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Scott Orn

Scott Orn, CFA

Patrick Lee on founding Top Corner Capital, a venture debt fund for early-stage startups

Posted on: 11/10/2020

Patrick Lee

Patrick Lee

Founder and Managing Partner - Top Corner Capital

Patrick Lee of Top Corner Capital - Podcast Summary

Patrick Lee stops by to tell the founding story of Top Corner Capital, a venture debt fund for early-stage startups. Scott & Patrick are old friends from Hambrecht & Quist / JP Morgan. They discuss those early years in their career, Patrick’s time at Pinnacle & WTI, and finally Top Corner’s advantage in focusing only on the very early-stage startups.

Patrick Lee of Top Corner Capital - Podcast Transcript

Scott: Hey, it’s Scott Orn at Kruze Consulting and welcome to another episode of Founders and Friends. And before we start the podcast, let’s give a quick shout out to Rippling. Rippling is the new cool payroll tool that we see a lot of startups using. Rippling is great for your traditional HR and payroll. They integrate very nicely, but guess what? They did another thing. They integrate into your IT infrastructure. They make it really easy for when you hire someone to spin up all the web services and their computer, which sounds kind of not a huge deal, but actually we did this study at Kruze, we spent $420 on average, just getting a new employee’s computer up and running and their web servers up and running. It’s actually a really big deal. It saves a lot of money and the dogs are in the dogwood. We see a lot of startups coming in. The Kruze now using Rippling. Please check out Rippling. Great service. We love it. I think we have a podcast with Parker Conrad. You can hear it from his own words, but we’re seeing them take market share so shout out to Rippling. And now to another awesome podcast at Kruze Consulting’s Founders and Friends. Thanks.
Singer: (singing). It’s Kruze Consulting Founders and Friends with your host Scotty Orn.
Scott: Welcome to Founders and Friends podcast with Scott Orn at Kruze Consulting. And today my very special guest is Patrick Lee of Top Corner Capital. Welcome Patrick.
Patrick: Thank you. Thanks, Scott.
Scott: Patrick and I have been friends for many, many years. Too many to tell, but I thought, Patrick, you maybe start off by just saying, retracing your career a little bit and telling everyone how you had the idea for Top Corner Capital.
Patrick: Sure. Going way back, I grew up in Montreal, came down and worked on Wall Street for a while, went back to business school. Then I moved out to the Valley 25 years ago and joined an amazing firm called Hambrecht & Quist. Very fortunate timing. Also, just fortunate to join an absolutely wonderful firm. That’s where Scott and I met. We both worked at Hambrecht & Quist together. And I basically spent the first 10 years of my career there initially doing a bit of everything, banking, investing and then ultimately raising a venture equity fund within Hambrecht & Quist and deploying actually two funds within that platform. But purely on the venture equity side. We were then acquired by JP Morgan and our fund got subsumed into what was then called JP Morgan Partners. That was a much bigger private equity focused and venture. I remained as part of the team doing venture early stage equity on the West Coast and basically ran the software practice for JP Morgan Partners for several more years. It was clear, the bank after the bubble burst in 2000, was going to get out of the venture business, I started thinking about the next thing I can be doing. I was lucky enough to meet another H&Q person who helped me with getting introduced to a brand-new venture debt fund, an industry I didn’t know about it at the time. And that firm was called Pinnacle Ventures. And so, I joined another H&Q colleague of mine there and that was the first fund there. And that was a lot of fun, just a brand-new fund, learned a lot about venture debt and I ended up spending eight years there. And then I was approached by WTI or Western Technology, which was one of the granddaddies of the venture debt space and I joined them after 8 years and then spent the next seven years as a partner with WTI. Again, doing venture debt. When I look back, having moved up to the Valley 25 years ago, the first 10 was pure equity and the last 15 years has been venture debt with two wonderful firms and funds. And that led me to saying, “I work and love working with entrepreneurs every day,” but I thought to myself, well, wow, I could do this myself.
Scott: Well, I had the same thing. That’s why I joined Vanessa. It’s like you’re living vicariously through a lot of entrepreneurs and you can’t help but want to try it yourself.
Patrick: Yep. And I’d always wanted to start my own firm. And that’s the genesis of Top Corner is I’d always wanted to do, to be an entrepreneur, to start my own company and to start my own fund. And I felt after getting 25 years of experience, I felt I finally had the experience I needed to do that. And so, this year, 2020, I launched a Top Corner Capital. Had no idea COVID was going to hit us. But despite that, I raised my fund during these troubled times and now I’ve closed that fund. And so now we’re Top Corner Capital was actively investing and deploying capital and I have an absolutely wonderful set of LPs and I’m building a ton of new relationships as well as my existing. The other thing that’s helped me is obviously having 25 years of a network and relationships and entrepreneurs and venture folks and so on. And folks like Scott and others, who’ve known me a long time. It’s a great way to being able to approach them and say, “Hey, I’m doing this now.” And it’s not something brand new, but it’s something a little bit different than I was doing before, but it’s been absolutely, I’m having a blast being an entrepreneur. And again, talking to entrepreneurs and being able to tell them, “I know exactly how you feel in what you’re going through, because I’m going through it.”
