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Scott Orn

Scott Orn, CFA

Jacob Colker of Lighter Capital on Startup Loans

Posted on: 12/19/2016

Jacob Colker

Jacob Colker

Chief Marketing Officer - Lighter Capital

Jacob Colker of Lighter Capital - Podcast Summary

Jacob Colker of Lighter Capital discusses startup funding and how to minimize dilution through Lighter Capital’s startup loans. Lighter does not take equity like traditional venture lenders and has minimal covenants compared to traditional startup bank loans.

Jacob Colker of Lighter Capital - Podcast Transcript

Jacob Colker: It’s an awful thing, when an entrepreneur who is working 60, 70, sometimes 80, 90 hours a week for years, when you put that much sweat equity into making something real and to birth thing that is vision of the world, you should get to keep a lot more of that value that you created, you should get to control that business.
Scott Orn: Welcome to Founders & Friends podcast, with Scott Orn at Kruze Consulting, and today’s guest is Jacob Colker from Lighter Capital. Welcome Jacob.
Jacob Colker: Hey Scott, thanks for making time for us.
Scott Orn: My pleasure. So, Lighter Capital is a really interesting lending company and we are string to see guys pop up in our client base and seeing you around the ecosystem, so I wanted to have you on. Maybe could you give a little bit of background, on Lighter Capital, and also on your career.
Jacob Colker: Sure. Lighter Capital simplistically helps entrepreneurs grow their companies in a way that is non dilutive, and that does not require a personal guarantee. We really fill a huge space in between banks and venture capital. On one hand with banks most often unless you have millions of dollars in revenue you have to sign personal guarantees, and banks are most often betting on your fico score in order to fund your business, but puts your personal credit and personal finances at risk. Conversely, venture capital, most people don’t realize this, only funds about 1% of the companies that pitch them, which means that after spending three or six or nine months putting pitch text together and going and talking to VCs you are only guaranteed about 1% chance of actually being able to raise venture funding to begin with. And so we saw this huge problem where there are tens of thousands of entrepreneurs in the United States that are doing great things, making a dent in their universe, building great businesses, employing people, helping their families and their employees build wealth and build equity and aren’t able to get capital to grow those businesses. So, we actually borrow a page from Hollywood for almost a hundred years, Hollywood has financed films under what’s called revenue financing or royalty financing where nobody really owns an equity stake in the Shawshank Redemption rather they take a small amount of funding and they us e that to finance the film and then on the back end, they take a royalty off of the ticket sales at the end of the day. And so we’re the leader in bringing that type of funding instrument to the tech sector, and so that is what Lighter Capital ultimately does, as we are a hybrid between banks and venture capital.
Scott Orn: So it’s like a non dilutive or less, much less dilutive form of capital for startups, right?
Jacob Colker: It’s not dilutive at all. We do not take an equity stake, we don’t take warrants, we don’t take anything, so for entrepreneurs who are looking to accelerate their bootstraping essentially, we are a great fit for that. It’s not to say that we don’t like the VC industry, we think VC is great, in fact, many of our companies go on and raise venture capital funding. What we are trying to do is help founders avoid dilution as much as possible, or avoid it entirely. And, in turn they can delay that fundraise for 12, 18, 36 months and go back out when they have much better metrics down the road and raise a much bigger round at much more favourable terms. There is no reason for entrepreneurs to give up 20 to 40% of their company in the early days, because that is what the current VC industry has convinced people that is necessary to grow your businesses. It’s not. And Lighter Capital is helping hundreds of entrepreneurs delay that process and avoid having to dilute entirely, which allows them to keep control of their destiny, for a lot longer and in many cases, indefinitely, which is a really powerful thing.
Scott Orn: Yeah, it’s a really good idea. So, talk about kind of your- you covered it a little bit there but your target founder, like who are you looking to help finance?
Jacob Colker: We work with two types of entrepreneurs, for the most part. We work with people that have raised VC funding in the past, and maybe didn’t have a great experience, and this time around, as serial entrepreneurs are looking to avoid dilution entirely, they may have bootstrapped their company to several hundred thousand dollars a year in revenue, and are looking to take their own finances out of the mix and get additional resources, without having to sign personal guarantees through banks or without having to take a significant equity dilution hit by going to Angels or VCs. So that’s typically one bucket of folks we work with. The other bucket are people that are on the VC track, that are looking to either delay their raise because they want to get their metrics up to a place where they have much better negotiating power, any company who is on the growth path and can wait 18 to 24 months to raise VC is going to be able to sell a lot less of their company for a lot more, which is just better negotiating all the way around. Or, they have been trying to raise VC funding and have been struggling because maybe they a niche CRM, which is in a two to three hundred million dollar market which is a great business, they are doing great things for themselves, their families and their employees, but it’s not going to be a multi-billion dollar exit, and so, they are struggling to raise VC funding. Those are folks that we work with as well. So those are the two buckets, what we call VC later, VC down the road or VC never, that they are just not interested in going down that path.
