Scott Orn, CFA
Scott Orn, CFA
Posted on: 03/05/2018
Aaron Tyler of TriplePoint Capital - Podcast Summary
Aaron Tyler, Managing Director at TriplePoint Capital, discusses Venture Debt for Startups.
Aaron Tyler of TriplePoint Capital - Podcast Transcript
| Scott: | Welcome to Founders and Friends Podcast with Scott Orn at Kruze Consulting. Today, my very special guest is Aaron Tyler of TriplePoint. Welcome, Aaron. |
| Aaron: | Thanks, Scott. Thanks for having me. I’m excited to be here. |
| Scott: | We’re actually recording remotely, and Aaron’s on video. He actually waved when I said his name. This is like radio. Aaron and I are old friends, we used to work together at Lighthouse for many, many years, like nine years I think, and Aaron’s a total pro in the venture debt world. He’s awesome to work with, and has worked with a bunch of the Kruze Consulting companies, so I wanted to have him on the podcast. |
| Aaron: | Super happy to be here. |
| Scott: | Maybe tell your life story. How did you get to TriplePoint? How’d you end up in the venture debt world? |
| Aaron: | I came from a liberal arts background in college and I never fashioned myself a particularly tech forward or geeky tech person. I started loving tech companies as an investment banker working at Robertson Stephens and just sort of almost got the kind of like entrepreneurial bug in a slightly different way, which was not necessarily wanting to be an entrepreneur myself right away, but certainly wanted to work with a lot of entrepreneurs that I just found to be super inspirational people. From there I sort of knew I really wanted to do something venture related, and I was fortunate enough to join a former colleague of mine at a small firm outside of Boston here at GrandBanks Capital. It was actually a horrible time for venture capital, it was 2002, internet bubble had blown up. I think for the two or two and a half years I was at GrandBanks we probably looked at 500 deals and invested in about one of them. It wasn’t a super robust, really get dirty with deal negotiation and getting to the end of things, which I guess you could say was a disappointment. I got a lot of good experience and sort of thinking about the business and meeting people. So much of the early stage venture business is learning how to read people and evaluate management teams, and getting comfortable with that aspect of the business as much as it is about market opportunities or the business model itself. |
| Scott: | Totally. |
| Aaron: | One thing led to another, I actually had a great experience there and spent some time with a startup that we were incubating called, it started off being called and eventually became a company called Where that I did a little bit of business development for those guys, and ultimately the company was acquired by eBay for, I think about 135 million. It was a really great story, and I like to say- |
| Scott: | That was a lot of money back then too, like in a tough venture capital environment and valuation environment, selling your company for a couple of hundred million dollars used to be an amazing situation. |
| Aaron: | Yeah. Yeah, no. That was fun. By the way, when I had joined Lighthouse the company was still a series A startup, Lighthouse being a venture debt shop that Scott and I shared a whole bunch of time at together. That was one of my first deals at Lighthouse so I’m super happy that I started out with those guys when it was like three guys in a dark room in our closet, and then kind of working a little bit of scale before they were acquired and took some venture debt along the way. I spent 10 years doing venture debt at Lighthouse, plus or minus, I kind of lose track. Then I joined TriplePoint over here about four years ago to open an East Coast office. TriplePoint has been a pretty good mainstay in the venture lending space for about 14 years now, but was heavily West Coast based. There was a good fit when they were looking to grow the franchise and it’s been a super fun opportunity for me to bring a lot of my relationships and some of the stuff that I knew to Boston, New York, and to a little bit lesser extent some of the places down around D.C. |
| Scott: | Yeah. I remember two things. First, you were like on ground zero of the New York venture capital scene just blowing up, and New York startup scene. The deals that you and Ned did in New York in the Lighthouse fund were just phenomenal. I remember out of nowhere these awesome … Maybe talk a little about that. Then I remember you were looking at TriplePoint and they were like, “Yeah.” They were going to let you open up the East Coast office and run that. I was like, “That’s an awesome opportunity.” They’ve always had a lot of capital and are good at raising money. You were like, that’s all you can really ask for when you’re doing deals, is to have the wherewithal to do what you need to do. I’m glad it worked out. |
