Scott Orn, CFA
Scott Orn, CFA
Posted on: 04/24/2017
Mike Lederman of Bridge Bank - Podcast Summary
Mike Lederman runs the West Coast Region for Bridge Bank, one of the premier banks that serves startups.
Mike Lederman of Bridge Bank - Podcast Transcript
| Scott Orn: | Welcome to Founders & Friends podcast with Scott Orn, we are back in action after tax day; it’s been a little slow on the Founders & Friends podcast the last couple of weeks because we’ve been concentrating on tax day for Kruze Consulting, but we’re there, we’re done, things are going great. So thank you very much for bearing with us, we’ll have a bunch of new podcasts coming out soon. And then, just a quick little note here, this podcast is brought to you by Kruze Consulting, the start up accounting and tax firm of Silicon Valley’s choice over 160 clients, and we’re very happy to say that we now have 20 team members at Kruze Consulting, so we’re growing very quickly. And please, spread the word. And also brought to you by Goodwin Procter’s Fintech bank charter symposium, which is going to be May 3rd, so shoot me an email if you want the invite, it’s run by Michael Whalen who is one of the top Fintech lawyers in all of the country; he’s Goodwin Procter’s specialist on Fintech, awesome guy, knows his stuff so well and that should be a really cool symposium, again we’ll be talking about the bank charter, Fintech bank charter, which is basically the US government is proposing lending kind of Fintech companies online lenders predominantly, have some of the same kind of statuses and regulatory regimes as banks do. Really interesting, nerdy stuff but I think this audience will probably like that so, shoot me an email if you want an invite. And now, onto our regular schedule podcast, and I hope you enjoy, thanks, talk to you soon. [music intro] |
| Scott Orn: | Welcome to Founders & Friends podcast with Scott Orn at Kruze Consulting, and my very special guests is Mike Lederman from Bridge Bank. Welcome Mike. |
| Mike Lederman: | Thanks for having me. |
| Scott Orn: | So Mike and I have been friends for a long time, and at one time Mike was a competitor in the venture lending world, he’s been at Bridge Bank for a long time, he’s built a great practice there, maybe you want to retrace your career a little bit for the audience? |
| Mike Lederman: | Sure, I’m happy to. So, I started in banking 16 years ago now, and spent about 10, 12 years in technology lending, working with startup companies at all stages of their life cycle. As you said I took a little break went to a venture debt shop for a couple of years, and it was a great experience working with companies from more of an enterprise value perspective. And then came back to Bridge Bank a little over three years ago. And currently, manage our San Francisco Bay area and Pacific northwest region, working with tech companies, again at all stages of their life cycle throughout all types of products and services that they might need. |
| Scott Orn: | Yeah, by the way, that’s a very large territory you got there. |
| Mike Lederman: | It is a large territory, thankfully it’s no more than a two hour plane ride to any of it, but yeah; there are three really different markets, Seattle, Portland and the Bay area, but Bridge Bank a whole is a nationwide practice, we work with companies all over the place. |
| Scott Orn: | Awesome. And so, on this podcast, we’re going to talk about banking services for start up, that is what you guys live and breathe, that you guys are awesome at it. We at Kruze Consulting refer deals to you, we just referred to one over to you where you closed the five million dollar deal which is awesome, I know the CEO is really happy, so thank you for doing that first of all. |
| Mike Lederman: | Thank you for the referral. They are a great company, we’re really happy to have them onboard. |
| Scott Orn: | Yeah, that’s a good one. So maybe, first of all, you guys just had a big acquisition in your life, at Bridge Bank; can you may be talk through what happened there and why it’s so great? |
| Mike Lederman: | Yeah, is it is hard to believe it’s been over a year and a half already, but Bridge Bank merged with Western Alliance Bank which is a bank holding company out of Phoenix, we are still Bridge Bank, but now a division of Western Alliance, so we went from being a 2 billion dollar institution to a 17 billion dollar institution and what that means is we’re able to grow with our clients a little bit better than we were in the past. Previously we would cap out at a commitment size based on the size of Bridge Bank as an independent bank, and now being part of Western Alliance we can grow up with our clients a lot better. So while we start out at a smaller commitment amount, we can now go up much higher, we can participate in their facilities as they grow, whether that’s working with other banks, with syndications, or continued work with traditional venture debt partners. So it’s been a great platform for us, it’s enabled us to roll out a few new products and services and groups, since the acquisition we have rolled out an equity fund resources group, we’re doing capital co-loans directly with the VCs. |
