto Rico, Lauren Cascio, welcome to the Decision Vision podcast.
Lauren Cascio: [00:03:44] Thanks, Mike. I’m so excited to be here and to represent Puerto Rico. How fun. There are a ton of entrepreneurs here.
Mike Blake: [00:03:51] So, for a lot of our listeners, I think their ears are perking up because I don’t know if they necessarily understand when we say non-dilutive funding, even what that is. So, can you take us through, how do you define to somebody what non-dilutive funding is and how does that compare to funding that actually is dilutive?
Lauren Cascio: [00:04:13] Yes. So, this is – by the way, this is one of my absolute favorite topics to cover with founders. This is something that a lot of founders have to learn about the hard way both equity financing and non-dilutive funding. And, it’s never easy or fun to learn about things the hard way, specifically when it’s something you’ve felt.
Lauren Cascio: [00:04:35] I have so many questions about funding and fundraising and what it was like. I now have experience on both sides of the table. So, simply put, non-dilutive funding is any capital that does not require you to give up equity or ownership. And that compares with dilutive funding, where dilutive funding requires you to give up equity or ownership in exchange for capital.
Lauren Cascio: [00:05:03] Dilutive funding also early on can require you to give up things like board seats and preferred equity, anti-dilution provisions, warrants, all of the things that early-stage founders typically think that they need to give up in the beginning of building their business. And there are some caveats to non-dilutive funding as well, specifically around venture debt. We’ll get into the different types. But, yeah, that’s it in a nutshell. It’s either giving up equity or not.
Mike Blake: [00:05:35] So, whether you’re new to the game or you just sort of watch it play out on Shark Tank, which is kind of the WWE version of venture capital, we typically hear about venture funding, the venture capitalists are the ones that get all the pub, they’re the ones that that everybody knows, the Peter Thiel’s of the world, and so forth. Why are some investors now trying to change the model? Especially since that model has worked very well, at least for investors, why are some investors interested in changing the model and providing capital that goes outside the raised capital sell stock kind of model?
Lauren Cascio: [00:06:15] Yeah. So, I don’t think that this is a new tool that VCs or investors are using, but essentially it can do a few things and I have some examples. So, it can definitely lower the risk for VCs by passing on risk to future investors. So, for example, a company that has raised a bunch of money, maybe $10 million, they are going to be eligible for, I don’t know, pretty what’s considered friendly venture debt terms where they’ll be paying interest rates of like 10, 12, 15% and they can probably find financing for about 25 to 50% of that capital. That’s usually later-stage companies that are raising more money, and in turn, the investors like this because they’re essentially passing on that risk to future investors. The life cycle of venture debt is that people raise it and then future rounds pay it off.
Lauren Cascio: [00:07:18] There are some other non-dilutive, and we haven’t gone into the types of non-dilutive funding yet, which I know we will. But there are other types of non-dilutive funding that can be complimentary to VC as well. So, in some cases, VCs have a limitation on the amount of follow-on they can provide into a company, or they have a capped amount of their total fund that they can make into a single investment.
Lauren Cascio: [00:07:45] So, if they want to preserve their position as the company goes on to raise later rounds but they just don’t have the spare capital or can’t make those investments, non-dilutive funding can help them preserve their position in those companies. It’s also – so, yeah, I think with market conditions like we saw last year, we saw insane markups in 2021. We saw valuations go through the roof, seeds, average seed-stage rounds, where I mean over 4 million, I think, in the US, and 2022 is not producing the same valuations.
Lauren Cascio: [00:08:26] And what that means is that investors are locked into these companies and these companies don’t have a choice because a lot of them can’t take a down round because of anti-dilution or whatever other terms they have with their current investors. And so, they’re looking to bridge and they’re looking to preserve their own position in the company, but also the position of their current investors. And so, when we see stagnant valuations, non-dilutive capital can be great. So, yes –
Mike Blake: [00:08:57] You said something that’s really interesting. I’m sorry to interrupt, but I told you we might go off script and we are in question too and that’s okay. But you said something I think is really intriguing and I’m not – it may have been intentional and that is that non-dilutive funding might be used to create effectively a synthetic anti-dilution position. Right? Anti-dilution, at least the way I see it, is considered a pretty onerous, almost punitive term. You don’t see it that often, thank God, because valuing anti-dilution is a nightmare. But on the other hand, you could achieve some anti-dilution by offering non-dilutive financing and sort of have your cake and eat it too.
Lauren Cascio: [00:09:41] Exactly. Exactly.