Scott Orn: I totally get the VC never world, because yeah, not everyone has a great experience going through that, and it is what you said, like the venture capitals are optimizing for huge exits, and if you are just kind of a small to medium size exit you are not even that exciting to them, and so some of those companies get stranded, or the capital space you get shot off, halfway through the process, and so I definitely see how some founders could be weary of that path once again.
Jacob Colker: That’s exactly right.
Scott Orn: And then the VC later, that seems like the market where we’re seeing you which is the Kruze Consulting client base, which is a company, I imagine is there a sort of sector like, you’ve got to be just doing really well the SAAS companies, right?
Jacob Colker: For the most part we only fund recurring revenue stream businesses, it’s not to say we only fund SAAS businesses, because there are other forms of recurring revenue, but we actually are disrupting the financial services by an algorithm that we’ve built that helps predict the future success of a business. So what does a funding institution like Lighter Capital doing with eight full time software engineers? Well, one of the challenges for banks is that for them to be able to underwrite a loan that is less than several million dollars, it tends to not be profitable because it requires a lot of underwriting work and it’s a difficult thing for them to be able to do is to go down market, so they tend to focus on going in side by side with VCs or focusing on fundings that are many millions of dollars. What we’ve been able to do is through our software, proprietary software, we are able to look at a company’s business performance and predict with the very high degree of certainty where that company is going to be in the next few years. Which allows us to basically augment some of the human effort involved in an underwriting process with technology which not only allows us to fund companies that are in much smaller check sizes, our average check size is about 270 thousand dollars, as opposed to several million which is what a bank requires. But not only can we fund smaller check sizes, we can also fund a lot faster, because our algorithm again looks at a lot of data points compares that against over a thousand companies that we’ve looked at, and it speeds up the process, so we, in many cases can deliver funding from start to finish in as little as four to six weeks which is unheard of in funding.
Scott Orn: Wow, that is amazing. I didn’t know you guys had this kind of automated underwriting process, that’s really good. So instead of going out to the lunch with the founder three or four times, and looking at the business plan but maybe not really digging into numbers, you guys are actually like really underwriting the numbers.
Jacob Colker: That’s right. Yeah, and we don’t bet on the human nearly as much as your average every day VC does, they need to look for pattern recognition, they need to find people who they think can be market leaders, who are going to totally disrupt and dominate a market place. If you are the 230th in the cloud hosting market, you are probably not going to get VC funding, but, if you have customers, with low turn, you’ve got revenue, you’ve been in business for over 12 months and you seem to have a pretty good grasp on your numbers, you are actually probably a great fit for Lighter Capital, so we are agnostic in that regard, we don’t have to have this Midas touch gut check opinion about the particular founders themselves, we obviously do look at that to some extent, but, it’s much more about how your business is doing, and what the numbers tell us. And we are betting on that performance, we are betting on your lifetime value, we are betting on your customer concentrations and not necessarily nearly as much on the individual
Scott Orn: Yeah. I really like how that allows you to do the smaller check sizes, because then you are basically opening up capital for a market that probably hasn’t been served before, like, without a personal guarantee, you can’t really get a loan from a bank, and without the big institutional VC financing, you can’t get a loan from a venture lending fund, so you guys are basically opening up the credit markets a little bit here?
Jacob Colker: Absolutely, we estimate that there are tens of thousands of entrepreneurs that are wholly underserved by the financing options available in the United States. And that’s a very powerful and emotional thing for us to be able to open up access to capital, to tens of thousands of people who no longer need to put their personal credit and personal finances at risk, or sell away the company in order to raise funding for the company. I myself have been an entrepreneur multiple times over the last ten years, many of the people that work at Lighter Capital have been through this process of having to give up huge chunks of equity and there are a number of us that are very passionate about defending the honour of entrepreneurs and creating an instrument where they don’t have to sell a huge chunk of control of their company in order to grow, it shouldn’t be that way and we are making a dent in helping to make that possible.