| Scott Orn: | That’s an underrated way of getting to VC’s deal flow is doing their capital coloans. |
| Mike Lederman: | Well, it doesn’t hurt to be their bank as well. So that’s been a nice addition and open up a new office on Sandhill road, we have a life science practice now that’s based in San Diego. My focus continues to be mostly on technology, but we also have a big asset based lending group, and a corporate middle market lending group here that we work with. It’s been a great a great opportunity for us to be now a bit of a bigger bank, but still have that small bank feel. |
| Scott Orn: | Yeah I think people maybe didn’t realize, but I as a seed or series A company you take a smaller loan and then- but as the company really starts accelerating they need like 10 or 15, 20 million dollar credit lines, at series B, or series C , series D, and that’s where you guys can play now, it’s actually really important that you got that bigger capital base and bigger bank behind you. |
| Mike Lederman: | And that was part of the impetus for that merger and it’s worked out really well. |
| Scott Orn: | Yeah, whoever thought of that- did they approach you guys? They must have. |
| Mike Lederman: | I wasn’t part of those conversations, but I think it was a win-win for both sides. |
| Scott Orn: | Yeah, because you guys always had really, you’re always really good on originations, and have a great reputation, and people know you; but just having like that muscle behind you is really exciting. |
| Mike Lederman: | It’s been helpful. As you know, there is only a handful of banks that lend a pre profit venture back start ups, so it’s nice to be one of them, and to be one as part of a top performing bank in the country. |
| Scott Orn: | I’m going to have to look at the stock and see if I can buy that stock. No comment from you probably. [laugh] |
| Mike Lederman: | We are all enjoying the stock price, I’ll say that. |
| Scott Orn: | So maybe talk about kind of the fundamental services a start up needs from their bank. I think a lot entrepreneurs, they get the VC money, they open a bank account, but they don’t really know all the things that a bank can do for them. |
| Mike Lederman: | Well the key is, what we find is a lot of times when there is a startup entrepreneur, their first bank account for their business is wherever they bank personally. And that might be one of the very big banks in the country, which do a great job on the consumer side, but might not be the best bank for an early stage venture or non venture backed technology company, who needs products and services that a traditional bank is not going to think about for them. And so, that’s where Bridge Bank I think does a great job, we have a product for early stage companies that are either venture backed or non venture backed, which essentially is free banking for a year. We give a greatwe call it bridge to growth, and it enables these types of companies to come over to us, start that relationship now, it might not be a debt need today but at least it has that relationship so they use this as a resource, whether it be to find a great CFO consulting firm, or an attorney, or CPA- use our resource. And also, get phenomenal banking services that are going to help expand that business, whether letter of credit, credit card, the things that these start ups need that to your point, they’re not thinking about right away. The bigger banks, the retail banks are not going to be as successful with those start ups as we are. |
| Scott Orn: | We see that a lot, like a lot of companies come to us with like a Chase or City Group or something like that, and it’s like not to knock, those are big successful companies, but they really get no services from their bank and oftentimes, they’re not used to working with people like an outsourced CFO, so like the fact that we’re accessing the bank account at different location we get locked out all the time, and it’s like people don’t understand the cost the company money, and then not getting the kind of benefit of your experience in the Valley your guys’ connections, I highly recommend they work with Bridge Bank, or the very least like another start up bank, because they those connections. |
| Mike Lederman: | As you know, this is a relationship business, so when you start that relationship early, and what we really make an effort to do is have that dedicated relationship manager for that company. And so, you’re not calling an 800 number, you’re not asking, you’re not going to a branch trying to find somebody to talk to, you know who to talk to, you’ve met with that person, you have their cell phone number and so it’s one person to call for anything, whether that be the banking services, the deposit needs, and down the road the debt needs, as that same person, that same point of contact at Bridge Bank that you’re working with. |
| Scott Orn: | It’s so important, even like that deal I referred over to you guys, like in the emails like hey Mike this is a good one, make sure you pay real attention to this one, it’s like that little tip of the cap to you tells you that this is a company, it’s worth your time, I’m not wasting your time I’m sure when you look at the debt needs you’re actually paying attention to who the referrer is, if they have credibility in your world. |
