SaaS Interviews with CEOs, Startups, Founders
How I hit $5m ARR, kept control using 3 different debt providers
21 Oct 2022
Chapter 1: What insights were shared from the Founder 500 event?
Hey folks, hope your Q3 and Q4 is off to a good start. We just wrapped up Founder 500 in Austin, Texas. Hundreds of bootstrap founders showed up. It was an amazing time. I loved meeting so many of you.
This interview today is a recording from that session, which you're gonna love because now we have visuals, we have the founder teaching, and I made every single speaker include their revenue graphs and real artifacts in their presentations. Without further ado, let's jump in.
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You were actually a massive inspiration of pushing me to get into FounderPass. So why don't you start there and I'll go to your slides. Give him a round of applause.
Yeah, thanks for having me. This is exciting stuff. So yeah, I guess I'll tell the early FounderPath story from my perspective, which is basically, I started Badger Maps like 10 years ago, a little more. And I started doing debt deals in like 2015, I think, maybe 16. And And debt back in those days, as some of you may recall, was not as good of a deal as it is today, right?
Lenders have a difficult time wrapping their arms around the concept of ARR and MRR. They're like, that's not an asset. That's not collateral. And then lighter capital came in the scene first. And they were heavily... They raised a ton of money and I forget how much, $60 million, big team.
And so to make the economics work on that, where you're going to pay off your investors at 12% or whatever they take, to pay for that big team, they needed a pretty big spread on the actual deal, right? So the debt was super expensive. Next, then other players sort of jumping in. And there's also like the, there's different types of debt players in SaaS, right?
There's like the Golubs of the world. That's actually their name. It's a huge, I don't know why. Golube, Golub, I don't know. But it's, that's, that's, that was their branding. And so they come in like later, if you're like, you know, $10 million and above and I think I think you have to have institutional investment to get their money. Right.
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Chapter 2: How did the guest start their journey in the SaaS industry?
All right, how much do you own?
65 and the other co-founder owns like 20 and then a third is there a dad there's a dad there's a there's there's a dad that i've squeezed money out of him too yeah well only one dad one dad in as well but 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 thought of debt but that and you've already tried to buy them out i imagine um
No. They're all really smart. They're like private equity guys. They're not going to be like, oh, sure, here, for 2x.
So let me pass this off to you. Start here to give everyone context on your revenue growth, and then these are your slides that you sent last night at 2 a.m., Steve.
That's me. Love you to death. Take it away. You know me, man. All right. There's not like a coffee spot up here. So that was, so that's what we're looking at. This is my little history right here. Very smooth, right? I mean, 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 fact is, in reality, these businesses aren't that smooth for a lot of reasons, right? You've got annual deals, you've got multi-year deals. 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. 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? It takes out your seasonality, allows you to, without giving up equity, make payroll in December, which is always a problem. So here's... Here's our website in 2012.
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Chapter 3: What challenges did the guest face with early debt providers?
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. It's definitely better today, but you know, this isn't bad. So this is what we looked like in 2012. The first way I funded the company was by, let me zoom you back to 2012, right?
And maybe some of you are in situations similar to this today where you've got four people on the team and you're making $50,000 a month or something. And I guess I was probably making $25,000 a month then. And it turns out the basic needs of a software company, the food and water that it needs, engineers and sales guys and product managers, they cost more than you can make at 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. But I was lucky in that I was able to fund the early parts of the business without equity because I had worked at Google early enough. So I had like a million bucks 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 it. The engineers built it. 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 the company's probably making like $200,000.
280k a year ish it's like 25 grand a month ish and uh and and we had four four mouths 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 was like, this thing is just not going to go anywhere, man. This thing is just toast.
It's just, you know, we're not going to work. We should just throw in the towel. I'm going to go. I'm going to go work in private equity again. Turns out it's a much better job. I didn't say I recommended starting a software company at all. I never said I recommend if you can get the million dollar a year job in private equity, go do that. Go do it. 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 were making ends meet. And then I got this $300,000 deal I'd been working on for a long time. And the, I guess the question here is how do you get a, uh,
large company to give you $300,000 when you're like four Joker guys. And we were working out of the back of a dentist's office at the time. We didn't tell them that, but, uh, we, so the, 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 paying three years up front. It was like $308,000 or something.
I traded away. I promised 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.
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Chapter 4: What strategies did the guest use to secure funding without giving up equity?
And I don't even know if they put that in today, but that's a key term to keep your eyes out for. Unfortunately, these documents are like 40 pages long 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 it's what they've promised to their LPs.
So obviously if you're loaning 8x MRR compared to 2x MRR, 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 4x MRR over four years. I mean, you'd have to be shrinking basically, right? So their rules were such that they can only go to that level.
Story short, ScaleWorks offered me a better deal. So a better deal in terms of more money and also a better deal in terms of cheaper money. And I told Leiter, hey, here's what these guys are offering me. Can you match it? And they were like, we can't break the four. So I went to ScaleWorks and they went to six, if I recall. I borrowed $1.5 million over three tranches from them.
And the more tranches you're getting, the better, right? Because you're matching your spend with, I guess, well, 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'd do a little loan every month for whatever you're paying for. And what I've always done 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 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'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 even today, you know, this stuff is super useful. Um, so the terms on the scale works 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 in 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 finance markets 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 or at least a year and a half, two years payback.
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Chapter 5: How did the guest navigate the complexities of revenue-based financing?
He would also loan more money. So Scaleworks is at 4x MRR. He's at 8x MRR. And they might even go higher than that. They haven't told me. He hasn't told me no yet. But it's a very fast and painless process with him. I mean, because he connects into all your data, right? He can see my profit well and my bank account and my Stripe and all these things.
Yeah?
I have a question. Mm-hmm.
It really, so 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 raising rounds and all that. The time for making this decision of going via debt versus going the VC route seems to be one that you'd have to make early on. And now
Invertible notes or safe notes and all of those. So there's this spectrum that exists now. When do you think this decision of going the equity route needs to 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 route?
I think 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 the equity round back six months, you get a bigger valuation. If you can push back the need by using debt...
And it's not just on the A round. You can do the same thing on the C round. If you can push your C round back because of debt, you want to do that. So you basically always... I'd say rule of thumb, always debt before equity if you can get it and it's like not 30%, right?
It's not either or. It's both.
Yeah, absolutely. You could do... if you had some first in a SaaS business, VCs hate giving you money before you have a million bucks in revenue anyway. Right. But it,
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Chapter 6: What factors should founders consider when choosing a debt provider?
What about... or is this pretty much received as financing?
Depends on the lender. So some lenders, I mean, ultimately what you want to do is be making $10 million a year and $2 million in profit, and then you can get some real cheap loans. Because a lot of lenders look at EBITDA and make loans on that, and those are cheaper loans. But, I mean, it's hard to make $2 million a year in profit.
And the reason they do that is because it's like, oh, well, if you're taking $2 million a year in profit, even if 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.
Do you have a favorite lender on the other case?
If you're profitable, I haven't gotten there yet, but... Awesome, guys.
We'll give it up for Steve Benson from Mountain Dew.
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