Scott Orn: That’s really cool, I can totally hear your voice. Just came back to that kind of venture later kind, because I think you touched on that, like being able to delay 12 months, 18 months, 24 months, a full venture route is hugely impactful, can you give the audience kind of maybe quantify that, or just kind of explain why that is so powerful?
Jacob Colker: Sure. I’ll give you an example of one of the companies we funded, to date we have funded a 130 companies in United States, we’ve deployed over 45 million dollars which on a deal basis, actually makes us one of the top tech funders in the United States. One of those companies, one of those 130 there is an entrepreneur named John Stewart who runs a company called Map Anything, they do territory mapping on top of sales force and lots of other cool things to help sales teams better visualize their data. They came to us a few years ago with a terrible term sheet, and respect for John and his team of course, I am not going to disclose that, but it was an awful term sheet. And instead of taking that dilusion, that VC funding, he ended up taking a little over a million dollars of funding from us over 36 months, and he got his numbers up to a place where they were much better negotiating power and then he went out and raised a seven million dollar series A at significantly better terms. Of course that’s all public, on crunch base, but with delaying that funding and using non dilutive funding, our funding instead, obviously we made some money on it, and John obviously, he was able to retain a significant amount of founder wealth, for his company, but more importantly, he was able to maintain control of his business. He didn’t have a VC stacked board of directors that fired him, after the company reached a certain point, he is able to control his own destiny. And that’s a really important thing for a lot of entrepreneurs, most of us when we quit that job or put our life savings on the line to go build a company, it’s not to go make a bunch of VCs rich who sit on the board of directors, it’s about making a dent in the universe, it’s about doing something great for ourselves, for our family, for the employees, that come to work at these companies and help us build this vision of how the world should be, build that dent in the universe. It’s an awful thing when an entrepreneur who is working 60, 70, sometimes 80, 90 hours a week for years, all those soccer games that you are missing, all of those moments that you are not able to enjoy in life, because you are staring at computer screens or jumping on that red eye to New York to get close to customer deal, because that is what it takes, when you put that much sweat equity into making something real and to birthing this vision of the world, you should get to keep a lot more of that value that you created. You should get to control that business, and the employees, in some cases, many hundreds of employees after a while that come to work for your businesses shouldn’t have to worry about some board of directors making a decision. Founders are the people that should be sitting in those seats after all that hard work and enjoy the fruits of their labour. And so that’s a very powerful thing and we are trying to do a lot more of that for founders.
Scott Orn: That’s really cool. What on average do you think you saved the founders who go venture capital later, do you think- it seems like you probably saved them like 10 or 15, 20 % dilution, have you ever done a study on that, to see how much equity they get to keep? What have you guys found?
Jacob Colker: I don’t have audited metrics, so I’ll qualify that on the front end, here is what I can say, on average our companies that we have invested in collectively have generated an annual of about 250 million dollars in revenue. And if you take a 5X SAAS valuation multiplier which is a standard multiplier these days, obviously some companies are getting 10X some companies are getting 3X, but just on an average basis, you know, that’s 1.25 billion dollars in revenue from the people on our portfolio. And if you assume that the average equity dilution round is probably 15 to 20% I can say with a pretty high degree of confidence that we have saved our founders a quarter billion dollars in equity from the 130 companies that we have funded. Now, again, that’s not audited and I want to qualify that that I am using some averages there, because we haven’t really sent weeks digging through every nuance in our data to pull the exact number but directionally, that’s probably a pretty accurate number in terms of the equity that we’ve been able to save our founders. And that’s not just about founder wealth, it’s about control and dilusion because a lot of times that particular 10 to 20% round that time could mean the difference between a founder still having 51% control and not, and that’s a big deal in terms of what is important to a lot of our entrepreneurs, it’s not always necessarily about the wealth aspect of it, but a lot of it has to do about the control aspect too.
Scott Orn: I totally agree. You know the other kind of aspect of that is if you can delay your venture capital around, you also have kind of exit opportunities that open up too that may not be available when you do raise around, and that might be selling your company for 5, or 10 or 15 or 20 million dollars and in the startup world, in the VC startup world that’s not a great outcome but if you own that company yourself and you haven’t really taken any dilution, those kind of exit amounts are actually really fantastic and are life changing, and by delaying your VC funding, you can actually preserve your optionality there and leave those options open. Do you guys see that happen?