| Mike Lederman: | Yeah that means a lot, and as you know, you always want to refer a company to someone that you know is going to take care of that, and so that’s everything this industry. |
| Scott Orn: | Yeah, so the startups are going to need, they’re going to need wire capabilities, potentially let our credit need to access their bank account, some stuff that may be more difficult with a bigger bank; what other things do you guys do for startups? |
| Mike Lederman: | I think the big thing is the debt piece, everything you mentioned on the deposit side and just on that subject, we have any product and service that the biggest banks in the world offer including a phenomenal FX capability and international services. |
| Scott Orn: | Oh that’s a great point. Our clients need to use foreign services, foreign wires and foreign effects a lot actually because no one’s really solved, there’s no Bill.com for foreign payments. Instead, they’re constantly using their bank to make those payments. |
| Mike Lederman: | Yeah, and there’s no question they’re going to have better products and services from us than from a bigger bank. We have a great FX team. But as they grow, they are also going to need debt, and whether that is debt from us or debt from a venture debt firm, it’s going to be a big part of the financing need for that company, certainly much less dilutive than venture capital, it’s going to supplement venture capital, provide additional runway extension, and so that’s where we can really come in to help not only if it’s from us, or an introduction we make to one of our partners or a hybrid of the two, it makes a lot more sense to again be working with a bank like ours, from the beginning. |
| Scott Orn: | Yeah you said it very well. Maybe just at the very high level, there might be a lot there saying like how can a startup possibly borrow money if they’re losing money; because everyone associates kind of you need money to borrow money, and who would want to fund or lend to a company that’s actually losing money. But, there’s a huge market of this, I used to be a member of this market, you guys are a dominant player like- how do you think about that as an institution, and what do you say to those people who don’t quite get that? |
| Mike Lederman: | It’s different. There’s thousands of banks in the country and only four that really do what we do, lending the pre-profit startups, so there’s three main types of lending products for most start |
| up companies: | one is going to be an account receivable in credit, that could be as simple as financing specific invoices similar to factoring, it could be a revolving [indiscernible] based line that we true up on a monthly basis of what is your borrowing base based on account receivable. Or it could be based on recurring revenue, and that’s one of our fastest growing lending products based on monthly recurring revenue in a multiple of that. And for a SAAS company that’s going to be a lot more predictable and your borrowing base availability doesn’t have the lumpiness of an account receivable aging, not a lot of quarter-end spikes that you used to see with AR. Đnd then the final more traditional debt product for start ups is ventured debt or growth capital. And so we offer all of those products, sometimes we prefer to do it on our own sometimes a company might benefit from a hybrid solution of a senior piece from us and a subordinated piece from a venture debt provider. We work with many of the venture debt providers around the country and I think we are very good partner to all of them as we prefer to do the best thing for the company that might not be all of it from us, and we’re certainly ok with that. |
| Scott Orn: | That’s how we became friends, because we would always talk about syndicated deals and I am not going to say the company’s name, but we actually did one, I don’t think if you remember, it’s like I got to see how Bridge Bank worked, how you worked, like in the real kind of underneath the covers and it was great; and the company really benefited because they got way more money than we could provide, as a one stop shop, and way more money that you could provide a one stop shop, and it worked out and I think one of the great things about those combos is you effectively blend the cost of capital for the venture lending fund which has a higher cost of capital that could be more flexible in the bank which has a lower cost of capital but need you to fit in some parameters, the company ends up getting more money at a lower interest rate, for everything. |
| Mike Lederman: | No question, and a more flexible solution. And that company is still a client, we’re still doing well, and that’s exactly right, and it extends runway between the time you did your last round and the time you need the next round, and so it’s a much less dilutive cost of capital for the company itself. |
| Scott Orn: | When you’re underwriting a business, you mentioned like monthly recurring revenue and accounts receivable and then enterprise value; can you kind of go into each of those a little bit, I think a lot of people who listen may not even know what accounts receivable financing is, and what monthly recurring revenue financing is? |