Scott: That’s so powerful to have that kind of common bond with them. And for them to know that you’re doing it too. I got to say, because we caught up a couple weeks ago. I’m so impressed that you’re able to raise your fund during literally the heart of COVID. I don’t know how you did it. Is there any learnings for the audience? What was the magical touch there?
Patrick: Well I don’t think anyone can prepare themselves for a period like we’re going through now with COVID. And I think I actually started fundraising in March, which couldn’t have been a worst month in the history to start anything, but I would say be prepared. Come up with a strategy, stick to your knitting. I didn’t deviate from the strategy of the fund, from the LPs I wanted to approach, from what I was saying, the value proposition. If anything, the silver lining throughout, not at the beginning of the fundraising process, but as time went on and I started realizing that COVID actually might be very helpful to me because my product is even more powerful and more impactful in this environment and everyone wants, there’s so much uncertainty, they want a little bit more capital, a little bit more cushion. The bar for the next round is higher. And so, all those factors when you add them up, makes venture debt, especially at the early stage, even more critical. And that’s really resonating now. And that’s another thing I would just say is, keep your eye on the ball, stick to your strategy and that actually helped fundraising because I was able to tell people, “Hey, I actually think.” I actually added a slide to my deck that basically said, “Here are the impacts of COVID on my fund and they’re actually mostly positive.” There are a few negatives, obviously. You can’t meet people as easily. If it’s a brand-new person you’ve never seen before and you’re trying to invest in them, that’s a little harder, but all the other reasons, having a fresh new fund with no baggage. I’m not triaging any portfolio that most other funds are. I’m not in a position where I’m feeling any kind of pressure to have to do things faster or bigger. And then, as I said before, the bar is higher so people need more capital. No one wants to set valuation right now with COVID unless you want to take some sort of hit. And so again, venture doesn’t touch valuation. Then having an extra million or two million bucks in the bank with these uncertain times and giving yourself more runway or growing faster or if something is really working in COVID, then it seemed more impactful than making a little bit of extra capital. And it’s not easy to get, particularly at the earlier stages. And that’s the last point I’d say is that my strategy is of keeping it early stage. I think most people are gravitating to, you’re reading about the later stage stuff that’s already proven and that’s where the feeding frenzy is because there’s a few really good deals out there and that everyone wants to get into. It’s harder to figure them out at the earlier stage.
Scott: Yeah, that’s such a great synopsis. And when I asked that question, I hadn’t really thought that COVID could help you, but you’re exactly right. Extending your runway is just incredibly valuable at that moment. That’s just so smart. Maybe you can kind of, because there might be some people are listening to this for the first, hearing the term venture debt for the first time. Can you kind of give a quick, the 30 second explanation of what venture debt is?
Patrick: Sure. It does mean a lot of different things to different people, but the core thesis is it’s and the core business that I’m in is it’s a term loan, typically a three plus year loan that’s given to a company. There’s an interest rate associated with it. There’re warrants associated with it. It’s completely flexible the way I’m doing it at Top Corner, there’s no covenants, there’s no restrictions, there’s no MAC clauses. The capital can be used just like a dollar of equity. And so most entrepreneurs look at this and say, “Well, I can get a dollar of equity or a dollar of venture debt, but the cost of capital for that’s far less expensive.” There’s still some dilution with the warrants, but it’s far less than pure equity. I don’t have to set valuation. I can use it anywhere I want. It’s not tied to a specific asset or has to be deployed. And again, there’s no restrictive covenants around it. And so that’s the way I’m doing it. That’s my version of venture debt, but that’s a very typical structure in the space and companies love using it. If it’s used properly, everybody wins, the entrepreneurs, the founders, the employees win, the venture investors win because they’re levering their investment. And then obviously the venture debt firm, that’s giving them capital wins as well if everything works out and every one mix. And so, the ideal scenario is a win for all the people around the table. And that’s the perfect venture debt deal. They don’t always work out that way, but they should. And that’s how they should look.