Jacob Colker: All the time, I mean, the good rule of thumb is to assume that from an expectations perspective, VCs won a 10X return of their funding, so if you are going to dilute 10% and then raise that kind of funding, you have to assume that you are going to now have to have a certain revenue number, and a certain exit number, in order to honor that expectation. We invested in the company for example called IPfolio and when I say invested, I want to be clear, we financed, because our instrument is considered a loan and structured as a loan, but it doesn’t have a lot of the restrictive financial covenants, that a traditional bank loan does; but IPfolio is a company we have invested in, it’s a 100% bootstrapped business, he took 200 thousand dollars of our funding over 36 months and today the company is millions of dollars in revenue, and for the exception of some equity grants to some key employees, the founder owns nearly 100% of the company, I don’t know if I’ve ever met an entrepreneur in my life that wouldn’t be thrilled to have a business that they own 100% of, that is generating millions and millions of dollars a year in revenue, right, I mean, if they ever choose to exit, in many cases, those key employees and that founder is going to have a way better exit than many companies that have taken VC funding and have been forced into a growth path, it might not necessarily have been right for that company, or to shoot for exits that are unattainable for that particular company and product and that particular market.
Scott Orn: Yeah, you are making a great point. Maybe you can present kind of the high level terms, like how long these loans last for, just give us kind of the basics on the loan structure so people can have an idea.
Jacob Colker: Sure, yeah. So, revenue financing is a new instrument, to be fair, convertable notes were relatively new just ten years ago and now they are all the rage these days. So, I understand that sometimes people are they would like to learn a lot more about a new instrument before they consider it, but it’s actually incredibly simple when you boil it down, so let’s just take a round number, let’s say a 100 thousand dollars, let’s say we give you a 100 thousand dollar loan, over the course of three, four or five years depending on what’s the right structure for your particular company and your growth plan. And simplistically, you pay us back 160 thousand dollars during that time, and the way we get paid is we take a very small percentage of your revenue off the top about 5%. So our pricing ranges anywhere from 15 to 30% on the interest rate when you consider it, and the loan structures tend to last anywhere from 3 to 5 years again depending on what makes the most sense. And, the payback structure is anywhere from 3 to 8% off the top of your revenue every month. And that’s simplistically how it works, it’s actually really simple. Comparing that against bank loans, banks, you could probably find an interest rate somewhere in the range of 10 to 15% but people don’t really consider what it means to have a personal guarantee, nor do they understand what are called financial covenants, I’ll give you one quick example, we funded a company last year, that had a 50% growth covenants is what they agreed to with a bank loan that they had taken, which means that they agreed to grow 50% every single year in order to remain in good standing with the loan. Last year, they grew 48%, they missed it by 2% and the bank called the loan. The entrepreneur had to come up with hundreds of thousands of dollars to pay back the loan in a short period of time. So banks have these things that they call covenants, which nobody understands, and they are often very restrictive, covenants, they control what you can and cannot do with that funding, because again, the banks don’t necessarily understand tech and they are betting on your fico score in most cases; or they are betting on the business but they want to control how that money is spent. So, when you’ve taken into account the full cost of what a bank engagement really is, that 10% interest rate is not the full cost at the bank and that’s what they tell you when you go there, so those are banks. On the other side, VC and Angels are expecting 10X so that 100 thousand dollars, they are expecting a million dollars back. And that’s over the course of 5 to 7 years these days. So, some people tend to think that VC investment or Angel investment is free, and when you really do the modeling, especially if you have revenue, and those are the companies that we work with, we don’t work with pre revenue companies, but when you have revenue, you’ve got product market fit most likely, and at that point it’s about growing responsibly and if you can do that for several years you are going to have a business that could potentially have an exit that is life changing for your family, and there is no reason why you should give up 40% of that business to VCs just because that’s what tech crunch tells you to do.
Scott Orn: You pointed out also about kind of the payback period, and the covenants are 22:58 because if you, the money is only useful to you as entrepreneur if you can invest the capital and get your return on investment, and that takes some time, it takes maybe six months, or 12 months or whatever, it takes, so if you are constantly worrying about your loan getting called through a covenant, or changed clause or something like that, then it’s like you can’t really trust, you can’t make that investment, you can’t generate the ROI and that’s why those covenants are so dangerous, I totally get what you are talking about.