Mike Blake: [00:09:43] I mean the thought of that.
Lauren Cascio: [00:09:45] It takes – yeah. It really takes risks out of the game for investors. So, yeah.
Mike Blake: [00:09:51] So, one type of non-dilutive funding that I don’t want to talk a lot about today because I have a separate interview scheduled is grants, right? But there are a number of other forms of non-dilutive funding that are available and to the extent that you can. Can you talk a little bit about what other forms of nondilutive funding are out there?
Lauren Cascio: [00:10:15] Yes. All right. So, I won’t cover grants even though I love grants. So, I will definitely dial in for that podcast. All right. So, there are a ton of non-dilutive funding, mechanisms, tools. I think the one that most founders think of when they think of non-dilutive funding is venture debt. And, venture debt can be very predatory. And it can really kill an early-stage company because the interest rates are typically very high because the risk is very high for an early-stage company. And, there are covenants and rights typically in those agreements. And so, venture debt is one type that’s like a Silicon Valley Bank, Mercury, a few others that offer the services, a ton of independent lenders that offer these services. But that is like the typical of what founders think of. It’s either venture debt or VC but is not true.
Lauren Cascio: [00:11:24] So, you also have accelerators that offer non-dilutive funding. I personally have been part of an accelerator here in Puerto Rico some years ago called Parallel 18 that provided just non-dilutive cash, a cash grant for joining their accelerator. You have crowdfunding which is like Kickstarter, Indiegogo, and this is essentially people buying your future product. So, any time that people are buying a future part of the company, that’s non-dilutive funding. They are funding you to get started.
Lauren Cascio: [00:11:59] You have revenue-based financing, which you mentioned earlier. And, revenue-based financing is one of my favorite types of non-dilutive financing for early-stage companies that have MRR or ARR multiples. And, those are companies like Pipe and Founderpath, Uncapped. I think most of those companies do revenue-based financing and factoring, which is for invoices. And, it’s great if you have the metrics to qualify for revenue-based financing.
Mike Blake: [00:12:36] And MRR and ARR for those of us who aren’t necessarily in that world, that’s basically for your sustainable revenue or sustainable growing revenue.
Lauren Cascio: [00:12:45] Yes.
Mike Blake: [00:12:46] Right?
Lauren Cascio: [00:12:46] Sorry about that. Yeah.
Mike Blake: [00:12:47] Monthly run rate or annual run rate.
Lauren Cascio: [00:12:49] Yes. Sorry. So, yeah, it’s based on recurring. Well, I’m probably using acronyms. And I’m like, what? Don’t you know those acronyms? Yeah. Based on recurring revenue. So, predictable revenue. And then, they take a percentage of – so they’ll front you the money upfront, maybe 12 months of your monthly recurring revenue, and then you pay it off over time and they’re tapped into your bank account. They have some algorithms that tell you how much you’re eligible for and all of that.
Lauren Cascio: [00:13:21] You also have tax credits. And this is not something that a lot of companies think about, but it’s something that I have used myself living in Puerto Rico. There are other places like Australia that provide tax incentives typically in the form of income tax credits that you can then sell for cash and that’s just for doing research and development.
Lauren Cascio: [00:13:47] And then, you have government loans, like SBA loans, and you also have asset-backed lending. So, that can either be tangible assets or intangible assets like IP financing for patents and some other things. That was a mouthful. I’m sorry. There are a lot of different types of non-dilutive funding.
Mike Blake: [00:14:07] Well, yeah, look, it is a mouthful, but I think it’s really important because this is a world that I don’t think is very visible. Right? And, I share the same view with you in terms of venture debt. You know, it’s out there. But I don’t know that I’ve ever actually worked with or even met a company that has raised significant venture debt because either the terms themselves are so onerous, or if they’re not onerous the company is really in a point where it’s not really venture debt anymore anyway. It’s more like an SBA loan or something. And it’s like, wow, thanks a lot. We could have gotten money from nine other places. But, you know, not many people know about these other possibilities that are out there. And some companies have been very successful on that model.
Lauren Cascio: [00:14:58] Yeah. I’m actually really interested to hear how, for companies that were seeking revenue-based financing, how impacted their finances. I mean, I imagined it had a really positive impact.
Mike Blake: [00:15:14] Well, it did have a positive impact. And, I think what happens – I think what’s happened, at least in my experience, you know, the folks that are providing revenue financing are no dummies. Right? And, they do good due diligence to make sure that that’s a good investment or at least an investment that is at the appropriate risk level for their particular asset class. And, I think there’s a validation perspective there that is beneficial. And, there’s probably a little bit of selection bias too. I think the companies that are successful with revenue financing, they’ve achieved revenue financing because they were likely to be successful.
