SaaS Interviews with CEOs, Startups, Founders
He Raised $15m to Help Your New Customers Pay for your Expensive SaaS Plans
13 Apr 2022
Chapter 1: What is the main topic discussed in this episode?
Just to be clear, you haven't deployed 10 million yet, so you're under a $1.2 million run rate, but you think you can break that fairly quickly if you deploy the capital? Yeah, we should be able to hit that pretty quickly. You are listening to Conversations with Nathan Latka, where I sit down and interview the top SaaS founders, like Eric Wan from Zoom.
If you'd like to subscribe, go to getlatka.com. We've published thousands of these interviews, and if you want to sort through them quickly by revenue or churn, CAC, valuation, or other metrics, the easiest way to do that is to go to getlatka.com and use our filtering tool. It's like a big Excel sheet for all of these podcast interviews.
Chapter 2: What is the purpose of Alternative in the B2B payment space?
Check it out right now at getlatka.com. Hey folks, my guest today is Baxter Lanius. He's a CEO and founder of Alternative. Alternative drives revenue growth for SaaS companies by offering flexible B2B payment solutions for end customers and arming sales teams with an additional tool to convert customers. Previously, he was a fintech technology investor at Apollo Global and Victory Park Capital.
Baxter, you ready to take us to the top? Yeah, that sounds great. Thanks for having me, Nathan. All right. There are so many. I mean, as you know, FinTech is like hot, hot, hot right now. So did you sort of see these evaluations, multiples at Apollo and Victory and say, I need to ditch the investor thing and jump into an operator role? A little bit, you know, it's an interesting story.
I've been following FinTech over the last 12 years or so. I really started investing in FinTech in 2014 and saw the boom of the industry. At the time, I was pretty unimpressed with the platforms that were founded in that timeline because ultimately many of them were just customer acquisition moats and strategies around websites and podcasts and news, et cetera.
And there were not really many companies that were actually innovating in this space. So I decided to leave Victory Park actually and start investing in technology companies at Apollo.
And then I saw this whole kind of wave of FinTech 2.0, as I'll call it, where there's just a tremendous amount of innovation and opportunity in the space to really disrupt the number of banks that are currently the incumbents. And we just started to really focus on B2B payments and B2B payment solutions to ultimately innovate the very antiquated process that is B2B invoicing and payment flows.
And so this is our first foray into the space and first product launch, which we're launching more broadly in the next week or two. And it's been a really, really exciting journey. And I think there's just so much innovation available and still untapped. So tell me more.
I mean, if people look at your website and they don't have a deep understanding of FinTech, they might go, wait, this is an invoicing tool. FreshBooks sort of is great here. There's a lot of invoicing tools. How are these guys different?
Yeah, so we see our product as really a sales enablement tool to ultimately unlock customer acquisition, drive and deliver flexible payment solutions to your end customers to drive revenue growth by increasing average contract values and decreasing the sales cycle. So it's funny you bring this up. I received a bill the other day for $10.50 from a publicly traded software company.
They said, pay by wire. I said, $10.50, you'd like me to pay by wire? That's going to cost me $20 to send the wire. And they had no other payment solutions. Now, that's just the tip of the iceberg in this market. When you then look at a $5,000 invoice or a $10,000 invoice, There are really only two solutions, pay by ACH, pay by wire.
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Chapter 3: How did Baxter Lanius transition from investor to founder?
And so the easiest way to think about it is our existing generic plan is six months of payment terms. So you would break that $10,000 contract into six payments of about $1,600. And we would front the capital to Salesforce on day one. So Salesforce is ultimately able to basically close that contract on day two. So there's no not even net 30 days payables for Salesforce.
They receive 95% of 10,000. So we take a 5% fee. So we'd wire them $9,500 upon closing. And then we'd collect from the customer $1,600 over six months. And that allows that small business to ultimately start to generate an ROI on the Salesforce CRM solution and start to expand their business. So now they can afford that solution. They can drive revenue growth at the same time.
Another interesting example that you see all the time is even with really, really large companies, if you look at their software spend, a lot of it's concentrated in January, February or specific months. And so their P&L and their budget is, you know, call it negative a million and a half and then zero, zero, zero for software spend.
You know, they want to attach an ROI to that dollar spend and so that their P&Ls and their budgets are properly balanced and they're able to generate revenue based off of that spend. So just to be clear, I'm Salesforce. I'm using you guys. I closed a $10,000 contract that I wouldn't have closed without you because it's a new solution for the S&P to actually be able to pay.
As Salesforce, I'm going to get a $9,500 check from you on day one. Alternative pays that. Then you're going to make... The S&P is paying you directly? SMB is paying us directly. Okay. So 1600 for six months, right? Or about $9,600, right? You fronted 9,500 to Salesforce on day one, right? So there's two things where I'm curious where this money goes.