Scott: Yeah. Your point about, if you take the right amount of capital, not taking too much. I used to always tell people three to six months runway needed. You don’t want to over leverage the company because sometimes you’ll get people who are, give me as much as possible. A year’s worth of runway in debt. I just don’t think that’s very healthy. One of the things I like about your fund at the early stages, it’s kind of self regulating. There’s less of a temptation for you to give a startup too much money. And there’s less temptation for a startup to take too much money because they know they need to go back to the capital markets pretty soon anyways. It feels like a really, really nice place to play in the venture debt ecosystem.
Patrick: Yeah, I sure hope so. That’s exactly right. You don’t lend a lot of money to an early stage company. It just doesn’t make sense. Yeah. And the flip side you’re right. If someone says, “Hey, I just want to buy one month of runway.” That really doesn’t make sense. I think you’re right in that three to six-month timeframe, although there are some companies that approach me and they don’t necessarily want to extend the runway, they want to grow faster. They think every dollar I invest in my sales force or acquiring a customer is accelerating my revenue and I know the ROI on that dollar. And so, I may have the same runway, but I actually think I can grow twice as fast if I have more capital now, hence I can still raise my next run on the same timeframe, but at a better evaluation because I’ve increased my numbers by so much. It’s either one. It’s one or the other or it could be both, you could be accelerating them and them more runway, which is the best.
Scott: I love the accelerating runway ones the best personally, just because that’s the point where the entrepreneur knows they’ve got something. When they’re willing to hit that gas pedal down because the metrics or just the customer feedback are working so well. And you’re right, the whole idea is that you can just increase your valuation so much more by using that growth rate. I think that’s the best use case. I love it.
Patrick: Or you tap into better investors or get better terms or just have a more successful financing or are you just give yourself more time to do that and therefore you can do other things if you’re preoccupied with running your business. Some people just want, hey, I want to put my head down and run my business.
Scott: What’s the typical setup for a deal? What stage? You’re early, but maybe just for the audience, spell it out a little bit. Is it seed? Series A? And how much are the companies looking for for Top Corner?
Patrick: Yeah, sure. I’m telling everyone it’s seed and series A and really the earlier series A’s and there’s a bit of semantics here. The nomenclature as a seed round, a series A round. Ironically 15 years ago, when I entered this business, the series A deal is what a seed deal looks like today. Used to be a five on five. A five on five was an incredible deal that you’d see. And so, a $5 million series A was pretty typical. You’re seeing a lot of these $5 million seed rounds so it’s a little bit of semantics, but I would say a company that has raised at least three million of equity, maybe as much as five million of equity, that’s I would say down in the middle seed deal for me. Has an investor that hopefully I know or know of or trust and they have some skin in the game. They typically take a board seat. This isn’t some party round where a bunch of people who are running together and there’s really no one accountable. Those are sort of the dynamics. And then I’m lending on that basis, somewhere between a half a million and three million. If it’s someone who’s raised just three million, maybe that’s 500K or 750K, but if someone who’s raised $5 million, then maybe it’s a million, maybe as much as a million and a half. And obviously if they’ve raised six or more, you can increase that level. And so that’s sort of more of the typical how I’m defining early stage. And I would say the last point is they usually have runway, so I’m not funding companies that are running out of money tomorrow. They usually have on average, 15, 18 months of runway. And they’re really thinking about how do I get to two years of runway? For instance, if they have 18 months of runway, how do I really push that runway out? Or how do I just grow faster in that timeframe? They’re not desperate for money, but they’re thinking ahead and they’re being very methodical. And that also shows you that the entrepreneur is prepared and thinking through it and being very smart about it. And that was obviously, that’s a good sign. When I got the phone call, “Hey, I have one month left of cash.” That’s not really something that I’d been looking at.
Scott: Well you’re touching on the quintessential issue with venture debt or any kind of follow on equity investor too, is that there’s an adverse selection problem. If the company down to three months of cash or even maybe even six months of cash, sometimes, it’s like, you don’t know why the existing investors are not putting more money in or why they let it get down that low. Our companies always have at least nine months of cash. That’s the bare minimum. Ideally you like 15 to 20 months but yeah, you touched on the point about the entrepreneurs planning ahead and coming to you maybe a year out or putting it in a place when they raise their equity round. I think that’s the really smart way to do it because then they know that they can actually use the money confidently because they know they have a lot of months of runway and they can kind of plan ahead. Those last-minute phone calls, like you said, are just tough to handle.