Lauren Cascio: [00:16:00] Yeah. Yeah. Yeah. It’s a special kind of company typically that is eligible or a good candidate for revenue-based financing because they’ve obviously proven product-market fit, which is a lot of the uncertainty and risk that you have in early-stage financing or early-stage companies. And so, yeah, they’re definitely not the only but definitely a strong candidate for success. I agree.
Mike Blake: [00:16:28] Now, some listeners may be hearing this and thinking that this non-dilutive financing may almost sound too good to be true. Is there a risk? Is there anybody that’s taking advantage of this, of the attractiveness of non-dilutive financing, and doing bad things with it? Is there a risk of being scammed in this space?
Lauren Cascio: [00:16:54] I don’t know if it’s being scammed. Probably, in a lot of – and this is not just for non-dilutive funding and raising debt. This happens all the time in VC. It’s being misled and founders who are so focused on getting back. So, regardless if you’re doing non-dilutive funding in most cases or equity financing, it is very distracting process for a founder. They are plucked from their day-to-day. Probably, their sales pipeline is suffering and their development pipeline is suffering because they can really only focus on either fundraising or running their company. You can’t do both well simultaneously. Probably, very few founders will say that they can.
Lauren Cascio: [00:17:45] It’s a distracting and time-consuming process. And so, what happens is that founders get to the finish line after doing all of this due diligence and creating data rooms and all of these things, maybe if they’re doing non-dilutive funding and it’s like one of the – we didn’t talk about this, but a hybrid like a convertible note. They’re just glad to be getting the money so they can get back to work and they ignore the fine print. They don’t seek the proper legal advice.
Lauren Cascio: [00:18:13] And so, yeah, they can be misled. They were unaware of certain covenants. They didn’t know that they were signing up for a conversion into preferred shares or whatever it is. You have to be really, really careful. So, the takeaway here is that the wrong venture debt can definitely kill a company if they’re unable to pay the principal. And, what you really need to understand is your worst-case scenario when you’re signing a document. If I’m unable to pay this back, what happens to my company? And you should be asking yourself that whether you’re raising non-dilutive financing or equity. It doesn’t matter. You should always know what happens in the worst-case scenario.
Lauren Cascio: [00:18:57] And so, yeah. I don’t want to see it’s too good to be true or that people are trying to scam you as an entrepreneur, but they definitely have their own best interests in mind. That said, we’re seeing a lot of innovation like the revenue-based financing companies, the factoring companies that have very standard product and very standard terms, which I love, kind of like what safe agreement did for raising equity as an early-stage founder. We’re just finding these standard terms. And that’s great because then you know what you’re getting and everyone’s getting the same thing. But, yeah, legal advice is worth it.
Mike Blake: [00:19:41] Yeah. I was going to say one of the takeaways there probably is that it’s important to have an attorney look this over for you if you’re not really comfortable reading agreements, especially because, you know, some of these platforms, particularly in the revenue-based financing area, do this thing entirely online. Right? And so, I didn’t go through one of the processes, but I suspect that if they are run entirely online and it’s basically a bot that’s going to approve your loan or not, right, you start off by asking, by answering some questions, and the next thing you know, you’re offered a loan and you’re given just a, hey, click to accept. And the next thing you know, right, you’ve got some things you didn’t realize you were agreeing to, and having a lawyer ride shotgun in that can be really important.
Lauren Cascio: [00:20:29] Yeah. Yeah, definitely. Even in the standard products, I agree. It’s really important to understand what you’re signing and what you’re getting into. And you should always, as an entrepreneur, I assume that’s the audience, you should always plan for worst case. And so your worst case in non-dilutive funding is, I’m not paying you back or I’m not paying the interest during the loan term, or I can’t pay the principal or a combination of both. What happens? Do they have security over the entire company? Can they shut down your company and sue you for the assets? You have to understand what you’re signing.
Lauren Cascio: [00:21:07] So, in venture debt, it’s possible. But in the more innovative asset-backed loans and revenue-based financing, factoring, tax credits, typically, no. Typically, I find them more founder-friendly. I’m a big supporter of founder-friendly terms.
Mike Blake: [00:21:31] So, let’s say somebody listening is interested and I’m sure somebody will be. They’re going to want to find out on their own where they might be able to obtain this non-dilutive funding. Sounds great. What’s the best way to go about identifying those sources? Is it as simple as a Google search or are there databases? Are there trade associations, conferences? What’s the best way to go find these sources?