The $100 extra that the customer pays above 9,500, where does that go? And then where does that $500 go originally that you sort of discounted the contract? Yeah, so we would think about it. So we collect $500, right, which is 5% of the $10,000. And so the customer's paying us over the course of six months, $1,600. It's just over $1,600. So we ultimately earn $500 in that transaction.
Do you make the other $100, though, from the customer? Because they're paying you $9,600 against a $9,500 advance. So you're making another $100 from the end customer, right? The SMB? So we're making $500 from the SMB. Sorry, I thought that was for Salesforce because you're only wiring Salesforce $9,500, right? We wire $9,500 to Salesforce. We then collect $10,000 from the end customer.
Oh, sorry. How do you get to $10,000? $1,600 times six months is only $9,600. It's really... $1,666.67. Okay, got it. So you are collecting the full... That's what I was trying to figure out. Exactly. There's no... You are rounding. There's no margin built in here. You're collecting the full 10K from the customer. Exactly.
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Chapter 4: What innovations are driving the B2B payment solutions?
Exactly. And what we're seeing is Salesforce now has the ability to just pass through that pay over time solution to their customers. So Salesforce now has pay up front at $10,000 or pay over time at $10,500. This way, at a net net perspective, Salesforce is still breaking even on the transaction, but they're able to now finance their customers. Okay.
So the question here is, how do you write that $9,500 check to, or sorry, the $9,500 check to Salesforce on day one? What's your capital source? So we're funded with debt and equity. We've raised just under $15 million. A portion of that is in a credit facility. And so we fund that transaction through our credit facility. Okay. So just to be clear, you've raised $15 million together.
That is the debt and the equity. Exactly. Okay. And what, $5 million was equity, something like that? Exactly. And 10 million is the total committed amount on the warehouse facility, or that's how much you've already deployed? That's how much it's drawn. Oh, you've already drawn $10 million. It's in the bank.
It's a little bit of a different credit facility than your normal course FinTech credit facility. So we have available capital of $10 million, which is currently in the bank. And we draw down that as we see demand for our product. And so we will be going through that pretty quickly here in the next handful of months.
I was going to say, so you think you can do $10 million worth of deals over the next couple of months? Probably more. Probably more. Okay.
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Chapter 5: How does Alternative's payment solution differ from traditional invoicing tools?
That's great. What did you do last month? Do you know? I'd rather not disclose because we've been in kind of this private beta period with a handful of customers. And now we've started our go-to-market strategy over the last four weeks. And now we're launching more publicly. Okay. Okay. Well, I'm going to guess here.
Do you think you can break a million dollars in new deals, like new loans this month in April? Yes. Yeah. Yeah. Cool. Okay. There you guys, there you guys have it guys. Now you have a little benchmark there. Right. So, okay. This makes sense.
Now the reason most credit facilities or warehouses or FinTech entrepreneurs don't draw down that 10 million is because they're paying unused, like you're paying an interest rate, no matter what, whether it's deployed or not, you just have a lot of confidence you're going to deploy quickly. So you're okay paying your warehouse provider, whatever their interest rate is.
And we ultimately don't have unused fees on our credit facility. So we have basically a flat rate associated with deployed capital. There are no upfront unused fees and incremental spend, which I think you see in most obviously typical and traditional facilities, especially facilities that I used to invest in.
So we have a little bit of a different structure and setup that I would say is preferential to both our end customers and preferential to the business. Ultimately, we pass through a lot of these opportunities to our end customers to ultimately give them better rates on these underlying transactions. Do you guys care about valuation right now, specifically your valuation?
Do you think you might raise soon or sell a portion of the company? There is no other tool on the internet that you can use to get a better and higher valuation than FounderPath's new valuation tool. We have over 253 deals that went down over the past 30 days, all the revenue numbers, all the valuations and the multiplier.
That way you can go filter the data, find companies that are your same size, what they sold or raised for or at, and then use those as comparables in your decks to argue and debate and get. a higher valuation and less dilution, which is the name of the game, less dilution. Check it out today at founderpath.com forward slash products. That's plural forward slash valuations.
Again, both plural founderpath.com forward slash products forward slash valuations. So you might have an advantage because of your connections in the industry with Apollo and Victory Park.
But most fintech entrepreneurs, first-timers, when they're raising their first credit facility like this, they're going to pay something between a 10% and 13% interest rate on capital that's deployed right there, cost of capital. And also, there's probably warrants and some covenants and things like that in that term sheet. Is your cost of capital in that same range, 10% to 13%?
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Chapter 6: What are the benefits of offering flexible payment solutions?
Well- We're not providing all of the equity haircut capital. So within that 20%, we have an additional capital provider that splits that amount. So if you, you know, using round numbers, our facility call it as $10 million, $8 million would be the senior tranche, $2 million would be the junior tranche. We're not contributing the entire $2 million tranche.