| Mike Lederman: | Sure. So, for accounts receivable, that’s when you’ve sent that invoice out to your customer, and you’re typically going to build maybe net 30 they are not going to get paid until net 90, maybe 120, depending on your industry. |
| Scott Orn: | Do you do this for startup accounting firms, because I was just sending out invoices just now, I was like I wonder when I am going to get paid on all these invoices. |
| Mike Lederman: | Actually we do, so we can talk to this. |
| Scott Orn: | Alright, well let’s turn this into a great meeting. |
| Mike Lederman: | So what AR financing does, is it helps with that, it’s very simple working capital financing, typically eighty percent advance rate against the invoices that you’ve sent, and get 80 percent of that today and true up every month, so you’re receiving 80 percent of your outstanding AR balances on an ongoing basis with standard borrowing base, borrowing formula, and enables you to pay your vendors before you’re getting paid from your customers, and typically you need to pay your vendors before you get paid from your customer so that really helps bridge that gap. |
| Scott Orn: | Yeah, you’re effectively pulling forward to revenue like one month, or two months, or three months it’s very helpful especially for a start up that’s growing rapidly, because then maybe they’re doing 500 thousand dollars of revenue one month, and then 700 thousand dollars and a million dollars that growth is really costly, you have to invest a lot of capital in that, so being able to pull that money forward and effectively invest those debt proceeds into your business while you’re growing, is really nice for the company. |
| Mike Lederman: | And it’s the least expensive cost of debt out there. |
| Scott Orn: | Yeah that’s a great point, it’s like that’s bank’s favourite thing, right. |
| Mike Lederman: | It should be a company’s favourite thing if, I were a company even if you don’t plan to use it it’s nice to have just in case. |
| Scott Orn: | Yeah that’s totally true, because you never know when like you had a bump or someone who normally pays on time all the time then pay on time this month. That’s a great point. So, account receivables, you deliver the service whatever you are doing and you sent the invoice and now you can essentially finance that with Bridge Bank. |
| Mike Lederman: | That’s right. |
| Scott Orn: | And then, what’s monthly recurring revenue, people hear about SAAS businesses but like what does monthly recurring revenue mean, how do you think, how do you advance against that? |
| Mike Lederman: | Yeah, so that’s where you are looking more at the future billings based on what you’ve done historically. What I mean by that is you take let’s use three months as an example, so what was the prior month monthly recurring revenue; maybe you’re billing annually but we can kind of put that on to a monthly basis. |
| Scott Orn: | If your account is doing a good job they are. |
| Mike Lederman: | So if you’re recurring on monthly basis, call it the three months of the last recurring revenue maybe it could be more, and we typically will multiply that by the retention rate, the retention rate for a SAAS company is going to be very simple; how much of your recurring revenue or you retaining, every month. |
| Scott Orn: | And SAAS should by definition have a really high retention rate, because after all these people are using your mission critical software, and they don’t want to leave and so they’re always going to retain. So if that retention rate was really low, you’d be in trouble anyway. |
| Mike Lederman: | I’d be in trouble anyway, but exactly, it’s typically high and so we take the last three months times the retention rate, this is a very plain vanilla type of approach to it, and that’s how much you can borrow in recurring revenue line. Very similar to an AR line it’s interest only for whatever you’re borrowing, you don’t have to borrow anything, you can borrow, you can pay down, you can borrow, you can pay down, whatever you’ve advanced under in that month that’s what you pay interest on. So, a very simple, very easy to administer. Again a relatively low cost of capital, unlike AR, it’s not actually fulfilled receivable, so it is that somewhat at times can be slightly higher cost of capital, but still a very inexpensive type of facility to put in place. |
| Scott Orn: | So if a company was doing a million dollars a month in revenue, and maybe their retention rate- you’d want it to be higher than this but 90 percent so, that’s 900 thousand dollars times 3, so they can borrow 2.7 million dollars. |
| Mike Lederman: | That’s right. |
| Scott Orn: | And again, that is fairly safe, it’s not quite as safe as accounts receivable, but it’s pretty safe and at lower rate because it’s so much safer. |
| Mike Lederman: | That’s right. |
| Scott Orn: | And then, you said something which kind of triggered something in my mind, which was you don’t have to pay down the principal, which is actually a key thing for startups, because you can borrow money but some lenders require you, or sometimes it’s right away sometimes it’s in the future, to start paying the lender back. And that impacts your cash flows, right? |