Patrick: Yeah. And I would say, folks like Kruze and groups like yours, I like working with because you guys talk the talk, our talk. We get it. We get it. And you can say to them, “Hey look, we’ve planned this out. We’ve run three scenarios. And yeah, you’re going to need to raise your next round in 18 months.” Well, you need to raise, if you have to have money in the bank in 18 months, then that means you’re out fundraising at least six months and probably in COVID, nine months. And so, do you really want to be fundraising in nine months or eight months or six months? And that’s when that they need your help and they need to have good modeling and good projections and scenarios. And the worst thing is when you meet a company that doesn’t have any of those things. And that’s why I always pull guys in like you. And I say, “You don’t know and I don’t even know what my capital is going to buy you because you don’t know what your true runway is.” And things change. And people mis-plan and people are ahead of plan and things like that. But I think the most forward thinking and thoughtful companies, not just entrepreneurs and boards and VCs. And if it’s explained that way, I think venture debt’s really a useful tool. And so that’s why if I meet a company who don’t have all the systems put in place then I would love for someone like you, I’d love to introduce them and say, “Go work with a Kruze or someone else like that to put this in place so that you can thoughtfully plan.” Because if your financing plan isn’t in sync with your business plan, that’s when things tend to go wrong.
Scott: That’s a really great quote there. I totally agree. And also, it’s like, it kind of comes back to that, are the founders responsible and thoughtful people? If you haven’t put your financial infrastructure in place and don’t know your runway, it’s I’ve been on the investment side too, but I imagine you’re thinking, well, what else do I not know? Have they not done properly? And so it’s not just about, it’s trying to fly an airplane in the dark because you don’t know what’s going on, but also the signals you’re sending to folks like you, is just, it’s not a good signal to not be organized and have everything set up. A question we get from people who are just coming to us. A lot of times, not a lot, but sometimes they’ll come to us with the financing being a forcing function. Is there any negative signal value? If you’re sitting around waiting for financials for two weeks, are you kind of going, “Hmm, what’s going on here? Why don’t they have their house in order?” Are you going to give them the benefit of the doubt and say, “Okay, let’s do the deal, but get your house in order after we get this thing closed.”
Patrick: Well I wouldn’t do the deal until they have. I wouldn’t. I just wouldn’t do the deal. I just say, “Let’s wait.” Same times they’re busy. Sometimes there’s a higher priority here, I got to get my product launched or something. Another product launch or something has to be, typically there’s a lot of things going on in their business. And so, I’m usually patient on that. I think, the other day I had a call with an entrepreneur and they said, “Well, I have some basic financials here, but I want to get them in better shape. Do you want to see the ones now? Or do you want to see the ones that I’m going to put into better shape?” And I always say, “I’ll wait, because if you show me the ones that aren’t great, I may just turn off and say, ‘You’re right. This company is not prepared.’”
Scott: Totally.
Patrick: And this is garbage. When you get garbage, you start to wonder, you’re right, what else isn’t going well? But also, they just, they don’t have an idea. They don’t even know why they’re taking my [inaudible] because they can’t figure out what it’s going to buy them.
Scott: One feature of your fund that I really like is that you guys are, you’re kind of the size where you’re super complimentary to some of the other players in the venture debt ecosystem. You want to talk about that a little bit?
Patrick: I designed the fund that way too, to say one, I’m always the person who likes to partner and I’ve done that a lot in my past with folks like you, with lawyers, with accountants, but also with and venture funds, of course, but on the venture debt side, the nice part is I’m not competing with, I don’t have a big, large fund that’s competing with the whole late stage and I’m not doing a full gamut of stages. I’m just focused on early stage. And particularly this seed and early series A stage, I think it’s appealing to groups like the banks and having spent some time with them where there, and I think COVID again, they’re moving a little bit more up, but they’ve never really been super comfortable with the seed stage round. That three or $4 million financing, they kind of want to see it be a little bigger and more meat on the bone and a bigger named VC possibly in the deal. And so, I’ve said to them, “Hey,” and I’m not in the banking business so I’m like, “hey, while you keep the banking business, I’m not in that business. Why don’t you send me that? And then look, I’m happy to hand these over to you, not just for the business, but for the bigger series A or B deal down the road.” And so, I think that part really resonates with that group. And then I think there’s some other funds that are just have grown to be and bigger. And they’ve said to me, “Hey, if we see some early stage stuff, we’ll show it to you. If you see a later stage thing, show it to us.” I’m sending them later stage leads and there might be something in between the two where we can actually partner and I could do a smaller piece and they could do a bigger piece and we could give the company what they’re looking for. I think it’s really advantageous and nice to have to think about that, the ecosystem and be open to partnering and working with people. Again, those would be most of the people I’ve worked with before and know and groups of that.