Lauren Cascio: [00:21:57] I really wish that there was – this is something that people ask all the time. They’re like, well, how do you find out about all of these different resources? I wish there was a better collective resource for this in general. You know, it’s so funny when you’re starting a company, there’s a ton of information you can find online about how to raise VC, how to create a pitch deck, how to run all of these metrics of turn and customer acquisition cost, and pretty much give yourself a degree online on how to start a company. It never – like one of the things that it never touches non-dilutive funding sources. And so, I wish there was a better collective for this.
Lauren Cascio: [00:22:40] But for the most part, I think that you can actually just Google some resources and maybe later we’ll start a website that just gives out resources. I’m kidding. I’m not going to do that. But, yeah, you can Google. You can look for, for example, you can Google crowdfunding and you’ll probably find like Indiegogo and Kickstarter. You can look up government loans or like SBA. You can go through SBA. It has a ton of loans. Grants, we’re not going to talk about grants, but there are a bunch of resources for how to find SBIR and grants online.
Lauren Cascio: [00:23:18] For revenue-based financing, you would Google like revenue-based financing for SaaS companies or for service companies or whatever you’re doing and you’ll find, yeah, like Founders Factory, Pipe, Uncapped, those companies. For the tax credits, I think that this is really regional. So, I know really well the tax incentives, the R&D incentives in Puerto Rico, familiar a bit because of a project about the ones in Australia. But I think that this is really regional. So, depending on where you live, maybe like look up research and development, tax credits in wherever you are and they’re maybe –
Mike Blake: [00:24:02] Or ask your CPA.
Lauren Cascio: [00:24:02] Or ask – so that’s another thing that you’re bringing up a really good point, Mike, asking your CPA or your CFO. A lot of early-stage founders don’t have this resource.
Mike Blake: [00:24:14] Yeah.
Lauren Cascio: [00:24:15] Which is part of this problem because part of their job is to find this type of financing. And, it’s one of the last things that founders hire. I mean, you must know this.
Mike Blake: [00:24:26] Oh, yeah. Yeah. In fact, one of the first shows we ever did was, should I hire a CFO? Right? I mean, the answer is yes as soon as you can. But a lot of people don’t because initially, it is a cost center. Right? A CFO is not a profit center. So, that’s very hard. But it’s exactly questions like this that a good CFO can not only help you answer but navigate kind of what is the best – what’s the best model? What’s the best provider?
Mike Blake: [00:24:55] Now, correct me if I’m wrong, but I think one of the other areas, one of the other characteristics that differentiate non-dilutive financing from equity, venture capital, in particular, is it seems to me that a lot of non-dilutive financing is almost anonymous. Right? I see so many online providers where you may never necessarily meet one another and we’re going to get into the process a little bit.
Mike Blake: [00:25:23] Whereas, with equity financing the game, you know, there’s no – you don’t just walk into a venture capitalist office, say, hey, can I have some funding? Right? It’s all about, you got to know somebody. You’ve got to get introduced by one of their investee companies or their investors or something. And, that in itself is very much a barrier to entry for people that are raising capital. Right? If you’re not a very good network, it makes it really tough. But for non-dilutive financings, it’s a little bit different, isn’t it?
Lauren Cascio: [00:25:52] Yeah. Depending on the type of non-dilutive funding, it is. There are some really innovative companies that have put this new spin on revenue financing and factoring and asset-backed lending where you don’t even need to talk to anybody on the phone. You connect your bank account and some metrics about your business model, and they spit out a, you know, a loan amount. And I think it’s great because it’s leveling the playing field for founders that are outside of the circles that are outside of these geographies. And so, it doesn’t require you to be in this insulated inner circle of VCs and what used to be just like Silicon Valley or New York or wherever. Now, it’s expanding a bit post-COVID. But that’s wonderful.
Lauren Cascio: [00:26:47] And I think knowing, and this is where this goes back to having the CFO, knowing the best type of financing for whatever you built is really important because there’s a better fit of non-dilutive funding for each type of company. But, yeah, you would basically plug in your the metrics that they’re asking for. Due diligence is probably not nearly as bad as it is in venture capital and get a loan. And, some of these companies are doing loans in like a day. It’s crazy.
Mike Blake: [00:27:21] Yeah. And that part, I think, also makes it attractive, right? Because the other – one of the other pieces that makes venture capital unattractive is best-case scenario. It’s a months-long process. Right? And, for a startup, months is a lot of time.