Jacob Colker: That’s right. And very few entrepreneurs really understand what a covenant is. And, actually very few entrepreneurs understand what liquidation preferences are too, you know. That two million dollars for 20% of your company in an exit isn’t necessarily 2 million dollars for 20% of your company. It ends up being much higher than that but entrepreneurs don’t get that, they are experts in building beautiful products with craftsmanship that are making a dent in their particular industry, but when it comes to financing, there is a lot of ways that entrepreneurs can get screwed, and that’s something that we are very passionate in helping entrepreneurs understand. One last thing I want to say is that one of the best arguments that I have heard for why you should take VC funding is because you get that gray haired advice that could potentially help you build your business with experience and more gravitas at the top and while that’s true, I think a couple of things are wrong with that, number one, they are not always experts in the advice that they give you, in fact, many people joke that you should listen to what your VC tells you to do and then go do the exact opposite of that and you will probably have a better chance of succeeding, so there is lots of jokes about VCs and the advice and the quality of that advice to begin with. But, one of the things that we are trying to change here at Lighter Capital as well is we, about six months ago hired Catelyn Gets, as our head of community. And within the 130 companies that we funded, there are probably close to 200 founders, because in many cases there are two or sometimes three founders per company or CXOs of those businesses, so we have 200 people who are not just gray haired advice but are actual day to day operators in SAAS businesses, and we are and have been building a community, a private client community here of founders who are regularly engaging with each other, who are giving each other advice, who are comparing notes, who are saying hey how did you hire vp of sales, or how did you say your structure for your customer success team, of how did you sell your product into those 500 companies last year. And there is a tremendous amount of knowledge sharing happening among the Lighter Capital founders and so it’s a lot more than just capital, at Lighter Capital, we have not gray haired advice, per se, although, many of our founders do have gray hair jokingly, but these are people who are direct operators in their fields, who are actually at the helm of multimillion dollar businesses operating every single day. And so, we feel very strongly that the advice that 200 fellow SAAS operators can give you, is infinitely more intelligent and infinitely smarter than one random VC giving you a thought or a suggestion. However, pattern recognition they may feel they have, it pales in comparison to the crowd source knowledge of 200 highly qualified people. And so that’s a real big push of ours, is to augment that gray haired advice with actual SAAS operators working in the trenches day to day, sharing notes and helping each other out, and that’s a real key focus of ours as well.
Scott Orn: And you also align with founders, because the faster they are growing, the more capital they will need and the bigger the loans can be for you so you have this really kind of incentive to help them grow and be successful, because that just makes you guys more successful. So I really like how that works.
Jacob Colker: Yeah, we don’t require personal guarantee, and so we don’t have a safety net, if your business does not succeed, we do not succeed, we lose our money. And so we could not be more aligned with founders and helping them grow.
Scott Orn: That’s awesome. Well Jacob, this has been a fantastic podcast, do you want to just kind of share where the audience can find you, and I really enjoyed it, this is Lighter Capital that has really developed an innovative financial solution here, I mean, I am used to the banks and I am used to the venture capital, and you guys have figured it out a way to compete with both of them.
Jacob Colker: Yeah, well if you are a recurring revenue business, and that includes SAAS businesses that also include some tech enabled services, and you are doing more than 15 000 a month in revenue up to a million dollars a month in revenue, really that is our sweet spot, we would love to talk with you, you do not have to be profitable, you can be on a path to profitability, but we look for reasonably high growth margins, at the moment we only fund businesses in the United States, but if you’ve been in business for more than a year, you’ve got revenue, you’ve got a recurring revenue stream, and you are going, we would love to talk with you, you can find us at and there is a button there that says “apply now” it’s the fastest way to kind of just get some quick understanding of your business and get you in front of somebody on our investment team, and we would be thrilled to help be a partner in growing your company. But not just us, there is 200 other founders and executives in our portfolio that would love to help you as well.
Scott Orn: That’s awesome, well Jacob Colker, thank you so much for coming on, is where they can find you, and I really appreciate your time. This is great!
Jacob Colker: Thank you so much.
Scott Orn: Bye bye, take care.

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