| Aaron: | Yeah, no. It was actually super interesting to start in a market like Boston which historically had a lot of telecom companies, a lot of sort of deep tech stuff. Of course with MIT and everything being there, a lot of that stuff got started there. It was one of the early places where venture funds started. Then to see the evolution to your point on New York, and how it’s really growing as a market. Now, even though it’s still a super expensive city to live in, sort of counter intuitive from the standpoint of having a startup there, there’s obviously lots of customers there, both consumer as well enterprise type customers, media companies, and it’s a great place to live. I think it’s just continued to be a super strong, strong spot for entrepreneurs. We were a big lender to a company called Jet, which was acquired, and a serial entrepreneur started that company and happy to be part of the story there. Then, some of the other fund ones there- |
| Scott: | You guys were in , you guys were in , you guys were in Rent the Runway, so many good companies out there. |
| Aaron: | Rent the Runway’s a great story too, it’s one of my favorite stories because I had a relationship with the founders way back when they were like series B and really just getting the story off the ground. Sort of took that relationship from Lighthouse and then as the company continued to grow and need more capital, we’ve been a big supporter and a big lender and investor in the company since I joined here. It was one of my first and bigger deals here at TriplePoint and still love what the company’s doing. It’s still growing, it’s- |
| Scott: | Every time Vanessa and I go to Vegas she’s got two Rent the Runway dresses that she’s wearing, so it totally works, it’s an awesome service. |
| Aaron: | The best part about it is now that Vanessa’s, you guys probably aren’t going to the wedding scene as much or doing that kind of circuit, they can still serve her because they now have the subscription business, the target demographic of which is the sort of professional mom and professional woman who doesn’t want to have a closet full of clothes that she doesn’t want to wear, wants to keep it fresh, and sharing economy, you know? |
| Scott: | Well we did that, Aaron knows that we had a baby recently and ahead of that we cleared out Vanessa’s entire closet. It was like exactly that, simplify and try to wear the same stuff more often, you know? Kind of for both of us. Well, maybe you could talk a little bit about … I mean like you do deals all across the country, but maybe talk about the TriplePoint value proposition, like how you guys compete in the market? |
| Aaron: | One of the major reasons that I joined here is TriplePoint has such a great, broad platform. We have various pockets of capital that are not only national, both coasts, and of course happy to do deals in the middle of the country too, but also a very robust European effort. So just given the depth of the capital base, it allows us to do a lot of really interesting and flexible things that really no bank can do. We’re just a different flavor of capital than equity, although we can also rate equity checks. We often lead early with a small equity check. As you well know in the venture world, lots of deals are sort of club deals. So to be part of a group of firms and individuals that are excited about an opportunity is a way to get in early. The fundamentals of this business, and certainly the fundamentals of TriplePoint are built around relationship lending. It’s so heavily relationship based. I mean lending as a practice is often thought of as very numerical based, it’s based on ratios, it’s based on a lot of balance sheet and cash flow analysis, and it’s based on things that seem very rigid quite frankly. This is completely counter to that. It’s thinking about who the people around the table are, supporting the project, both founders and investors, and what the dream is. I mean this is really, it’s taking true venture risk. Yes, we’re still as a lender the first money out, but we like to think that we do a lot of the same work and think in a lot of the same ways as venture firms do. Really kind of take a lot of the same risk right alongside them. That’s, going back to TriplePoint specifically, we love to get involved early, we love to lean in, we love to try to do things where the banks who are our typical competitors really can’t. You know, whereas those guys will lend formulaically and sort of always have the rails that guide the bank world. We don’t even sort of think about rails, we kind of think about what the right amount of capital is and the best way that we can help the company and be like a really good long-term partner. |
| Scott: | Maybe to set it up, I think you said this very well, like the fact that you’re so relationship driven and kind of evaluating different things outside of just basic financial analysis that a bank would do, opens up this huge lending opportunity in startups. Because I mean you and I know this for many years, but when we would say we’re lending money to startups, people look at us like we were crazy. Like, Why would you lend money to a company losing lots of money? That sounds terrible. But it turns out there’s a lot of opportunity there. Maybe talk about kind of how the mechanics of the industry work and why there’s opportunity there. |