Lauren Cascio: [00:27:37] Oh, yeah.
Mike Blake: [00:27:38] Companies live and die in a few months. Right? But, yeah, I was noticing this that it’s almost like some of these non-dilutive loan sources almost operate like online mortgage companies, right, or car lending companies. You put in some information and semi-instant approval. It’s remarkable.
Lauren Cascio: [00:28:00] Yeah. And there will be more of this as well. I think we are just in the beginning. You shared an exciting number at the beginning of this podcast and it’s a growing market. It’s going to, I don’t want to say it’s going to take over portions of VC because there’s just never enough funding. You can never have enough funding. So, just more companies will have capital available to them based on what they’ve built.
Mike Blake: [00:28:29] So, we’ve made a pretty good case that non-dilutive funding is pretty attractive. It’s pretty awesome. Are there – what is the role for venture capital going forward? I’m not sure that Mark Cuban and Peter Thiel are going to be put out of business any time soon. When might somebody kind of pump the brakes in going after non-dilutive funding and instead start seeking equity capital in spite of the shortcomings that we’ve discussed? When might a more traditional route actually be appropriate?
Lauren Cascio: [00:29:03] So, my one-line summary for this is they should always – I want to say – I believe they need to coexist. That equity funding and non-dilutive funding should coexist. There is a time and a place for both of them, and in some cases, there is a time and a place for them to coexist on the same round or at the same time.
Lauren Cascio: [00:29:30] So, even though I’ve had my share of bad experiences with equity funding and boards and venture debt personally, I believe that taking on equity partners or equity investors, pardon me, is really important when you’re making strategic moves in your industry. This is like when you’ve found product-market fit, at least a bit of it, you can repeat the customer a dozen times and they’re paying a similar price for it. And/or you’re ready for an alignment for scale or go public strategy or exit.
Lauren Cascio: [00:30:22] The caveat to that is that there are so many empty promises that are made by VCs. Some VCs have hundreds of companies in their portfolio and not nearly enough time or effort to support all of these companies the way that they need to be supported through their pivots and changes and change management and all the things that happen in early-stage companies. And so, one advice that I often give to founders is that the majority of VC money is just money, and look at it that way and don’t trust the promises. But I always encourage founders to do diligence their investors the same way that the investors are doing diligence on them.
Mike Blake: [00:31:05] I agree with that.
Lauren Cascio: [00:31:06] One of my favorite ways to do that is to talk to their portfolio companies, but not the references that the VC gives you. Because if you ask an investor for references and their network, they’re going to cherry-pick references. I’m talking about going into Crunchbase, finding out the companies that may have died or gone out of business, and interviewing those founders, and understanding what the relationship was like and where there were weaknesses or blind spots within the VC firm.
Lauren Cascio: [00:31:43] So, it’s really, and I think already said this, it’s like getting married. You are bringing somebody into your company. And if you’re at like a seed-stage or Series A stage, likely you’re giving them board seats. You’re giving them power in your company. It was less common probably in the last year or so, where VCs were just handing out a bunch of checks with all the free money that was falling. But they take board seats. And so, you have to work with them. You’re going to have to understand how they envision your company, and you have to understand how you’ll work together just as much as you do with your co-founders or your top executives.
Lauren Cascio: [00:32:24] And so, yeah, there are pros and cons to both. And, I think that most successful companies will dabble in both types of financing because it can be done really eloquently when done correctly. That’s like the long and short of it.
Mike Blake: [00:32:45] Okay.
Lauren Cascio: [00:32:45] I have some other thoughts on how market conditions affect it and valuations play a role and the times that venture debt can be riskier. But, yeah, the main takeaways are that they really should coexist. And, as we see a rise in more standardized non-dilutive funding companies, we’re going to see the two marry in a lot more of the companies that hit the series A, series B, and scale metrics.
Mike Blake: [00:33:21] So, this was actually a nice segue to the next question I wanted to ask, which is, when we think of traditional non-dilutive funding, i.e. loans, the agreement will typically have something that are – some things that are called covenants, which is just another word for agreement, obviously, but they’re restrictive covenants that restrict what the borrower is allowed to do, and in some cases may impose penalties if the company fails to meet certain performance targets. Do those kinds of things, do covenants like that work their way into non-dilutive funding as well?
Lauren Cascio: [00:34:05] Into certain types of non-dilutive funding, absolutely. For example, traditional venture debt will carry usually financial and performance covenants and these are requirements that are part of the loan agreement. Yeah. If you violate – it depends. And this is another one of my many issues with venture debt. If you violate one, you may be defaulting. You may be in breach of contract. And so, they may be able to go after assets or after the company without you even realizing that you’ve done anything wrong.