Scott: Yeah, you made so many great points there because sometimes the deal is just not quite a fit for a bank or even some of the big venture debt funds. And they can kind of try to squeeze or maneuver into the deal working. But I think it’s better for them and for the client, for the startup to work with someone like you, who’s perfectly sized for the opportunity. Everyone’s aligned. And I think the banks know that they’re going to get another shot at the deal when it’s a lot bigger. And meanwhile, you made the great point about they get to retain the banking business, the deposit business.
Patrick: I’m sure they are.
Scott: And that’s valuable for them. That’s a really core part of their business. I’m thrilled for you. I just think you have such a good setup here. I’m expecting that this is going to be very successful and then two years from now, we’ll be doing another podcast where you raise a $100 million fund or $200 million fund or something. Something that if you want to, you might want to just keep at the size you have because it’s the perfect amount of money. You don’t feel pressure, but you can also do enough deals.
Patrick: Yeah, I did design the fund to be smaller and didn’t feel like I had to raise a gazillion dollars. I thought about those types of things. But I said, “Look, I really think this is a winning strategy.” And yeah, I’m focused on this fund and a 100% on this fund and my head’s down. I hadn’t thought much about the next step after that. But I think for now, it’s validating this strategy, which seems to be validated. Go out there and make good investments and return capital and make money for my LPs is my number one priority.
Scott: Yeah. That’s awesome. Before we go, there’s one other point that we were talking about before we turned the mics on, which is the company that get the work with you, they’re not working with the new associate who doesn’t quite understand venture debt or doesn’t quite understand startups. I think that’s really special that they get to work with someone with your experience level who really frankly, has seen everything, good and bad. Are you getting that kind of feedback in the marketplace?
Patrick: Oh yeah. That’s fun too. And I don’t have to sort of go, well, let me go back and check with my partnership. Or we have to go through an investment committee meeting or the bank has all these layers of approvals. Because it’s a big organization. The bigger you are, the more you have to do that. It’s not a bad thing, it’s just that’s what happens when you get big. It’s really nice to be able to just say to someone, they say to me, “Well, who’s making the investment decision? Who’s monitoring the company? Who’s tracking it? Who can I get help with?” I’m like, “I’m all the above. I’m taking out the trash and I’m doing everything.”
Scott: Really from working at your house, you’re taking out the trash.
Patrick: Yeah, literally. Literally. When I get my office, I will. It’s soup to nuts. And yeah, I can’t hand that off to someone else anyway. I want to make sure each investment I’m working on and making sure I’m on point on it and that they feel they can call me and you’re right. I can give them more at least experience and here, I don’t have all the answers, but I’ve seen this and I’ve seen that. And do you want help with this or with that? Can I make introductions? Help you with your future financing, help you with your financials? As you think through scenarios and things like that. It is nice to be able to say, I can lean back on 25 years of experience and that again seems to be resonating.
Scott: Yeah, that’s awesome. Well, maybe you can tell everyone how to get a hold of you, how to reach Top Corner Capital and how to get a deal started or even if they have a friend who’s raising venture debt, how to get them in touch with you.
Patrick: Yeah, my emails are probably the easiest. It’s just patrick@topcornercapital.com. And then I’m in the process of building, I have one basic website up there, but I’m in the process of building a little bit, a more robust one that’ll have also a contact page on it. But I think the best way is just to email me. And I’m usually pretty responsive and we’ll promise to be transparent and simple and straightforward with anyone who comes to me and tell them right away, these fits or it doesn’t fit. And I think move quickly too. That’s the other thing I’ve heard as I’ve talked to a lot of VCs and micro VCs specifically, they’re just like, “Hey, how fast can you move?” I was like, “As fast as you want me to.”
Scott: Because it’s you, you’re making the decision.
Patrick: Yeah, that’s another great thing.
Scott: And you have all the experience to know what a good deal looks like and what one that doesn’t fit looks like.
Patrick: Yep. Yep. And then to be able to paper a document and get it going. And I think that’s the other advantage of venture debt, it’s not a long, complicated process. It should be pretty quick. Especially at the early stage.
Scott: Yep. Well, Patrick, I’m really happy for you. I’m proud of your success here and I look forward to working on some deals together and just kudos to you, man. You’ve raised a fund and you’re just in a great position to succeed.
Patrick: Well, thank you so much. You’ve been a good friend and partner along the way and I look forward to working with you guys.
Scott: Awesome. All right, man.
Singer: (singing). It’s Kruze Consulting Founders and Friends with your host Scotty Orn.

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