| Aaron: | There’s opportunity there because fundamentally if a company is venture backed, and we primarily lend only to venture backed companies with few exceptions, but the fundamentals of the venture capital equity industry are, rarely does a company raise a series A round from top tier venture capital investors and not get at least some sort of series B round, follow on capital. So as a venture lender, and going up the line as companies mature, yes, companies still fail at series C and series D but as they begin to build more enterprise value it sorts of mitigates the risk of the debt. To go back to my earlier point as, if you pick the right venture relationships and you’re backing the right teams, the reality is that most of the time even if companies fail, as a venture lender you can still get your money back with a double digit coupon, right? You won’t make anything on the warrant piece that you own, but … And of course that’s not what we’re in the business for, we’re not in the business to just try to clean up a company that fails and take home a nice coupon. That’s not it at all. That is the dynamic through which we can lend to very early stage companies. Of course the whole flip side of that conversation is we believe that we can also truly add value to the balance sheet here, of these companies, such that when a startup that goes and raises a six million dollar series A that gives him or her 12 to 18 months of cash, if we can come in and provide some additional capital that gives them another, call it six to nine to twelve months of cash, that’s usually a really good value proposition for both the entrepreneur and the investors. The concept being that those extra months are driving, theoretically, that company up the valuation curve and they can raise their next round of capital at a higher valuation and thus preserve more dilution for themselves. It’s a win-win for kind of everybody in that sense. |
| Scott: | Yeah. That’s an incredible point and I kind of want to reiterate it. I’ve always known those extra few months of capital are super valuable, but now when I’m working on the company side I see it constantly. Like just a couple more months and you get that much more customer traction, or that many more improve points, which allows you to raise a much larger round, like a significantly larger round than if you didn’t have that extra runway. It’s not just like dilution, but it’s also the next round of capital can be a lot bigger, which can unlock a lot more stuff. I’m a huge fan. I think you and I would both say use venture debt as kind of like extra capital, not build your plan around it. I have that talk all the time with our clients where it’s like if your plan says you need eight million dollars, raise eight million dollars of equity and then raise two, or three, or four of venture debt so that you have that addition. You treat it as additional runway that you can unlock later. |
| Aaron: | Yeah. I would like to say, most entrepreneurs always start out with the idea that they only need this amount of capital to get to this point in their business, and it rarely ever works out that way. So, venture debt serves sometimes to help you catch up to what your original thought was. You know, for the really good companies it gives you true option value ahead of your next round to either continue to step on the accelerator or to be able to negotiate a better round right then because you know you have some venture debt available to you or in the bank. The fact of the matter is most companies actually use it to catch up to their original plan, which is okay. |
| Scott: | Yeah. Every entrepreneur I’ve ever met and had the pleasure of working with was always very optimistic. The catching up is like, the business is going to get there some day, it just takes longer than everyone thinks. People don’t even realize how long, like when you raise money, there’s like a two or three month lag on just being able to hire the people you said you were going to hire, like two months ago. There’s just so many things. The other nice thing about just generally speaking of venture debt, is that that six to nine months of optionality, you may actually have an M&A exit in that time. By having extra capital and not having to kind of reset the valuation higher with new equity investors, it allows a entrepreneur to take more time to actually let an M&A exit happen. I think people don’t always know this, but the second you do your series B or series C, whatever the next round is, and you take more capital at a higher valuation, you basically got to like three X that valuation. You can’t just raise a series B and then sell a company two months later. That’s just never going to happen unless it’s like something incredibly special. Kind of prolonging the optionality with the debt is another just big win, you know? What are some key terms for you guys? Maybe just kind of, you were kind of talking about guard rails that a bank has, but I think our client … I always think of, when we’re doing these podcasts, like, “What do our CEOs want to know?” Really kind of the nitty-gritty on the term differential, the terms, like what they’re signing up for with you guys versus the bank. |