Lauren Cascio: [00:34:46] It’s not specific to debt. It happens in equity too. But, yes, so you have covenants. You also have right of first refusal which can prevent you from taking other types of debt or other lenders. So, you have to be careful and this is going to go back to one of our first points, which was have a lawyer because you have to make sure that your lenders can coexist. You need to make sure that your debt and your equity can coexist, meaning that your debt does not violate terms of your equity agreements and your equity agreements do not violate terms of your debt. For example, some debt will be above even preferred equity. And so, if you have investors that are earlier investors that had preferred shares, which I also advise against, then – am I allowed to give advice? That’s my own advice.
Mike Blake: [00:35:39] Please.
Lauren Cascio: [00:35:39] My personal advice. Personal advice, don’t give preferred shares. But yes. So then, you would need sometimes subordination signatures and all of these complicated things that I don’t do that lawyers do. And so, yeah, you need to understand what you’re reading or what you’re signing. And, some of the documents can be really long, specifically in venture debt. You can have secured debt that’s like a general obligation of the company. It could also be specifically asset-backed.
Lauren Cascio: [00:36:11] And so, yeah, it’s not innocent, you know, specifically venture debt, it’s not innocent. Typically, it is secured in some form or fashion. It’s not just free money. If you want just free money for doing research and development, I’ll segue into your podcast about grants, so.
Mike Blake: [00:36:34] So, those terms obviously can be very complicated, can certainly be very impactful. In your experience, are non-dilutive capital providers open to negotiation? Is it worth trying to negotiate with them or do they typically just issue a term sheet take it or leave it?
Lauren Cascio: [00:36:55] Everything in life is negotiable. You can negotiate anything in life. So, okay, in the standard products – so Pipe is actually a really good example of this. They’re a marketplace. They take bids for contracts. And so, essentially, those terms are set. Right? They are standard terms. They’ve been evaluated by some models. There hasn’t been a back and forth. There hasn’t been an in-person meeting or a phone call. They’re just terms that are given and people can bid on those terms and you’ll take the best terms that are available. Right?
Lauren Cascio: [00:37:37] And I really love these standardized products because, again, it levels the playing field that you can’t really hide much under it. Everyone’s getting the same deal. And you know what you’re getting into as a founder, which you should be able to safely feel like you know what you’re getting into as a founder. However, when you’re doing convertible debt or you’re doing venture debt, or just like a general note on the company in any form or fashion, yeah, usually you can just negotiate them. They’re not – I mean, I don’t think that any – I don’t think there’s ever a time where you shouldn’t negotiate.
Mike Blake: [00:38:17] Okay. Are there certain kinds of companies or models that tend to be a better fit for non-dilutive funding than others?
Lauren Cascio: [00:38:28] Oh, yeah. Definitely. So, I’ll just say that for mature companies that have clear product-market fit, they’re able to raise equity with strategic investors from strategic, from big firms. They’re on the path to IPO or exit or whatever it is. Equity is definitely a frontrunner. I don’t think that they shouldn’t supplement with financing, taking advantage of financing the other assets they built. Like if they built a strong annual recurring revenue, why not take financing to grow with that asset? Or, if they have created a portfolio of IP assets, why not borrow against those IP assets, if you can, for a reasonable amount of money? And those types of financings are typically reasonable. They have very reasonable loan terms.
Lauren Cascio: [00:39:33] So, the companies that are typically attracted to like, I don’t know, tax incentives, grants, or asset-backed loans, specifically intangible asset back, are typically companies that have taken a heavy technical risk. So, they’ve spent a lot of money developing the infrastructure, the architecture of the product, those are your deep tech companies, and a lot less on sales and marketing efforts. And so, they won’t be able to get revenue-based financing. And in some cases, it’s very difficult for them to raise VC on favorable terms because investors just simply don’t value those intangible assets the way that, I don’t want to say the way that they should, but, yeah, really, the way that they should. Intangible assets are an asset that should be on our financial statements. They should be on our balance sheets, and they’re just not and so –
Mike Blake: [00:40:34] That would be a three-hour rant for me. Don’t get me started on that. Oh, boy.
Lauren Cascio: [00:40:39] Exactly. Yeah. That’s a rabbit hole there. But – that’s one of the big blind areas, in my opinion, of venture capital, is that they have absolutely no idea how to value intangible assets properly specifically for the SME market.