I also think that within any of these platforms, you also do want to de-risk your underlying asset quality and underwriting and ability to do diligence on these deals. And so taking out as much leverage as what's available to you is not always the best strategy. Okay, Colin Baxter, who's the third party you stuck in here? They must be very strategic. Is it Apollo or Victory?
They're not going to do a $2 million tranche deal, right? No, it's very small institutions that we have a very strong relationship with. Interesting. Okay. Is your own money in that? Are you an LP in that institution? Are you deploying your own personal capital through that tranche? My own personal capital is also in the junior tranche, not through the company. Okay.
that's, that is how you build a great company here. Right. And get like the best of both worlds on all sides. This makes total sense. Okay. Let's go back to talking about market. Now we understand economics. I mean, how do you go convince like right. Salesforce and all these guys just sort of adopt you. What's that playbook look like? The playbook actually is quite simple.
And it's all about revenue growth, right? I mean, we're charging 5%, which to some companies, I mean, the way we think about it is it's really 2% above what credit card fees are. So if you're using Stripe for your payables, we're charging 2% incremental to Stripe on collections. And it's really all about revenue growth and the ability to cross-sell, upsell, and drive price increases.
So within our existing beta customer group, we've seen ACVs rise by about 25%. And we've seen a sales cycle decline by about 15%, driving just under 50% revenue growth. And so the opportunity is really in that in a nutshell, is how do you upsell, cross-sell, drive price increases? And then how do you pivot from a monthly subscription strategy and plan to really upfront contracted revenue?
So we also have a number of businesses who... to get started into the market, started with a monthly subscription plan because it's a little bit more amenable from the customer side. And now we're getting those customers to pivot to upfront contracted pricing using our pay over time, flexible financing solutions as the incentive to the end customer.
And Baxter, how many of those end customers do you have right now? How many companies factor at least one invoice? So we have just over 10. Okay. Just over 10. And are these all B2B SaaS companies mainly? B2B SaaS and services businesses. And service. Okay. Last question here. Obviously, vintages, default rates, borrowing-based certificates, right?
You've got to try and underwrite that SMB and their ability to repay that $16.66 per month. How do you handle that? So we're integrated on a number of different platforms. The first integration that we use is Applied API. So we do a quick kind of bank account underwriting model. We underwrite them pretty quickly based off their cash balance, based off their cash burn and their ability to repay.
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Chapter 7: How does Alternative help SMBs afford expensive SaaS products?
Q3 last year. Okay, cool. And that was, that's your, I mean, that was your first capital and right. That's your only capital in equity sidewise. I invested a little bit of money, but personally in the business to really get it off the ground. But that was our kind of first, you know, call it third party institutional raise. Okay. Are you the sole co-founder or sole founder? Yes. Okay.
We love that. So he knows he's onto something big. He says, I'm going to risk my own capital. I'm going to keep 100%. I'm going to manage the cap table here. So that's great. Now, Baxter, was that money you initially put in? Did you structure it as a loan or was that real equity? That was real equity. Okay. I was going to say the real extreme example was you loan your own company that money.
You raise the $5 million. You take that back. You got in the junior tranche. You're on all sides of this thing, which is great. Okay. But it's your own money. So $5 million raise last year, pre-seed round. We'll see what happens next. Just to be clear, you haven't deployed $10 million yet.
So you're under a $1.2 million run rate, but you think you can break that fairly quickly if you deploy the capital. Yeah, we should be able to hit that pretty quickly. I think the goal is continuing to go to market and continue to get our value prop out there.
I ultimately think that B2B payments is a trillion dollar industry and every single B2B company, whether it's software services, will have flexible pricing solutions. We can't live in a world in which pay by ACH and pay by wire are the only two solutions for checking out for a $10,000 payment or a $2 payment. Um, and there's just going to be a tremendous amount of innovation in this space.
And it's a really, really excited space to be in. Team size today. How many people? 13. And how many engineers? Nine. Okay. There you go. So when he says there's tech behind it, there's tech behind it. There's nine engineers. There you go. That's proof is in the pudding, right? Very cool. Bachelor. Let's wrap up here with the famous five. Number one, favorite book. Shoe dog.
Number two, is there a CEO you're following or studying? Frank Slootman. No, that's a hell of a business. Can you do this on utility-based pricing? I mean, Snowflake really, I would argue is not SaaS. It's actually utility-based pricing. It changes every month. Utility-based pricing is a really, really interesting model.
I think Snowflake's perfected it just given their ability to innovate and market position in this space. For our specific business model, I think you may be able to, but it'll be challenging. Yeah. And maybe that's the future. Who knows? Number three, what's your favorite online tool for building alternatives? Notion. Number four, how many hours of sleep do you get every night? Six to seven.
And what's your situation? Married, single, kids? Fiance, getting married in August. Oh, very exciting. Okay, but no kids, right? No kids. All right. And how old are you, Baxter? I'm 32. Last question. Something you wish you knew when you were 20. try everything that's in front of you.
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