| Aaron: | Yeah, so I think the things that we frequently see and frankly what we love to sell is a couple of things. First of all there’s virtually zero structure around any of the capital that we make available to companies, which is a better way to say that is these companies can use our capital like they can use their equity capital. It is debt, so they eventually pay it back. It’s not formulaic, it’s not built around some sort of availability based on these kind of metrics and these kind of ratios in the business. We think about what the right amount of capital is and we commit that amount of capital. In most cases you can draw that amount of capital on day one, or day whatever the end of the availability period is. Which leads to my second point, we typically … Whereas banks typically have certain restrictions around how long they can make capital available if it’s not drawn, we, because we’re a fund structure, can do a lot more creative things that way. So the reality is we can actually provide what is essentially is longer option value for the portfolio company, for the CEO or the CFO who’s thinking about this, which is critical because whereas a bank might only give you six or 12 months of availability period, we can sometimes do things a lot more aggressively than that. We virtually never have covenants in our deals, that’s really again a bank thing and something that we look at as putting guard rails around the capital that I think defeats the purpose at some point, at some level. I guess finally what I would say is we do a lot of really, what I think are really unique things in terms of how we allow customers to pay the capital back, in that we provide various options for repayment that sort of scale based on different things, different lengths of interest only, different lengths of amortization. They’re priced accordingly, but it really gives the customer a lot of different options to match to their own cash flows, which I think is hugely valuable to people because what ends up happening is sometimes today you have this idea of like, “I want this kind of a deal and this is how I want to repay it.” But nine months down the line when your business is in a totally different place and you’re thinking about using this capital, you may change your mind and have a different view on how you want to use this debt. You can do that with our terms sheets, and that I think is super valuable to people. |
| Scott: | Last time you were in San Francisco I was giving you a bad time because it’s like, it creates a lot more work for the CFO. |
| Aaron: | Right. |
| Scott: | I have to four different things, and it’s like, “Oh my god, I’m going to kill myself here.” |
| Aaron: | Yeah, and it’s |
| Scott: | But you’re right, it does actually create a lot of optionality. A very simple example might be like you guys might let someone draw down money for 24 months, interest only, and then they can pay it back on that moment, they can pay it back over 12 months, or pay it back over 24 months, and amortizing regular payments. |
| Aaron: | That’s right. |
| Scott: | Those three choices actually create a ton of value for the CEO and as hard as it is for me to do my Excel skills, it’s definitely a good thing to do. |
| Aaron: | The other thing that we like to do, by the way, which I think is a big differentiation, is we’re really comfortable forward committing capital that the company can grow into, which I think is a way of sort of saying to people, “Hey, you asked for five million for now, and here’s the five million that you want. We make that available to you, all these different repayment options. But here’s an additional X million dollars that we will be happy to unlock to you once you hit a business milestone, maybe when you raise the next equity round.” Whatever it might be. It’s sort of a way of us saying, not only do we believe in your business, but we actually want to go ahead and show you a path to a much larger relationship. One of the things that so many companies, as you well know, run into is outgrowing their relationship with their bank, for example. Because of the four and a half billion that TriplePoint has raised and deployed over its 14 years, we have a lot of capacity to be a long-term partner with people and it’s really, really valuable. About three years ago the firm did a public offering through what’s called a business development company, and you can read all about this part of our organization under the ticker TPVG on the New York stock exchange. Essentially it allows us to raise capital from the public and to write really large checks to companies like Rent the Runway, and the Jet, and Dollar Shave Club, and Nutanix, and some of the other really, probably well known and perhaps not well known companies, but where they required checks of 20 million and larger. There’s very few people in the industry that can do that kind of stuff, especially to companies like still venture stage companies that aren’t yet profitable. That’s given us a lot of latitude to be able to go into these companies, as I said, and say, “Here’s what you want today, and here’s a path to something much larger as you grow, and we want to continue to be your partner.” |