Mike Blake: [00:41:00] Yeah. And the accounting world in general.
Lauren Cascio: [00:41:02] The accounting gap. We’re all running off of gap.
Mike Blake: [00:41:06] It all behaves as if intangible assets don’t exist. Right? I mean, okay, I need to center myself because otherwise we’ll be a three-hour off-ramp into intangible asset valuation and gap, and –
Lauren Cascio: [00:41:18] Yeah.
Mike Blake: [00:41:19] No. We’re just not going to do that.
Lauren Cascio: [00:41:21] Okay. So, we’re not going to go down that rabbit hole. I would jump down the hole with you, Mike. Maybe, we’ll crack open a bottle of port and have a virtual session to commiserate. But, yeah, so, definitely companies that have taken heavy technical risks, deep tech companies, research companies should absolutely optimize what they’ve built with grants and tax incentives or intangible asset-backed loans.
Lauren Cascio: [00:41:51] Companies that have focused more on sales and marketing that have some strong early traction should be looking at revenue-based financing or factoring, depending on what they’re selling and how they’re selling it. Why not? And allow that to fund your build-out of your product or whatever your version too. Companies that are direct-to-consumer, D2C, companies that have tangible products, so many founders I’ve talked to that are building tangible products and I don’t do tangible things. I’m like, I live in the intangible space, data systems, cloud infrastructure, code. But founders that build tangible products, they almost never consider crowdfunding. I’m like, why? If you have all these people asking to buy your product or have purchased prototypes, do crowdfunding effort. Like, that is the perfect non-dilutive financing and you have revenue built in to your funding. And so, yeah –
Mike Blake: [00:42:56] It’s the ultimate customer validation.
Lauren Cascio: [00:42:58] Absolutely, the ultimate. And you don’t even have to take risk because unless you hit a certain metric or sell a certain number, you’re not going to build it and you don’t have to pay the factories or the suppliers. And so, yeah, so there are definitely better types of financing. Maybe, I should write like a post on this, a blog post. I have lots to say.
Mike Blake: [00:43:24] I think you should. You know crowdfunding reminds me – have you ever watched the movie The Producers?
Lauren Cascio: [00:43:30] Possibly.
Mike Blake: [00:43:32] It’s a Mel Brooks movie. It was eventually remade. But basically, the story goes, it’s about a couple of playwrights that recognize that failed plays actually enrich the playwrights more than successful plays. Right? If you raise a bunch of money, it bombs night one, you shut it down, and then you actually pocket the rest of the money. Right? Whereas if it’s successful, you may not. And so, the producers deliberately set out, these two guys, deliberately set out to make a play that would fail, raise a bunch of money for it, sabotage the play, and then pocket the proceeds. The problem was, and they thought they had this winning theme, they called it Springtime for Hitler. Right? It was a musical about Adolf Hitler basically in Brooklyn. And the problem is, that it was so bad, it was hilarious. And it was a smash hit and it basically ruined the two guys that had raised the money.
Lauren Cascio: [00:44:31] That’s funny. I have to check it out.
Mike Blake: [00:44:32] It just occurred to me that whole story was just Mel Brooks talking about crowdfunding in the 1970s.
Lauren Cascio: [00:44:38] Love it. Yeah. There you go. It’s not a new concept. Well, don’t do that to any –
Mike Blake: [00:44:45] Don’t do that. We’re not advocating fraud at the end of the day. I should point out that was fraud, so.
Lauren Cascio: [00:44:52] Yes.
Mike Blake: [00:44:53] And also, don’t make material about Hitler. Only Mel Brooks can get away with making Hitler funny. Nobody else can do that, so.
Lauren Cascio: [00:45:02] No.
Mike Blake: [00:45:02] Not a place we recommend that you go. I’m talking with Lauren Cascio and the topic is, should I pursue non-dilutive financing? I’m curious because you have a unique or certainly a very an unusually informed perspective on this because you’ve been with companies that have raised capital, you’re now a capital provider yourself. Is non-dilutive financing starting to disrupt conventional venture capital?
Lauren Cascio: [00:45:36] This is such a tough question because I think that they’ve co-existed for a long time for as long as I’ve been in the game, at least. And, I don’t – I believe – I firmly believe there’s a shortage of capital, that there is a higher demand and there always will be a higher demand for capital. And there is a true funding gap not only in the US but in global markets, and we will never have enough funding.