| Mike Lederman: | And that’s one of the big differences between a line of credit and a venture or growth capital term loan; with a line of credit, for us I can’t think of any times where there’s any required borrowings, so if you need to borrow- you borrow, if you don’t want to borrow- you pay it down. Unlike a term loan which might have a draw down period of some sort, but then it’s going to have an interest only period and then itâs going to amortize back, usually with equal monthly principal payments plus interest. You may or may not want that money out a year or two down the road that’s the benefit of a line of credit, maybe in addition to or instead of a term loan. |
| Scott Orn: | By the way, we used at Lighthouse when I was doing it, we used to do amortizing loans so like a company might be paying down 50 thousand dollars of principal or a 100 thousand dollars of principal every month, and while that’s great for the lender, because it’s reducing their risk, and they can redeploy those dollars, it’s not great for the start up. Ideally, they would like to have that money on interest only for forever, and I’ve had many founders asked me that I’m sure they ask you that, but you know we say that jokingly, but the longer they don’t have to pay the money back, the longer they can continue to reinvest those dollars in their business. |
| Mike Lederman: | That’s right, and that’s what I was saying earlier, the hybrid approach can sometimes add tremendous value, whether that be a line of credit, and a term loan from us, or a line of credit from us and a term loan from one of our partners. It’s a nice way to get the best of both worlds. |
| Scott Orn: | Maybe just talk about that a little bit, because it may be kind of a foreign concept to some of the listeners, that two lending institutions can work together and actually lend to the same company. |
| Mike Lederman: | It might be a bit unique, but that is one of the hallmarks of how I think we’ve been successful at Bridge Bank, is building those relationships with the venture debt fund community. And we’ve worked with many of them, if not almost all of them, and the benefit to the borrower of working with the bank and the fund is the fund can be a little bit more flexible than a bank at times; it’s going to be a higher cost of capital, they don’t have the depositors’ money to lend out like a bank does, so they’re going to have a higher cost of capital, but that blended cost of capital can be so advantageous to the borrower. And, many times the bank and the venture debt provider have worked together a lot in the past, and so there are agreements among both lenders called an intercreditor agreement, which is already in place, you change the borrower name and that document is done. |
| Scott Orn: | That’s actually a critical distinction, I’m so glad you brought that out, because, there are times past where we would try to partner with someone who wasn’t a bank that wasn’t very reasonable, and we didn’t have that inter-creditor agreement and so the two lenders would spend a ton of energy and time kind of butting heads over certain terms- |
| Mike Lederman: | And the borrower’s money. |
| Scott Orn: | And the borrower’s money, yeah, and the borrower just wants their deal, so having like preferred partners like you, is really helpful because then the borrower knows what they’re getting into, they don’t have to worry about the two kind of, the two other people fighting between themselves. |
| Mike Lederman: | Yeah that’s right. |
| Scott Orn: | Yeah. And so, in those agreements usually you guys are senior and you guys have kind of the advantageous position? |
| Mike Lederman: | Yeah, the bank is always going to be in the senior position, that’s standard. |
| Scott Orn: | And that’s because your cost of capital is so much lower, you have to be senior, you have to be kind of first out. |
| Mike Lederman: | Yeah, and depending on how something is structured, the bank might have a senior lean on all assets of the company, we might have a lean on specific assets of the company, and the venture debt provider might have a lean on some assets in a senior position. Most of the time it’s fairly straightforward, the bank is senior on everything, the venture debt lender has a second. |
| Scott Orn: | So you guys can work together, and just from fire power perspective, you said you can go up to like 50 million dollars alone as Bridge Bank now, and what could you do in conjunction with the lender, or is it more about just kind of crafting the deal terms to fit each other’s risk profile? |
| Mike Lederman: | Everything is deal specific. We do have- that’s easy answer, we do have a much higher legal lending limit now, as we’re part of what Western Alliance Bank, but yeah, we have much larger facilities with our clients as being part of Western Alliance, than we did as an independent bank with Bridge Bank, which is great, as we prefer to work with our clients from very early stage to IPO and beyond, and we have many examples of those types of clients that started with us early and we are still either leading or part of multi lender facilities for our clients that have had liquidity events, successful IPOs. |