| Scott: | Yeah, that’s a huge point because like even today I was telling you before we started recording I have a new client for you. Their question to me earlier today was like, “Well this is a five million dollar deal, but would they want to do more?” I kind of like laughed because you guys have so much capital that you’re really, you’re kind of doing the five million dollar deal just to kind of get a relationship going, and then you really want to do a 25 million dollar deal, and so I conveyed that to them and they were like, “Oh that’s great, that makes a lot of sense.” The other kind of core things that you guys do really well, you glossed over this a little bit but there’s no MAC clauses, there’s no investor abandonment, which a lot of people don’t quite understand. The banks are very upfront, they require either a MAC or investor abandonment clause, which basically means it call it the get out of jail free card, you know? The MAC is the most damaging one because it’s like they can just say there’s been a material adverse change in the company, we are calling the loan, we’re putting you in default, and we’re going to get our money back. Then the investor abandonment is like they basically say, they call your investors, the venture capitalists, and if they’re not going to fund the company more that’s then a default. Entrepreneurs don’t always really understand that, and times have been pretty good for a while so there hasn’t been a lot of that. I think when I am evaluating term sheets, that’s literally the first thing I look for. As you can imagine, the interest rates vary, right? Like I always kind of say banks are really cheap, they’re a great cost to capital, but they have these gotchas that could get you down the road. Whereas you guys are more expensive but you can truly use the money. It’s flexible capital that can be used. |
| Aaron: | That’s right. Yeah, you’re absolutely right about all of those points. Really it points back to what I was saying earlier. I mean it’s such a heavily relationship based business that we try to not put a lot of that stuff in there that banks need, because banks are regulated and we’re a relationship long-term driven business. So I think we like to look at a situation by feeling really good about the investors around the table, and about the story, and about the team, and not hanging your hat on some of that stuff that tends to make … Gives a lot of heartburn to entrepreneurs and also to their investors. The fact of the matter is we’re going along for the ride just like the rest of the investors and I think we like to think that we also sort of like to wear our big boy or big girl pants alongside everybody. This is a business that sometimes it’s really hard, but you don’t build a reputation I think like TriplePoint has by trying to call MACs and by putting people in default. It just is, it’s a way to kind of really sort of soil yourself in this industry. |
| Scott: | Yeah, for sure. |
| Aaron: | As you well know. |
| Scott: | I think that’s a huge point and it’s easy to take the lowest cost term sheet, but you’re really most of the time doing yourself a disservice. It’s super important to understand that. Hey maybe talk just quickly about warrant coverage. This is a question we get all the time, what is warrant coverage? How is it calculated? Why does TriplePoint ask for warrant coverage? Maybe just explain that a little bit. |
| Aaron: | Yeah, I like to say that you actually as a portfolio company, as a CEO, you actually want me to have an option for some ownership in your company. By the way, it ends up being a very small percentage, but that aligns us in a really important way. I mean obviously we’re aligned in that we’re an investor, we lend to you and we are sort of along for the ride for at least some time period, but this is a way in which we are 100% aligned in the best interests of the company. As I said at the beginning of the conversation, this is enterprise value lending, it’s future enterprise value lending, it’s everybody looking towards the same goal of having a great outcome. A big company, a successful company, whether that’s profitable, whether that’s being acquired, whether it’s going public, whatever it might be, and part of that is all having alignment with a piece of ownership. The concept of a warrant is simply that it gives us an instrument to buy, usually preferred but sometimes common shares, again, in a very small amount. We’re talking usually less than 1% of the company on a fully diluted basis. In essence it’s probably what you’re going to end up giving a few engineers, which again, every entrepreneur, and for that matter every venture capitalist, fusses over every percentage point ownership of the company, so we can appreciate that. Again, it goes back to the partnership approach that we take, and we like to say we think we’re taking risk for you on behalf of you, we think that we’re leaning in to give you this capital that will allow you to do a lot of great things, and this is part of our return. It’s as simple as that. I mean the fact of the matter is many of those warrants are never really worth anything, but they do truly align us with the founders of the company and the investors, the other VC investors in the company because then we’re playing for the long-term as well as just sort of the making a coupon on our debt. |