Lauren Cascio: [00:46:11] I believe that non-dilutive funding, outside of traditional venture debt, but the other types that we talked about, is going to be a key mechanism in the ability for companies to capitalize on the things that they’ve built and fund their companies to success. And that doesn’t mean that it’s going to take away from the VC market. There’s still a time and a place for VC. We’re seeing a ton of VC funds that are very small emerging – from emerging managers, new managers. People have never run VC funds before. A lot of them, ex-founders, left their own firms to build impact firms.
Lauren Cascio: [00:46:58] And so, I think that that will continue. That trend will continue where you have a lot of emerging managers beginning to fund companies that are seeking to make impact. But I think that non-dilutive funding is just going to slightly close the funding gap that we have. And, you know, as entrepreneurship and building companies become more status quo for people that we’ve seen or seen in post-COVID, people creating their own businesses, leaving the corporate world, there will always just be a demand for capital, and we’re not ever going to be able to fill it.
Mike Blake: [00:47:45] So, before we wrap up, I’d like to ask you a patently unfair question. But I only ask patently unfair questions to my very best, very smartest guests because I know you can handle the curveball.
Lauren Cascio: [00:47:57] Oh God.
Mike Blake: [00:47:58] And that is that it seems to me that non-dilutive funding might also be a path to closing the gender and race bias in early-stage financing because it’s not so personalized. Right? It’s not about being part of the same club, the same alumni association, the same country club. But as we talked about earlier, the sources of financing may not even know who you are. Right?
Lauren Cascio: [00:48:26] Yeah.
Mike Blake: [00:48:27] And there’s no basis for the bias. Does that resonate at all or am I just grasping at straws here?
Lauren Cascio: [00:48:33] Yeah. No. 100%. I’ll make one reference to Gulp Data. In our survey, we ask a question about being minority-owned or being women-owned and that is because I want to compare funding metrics with the SBA’s funding report that they did. I think it was in 2020. There’s a huge gap not only in minority and gender but in geography. And, I think that non-dilutive funding is, I mean, one of the questions you asked me was this decision-making process is essentially blind. It is because it’s merit-based. Does the company fit the profile we’re looking for? Does it fit the risk profile that we’re looking for? And if it does, it gets funded. And if it doesn’t, it does not. It doesn’t matter who you know. It doesn’t matter what school you went to, where you live, what gender you are, what race you are, you get funded. And it’s a beautiful – I mean, I wish that more funding operated like this, including government loans and grants. Like, this is information that they also know typically when you’re applying for funding, and I don’t think it should be relevant. It’s just not a relevant input metric to determine risk.
Mike Blake: [00:50:04] And in fact, that in part is why I sort of carved out grants into a separate topic because a lot of the automation, a lot of sort of the distance between a funding applicant and funding provider that exists in a lot of these revenue-based financing solutions does not exist in a lot of the grant world. The grant world, in my view, actually resembles much more closely venture capital, right, in terms of the relationship building and so forth. That’s why I did carve it out.
Mike Blake: [00:50:39] Lauren, this has been a great conversation. I know it’s an hour later for you there than it is for us, although knowing you, you’re probably working another 10 hours. But if – there are probably questions that we haven’t covered or maybe a listener would have wished we’d spent more time on. If somebody wants to contact you to follow up about this, I mean, you’re so knowledgeable about the topic, can they do so? And if so, what’s the best way to do that?
Lauren Cascio: [00:51:04] Oh, yeah. So – absolutely. And I’m always, like, happy to help founders navigate fundraising or whatever they’re facing. I’ve been there, done that, doing it again. So, the short one I think is lc, like Lauren Cascio, but firstname.lastname@example.org. That’s like an easy one. Or you can find me on LinkedIn. I like notes though. You connect with me at a note, so I know why you’re connecting with me.
Mike Blake: [00:51:35] Okay. Well, that’s going to wrap it up for today’s program. And, I’d like to thank Lauren Cascio so much for sharing her expertise with us.
Mike Blake: [00:51:43] We’ll be exploring any topic each week, so please tune in so that when you’re faced with your next business decision, you have clear vision when making it. If you enjoy these podcasts, please consider leaving a review with your favorite podcast aggregator. It helps people find us so that we can help them.
Mike Blake: [00:52:00] If you would like to engage with me on social media with my Chart of the Day and other content, I am on LinkedIn as myself and @unblakeable on Facebook, Twitter, Clubhouse, and Instagram. Also, check out my new LinkedIn group called Unblekable’s Group That Doesn’t Suck. Once again, this is Mike Blake. Our sponsor is Brady Ware & Company. And this has been the Decision Vision podcast.