| Scott Orn: | That’s really cool, that’s got to feel really good too, because you build a relationship with the CEOs, you get to stick with them for a long time. |
| Mike Lederman: | You do, and that goes to show about the relationship that the companies I think feel with us, because at times they get to a certain size where they might not necessarily need us to be a part of a larger facility, however, we have a relationship with the management team or the board that says, you guys were there from the beginning, we want you to be a part of this going forward, and we have a few really good examples of that, they are great testaments to what we’ve done. |
| Scott Orn: | I also think in Silicon Valley nothing ever works goes the plan. In the life cycle of a start up there’s always going to be at least, at least one moment, but probably three or four were like oh no what’s happening, or you’re missing number, of whatever it is, there is going to be some adversity and having a bank partner and a lending partner who actually really understands that, and has a lot of experience, is hugely valuable because there are things you can accommodate them, you can restructure a deal as long as you feel safe, there is a lot of things you can do to help a company get over the hump, and if they’re just kind of picking a lender based on lowest cost of capital or some other criteria, they’re missing the boat, they should be doing it based on a relationship. |
| Mike Lederman: | I know that a lot of times companies will create that spreadsheet and show the three banks they’re talking to, and put in the cost of capital and the interest only period, all the deal |
| termsScott Orn: | Unfortunately sometimes I’m creating that spreadsheet, but yeah. But I talk about the relationship all the time, and like how people act, that super important. |
| Mike Lederman: | I don’t want to discount it that’s a very important part of it. However, to me, the more important part is what’s the reputation of that lender and the team that you’re working with and what’s going to happen when things don’t go to plan, to your point, things many times don’t go to plan. That’s where financial covenants come in, you know, we might put a covenant on a facility, and that’s an important thing to think about here, where a financial covenant is a financial metric in which the borrower is saying I’m going to live up to this part of the agreement, the document is going to read that way, that the bank has the ability to take all sorts of terrible actions if a financial covenant default occurs. However, as I said, this is very much a relationship business, and we are used to companies being off plan. Does that mean we want the default, of course not, nobody wants the default. However, how is that lender going to act in the event of a default? And what is the process. There’s always a story, it could be an equity round is coming together, it could be my liquidity is lower because a customer payment got delayed, it could be a contract got shifted from Q2 to Q3, there’s every possible reason and we’re used to that, it doesn’t scare us. And it shouldn’t scare the borrower either, as long as you’re working with the lender that understands that. |
| Scott Orn: | Yeah, and also, and that’s hugely important, I can’t emphasize that enough, and also you do a lot of deals with their investors, oftentimes, and so you have like this other channel where you can, there’s a relationship that way too, and no one’s going to act in a rash way if you still want to be doing those VCs deals, and by the way, you’re a very important capital source for those VCs like they want to get, run away off of your money and have a great working relationship with you, so they are not going to burn you either, so it’s a really constructive three way relationship. |
| Mike Lederman: | It is, we’ve said that word so many times here, it is a relationship with the borrower, the investor, and the lender, and it all has to work together. |
| Scott Orn: | Yeah, well I’m super excited about where you guys are, I mean, the merger is great, you have all the relationships and like I said, we just referred over a big deal, you did it; maybe you can tell everyone kind of where to find you, how to reach out to you? |
| Mike Lederman: | Sure, so my office is in San Francisco, but e mail is always best mike.lederman@bridgebank.com and our website is Bridge Bank.com, and again nationwide practice and we’ve been lending to tech startups since we were founded in 2001, so we’ve been around a long time and not going anywhere. |
| Scott Orn: | And I have worked with Mike personally, he’s been great to work with, so I highly recommend him. |
| Mike Lederman: | Well thank you. |
| Scott Orn: | Alright man, thanks for coming by, I really appreciate it. |
| Mike Lederman: | Thanks for having me. |
| Scott Orn: | Thanks for coming on Mike and as everyone knows, banks are very careful about compliance, so I would like to read one quick disclaimer which is Bridge Bank is a division of Western Alliance Bank, member of FDIC. Thanks. |