| Scott: | Also, you’ve made this point, it’s not a lot of equity, it’s a very small amount of equity, especially relative to a similar amount of money in a VC check. |
| Aaron: | That’s right. |
| Scott: | So it’s like negligible actually. Then, another point I make oftentimes is if there warrants are worth a lot of money, you aren’t going to give … You’re not going to care, because that means you had a tremendous exit and you are retired and growing grapes in Napa or doing whatever you do on the East Coast, skiing I guess or ice fishing, I don’t know. I give you a bad time. You know what I mean? Like it’s such a de minimis amount of equity, and if you like at TriplePoint and you’re like, “Oh, TriplePoint made a ton of money on my deal.” Well odds are you made 100 times more money than they did and you’re doing just fine. I like how you’re talking about alignment, because that’s really the most important thing with a lender, is like they need to be there in the good times and the bad. That’s really the most important thing. If they’re there in the bad times, you want to reward them in the good times. That’s my basic philosophy. |
| Aaron: | That’s right. That’s right, yeah. You know, like you referenced the fact that our capital is a little bit more expensive than a banks for example, and we probably ask for warrants that are a little bit higher than a banks. At the end of the day this all comes down to what are you getting for this capital, right? We sort of look at the world and say we think we do things in a fairly constructive way with a long-term view, and sort of 100% support of the entrepreneur and his or her investors. We like to think that for being a good partner, that that has a certain cost to it just like sometimes buying the cheapest shirt online is not a good way to get a quality long-term and lasting shirt that you’re going to enjoy. |
| Scott: | I use the Target versus Nordstroms analogy. My dad loves shopping at Target, and god bless him, but you get a lower quality kind of thing for a lower price. Then I like to go to Nordstroms and buy a shirt that’s going to last and be there . |
| Aaron: | Well, and I also like to say you don’t pick your venture capital investor, when you go out to raise your series A round, you don’t just pick the cheapest term sheet, the term sheet that preserves you the most dilution. You pick the investor that you know is going to be a long-term supporter of the company. I honestly, I think that that goes the same way for your, you should look at your venture lender that way as well. |
| Scott: | Well you and I have, because we’ve worked in the industry, we know how many times we bend over backwards, or restructured a deal, or may really help contribute and make the startup successful. Maybe on the outside, or maybe for our first-time entrepreneurs they don’t quite realize that happens, but it does happen. Paying up a little bit does help quite a bit. Well this has been awesome. Maybe you could tell everyone where they could find you and for … You’re doing everything, you’re doing stuff across the country, right? Not just East Coast? |
| Aaron: | Yeah. Yeah, no. I mean we have a robust group of my partners out in Menlo Park, we have an office right on Sand Hill Road, and then we now have both a Boston office and a New York office, where I am frequently in both of those places. You can always find me out here, I am atyler, A-T-Y- L-E-R, @triplepointcapital.com. You know, you can also of course find me on LinkedIn, or you can ping Scott. Super happy to meet all shapes and sizes and stages of startups, even if you don’t yet have venture backing, just love to hear the stories and love to see if we can be helpful. |
| Scott: | Yeah, and I can testify, you do a great job, you’re awesome to work with, and I think we might have like two working right now, plus you’re in another one of your companies, and I think there’s a lot more on the way as we’re doing more stuff around venture debt so- |
| Aaron: | Awesome. |
| Scott: | Thank you for being an awesome partner, thank you TriplePoint, and we look forward to sending more Kruze Consulting clients your way. |
| Aaron: | Likewise. |
| Scott: | I look forward to you coming into San Francisco next time and meeting our baby and coming by the office. |
| Aaron: | Right on, Scott. Well thanks for having me, this has been awesome. I’ve really enjoyed getting to know some of your colleagues and seeing how awesome the business that you and Vanessa have built is. I’m psyched to be doing what I’m doing here at TriplePoint. Great platform, great people, and look forward to working together. |
| Scott: | Awesome. All right, man, I appreciate it. Thanks so much. |
