 The topic of our conversation today is on innovative fund models and I'm joined today by three experts Who I hope you hear a lot more from than you do from me So I wanted to just tee up our conversation a little bit and then let these three have the stage Just wanted to thank you all again for being here. Thanks to so cap for hosting us Thanks to Michelle who's been a fantastic point of contact for us and helping to organize this panel We had an amazing last-minute substitution with a sick panelist and you're all blessed To be with another incredible panelist on our stage today. So some incredible adaptability from the so cap team It's been great to work with you all I wanted to do another show of hands Question for the audience really quick before we get started who here has ever made or received an Investment or some sort of capital transaction that was neither debt nor equity Something kind of funky in the gray areas Hope you guys raise your hands Tessa Justin Cool, okay, so that looks like maybe a quarter of the room So there's some folks here with a little bit of experience with what we're talking about today And hopefully a lot of folks with just some great genuine curiosity Our goal as panelists and and in bringing this this to you all today is to sort of just demystify Some of these examples of non-traditional capital products for entrepreneurs I hope you leave this session today with some of your questions answered and hopefully a lot more curiosity about this subject Then maybe you began with and frankly I hope you leave today knowing three great examples of interesting innovative fund managers who you can go to to ask specific questions About their models and how they came to the conclusions that they have so If you don't leave with having those accomplished today, then I am to blame and you can personally find me afterward I Want to start by asking each of our panelists to very briefly introduce themselves And so the basics of of how I hope these folks can introduce themselves. Hold on between my two pages Follow this theme who you are where you're based and where you work What your fund is and what it's called and how you invest in businesses So this is you know relatively straightforward a few minutes each Could you all go down the line and give us kind of like the who where what and how of who you are and what you do? Yes, I can start. So hi everybody. My name is Tessa Flippen and I'm the founder and managing partner of Capitalized VC I am based in Chicago and that's where the fund is based and we invest in diverse founders At the intersection of e-commerce infrastructure and enablement and CPG brand And so we look to invest in founders both using equity traditional VC Structures, but then also a redeemable equity or what I like to call revenue-based investment vehicle Hi, everyone. I'm Justin Schwartz managing partner of Impacto capital Impacto capital is a fund based in Ecuador. We invest in the Andean region of South America In startups in social environmental impact startups using revenue-based financing Hello, hello. Hi everybody My name is Deon Cook co-founder and CEO of Ninchum co-op based in Seattle, Washington Was the what oh, yeah So our fund creates safe pathways for black entrepreneurship and innovation and we really invest in We look to invest and create a thriving black business community to serve as anchor for economic ability in the community Awesome. Thanks guys. I hope that you all in the audience can see already here We have sort of an example of a continuum of capital products like we typically call them That serve a broad continuum of entrepreneurs And that's sort of one of the themes that I hope you pick up on from this conversation Is that when you step away from sort of this false dichotomy of debt and equity being the only sort of capital products for entrepreneurs You can see that there's a kind of a broad spectrum of capital that can serve a broad spectrum of entrepreneurs Capital needs and you'll see you'll hear examples of that from these three panelists today So broadly these are the things that we'll talk about with our three panelists today And these are the sort of areas that I think it'd be great for you all to chime in with questions about We really want to hear from the audience because I know this issue is these issues in general are Complicated and nuanced and your questions. No such thing as a bad question, especially in this context. So your questions are very welcome The broad themes we're going to talk about are how these folks have designed their funds and their general strategy for their funds What they're doing how they work and why The issues of educating folks about their fund both the entrepreneurs who will receive innovative non-traditional capital and the investors who obviously have to capitalize these funds and Understand the sort of mission of the fund to provide capital in a non-traditional way and then of course the outcomes I mean the the why we're all here What happens when you run a fund like this and when you make these sorts of investments or capital infusions into businesses so Without further ado, and I wanted to say first of all one more thing in terms of like level setting here we want to commit to using sort of like laypeople's English and so if there are terms that we use that are Not intuitive, please ask us to clarify this world is full of unnecessarily jargony Language and we we aim to be really sort of straightforward with how we describe this stuff and and like Sharnay said with our introduction Please bring your energy We'd love to see a room full of curious faces So if there's thoughts you have make sure you write them down We'd love to address them in the Q&A section. So with that I'd love to talk a little bit more about the fund design story with each of you And so maybe could you start and we can just go down the line in this order like before Could you start with the problem of unmet capital needs and maybe an example of an entrepreneur that you Have worked with with your fund and how your sort of non-traditional capital product helped solve a problem for him or her short so At capitalized I mentioned we invest in technology companies So these are you know technologies and tools that ultimately can plug into a consumer brand So they're in this like world of commerce world of commerce enablement But then on the other side of the table we're investing in consumer brands or CPG companies And so that really is where we've seen an interesting need for You know more creative funding structures like this revenue-based investment vehicle and so What we've seen is that there are Amazing diverse founders on both sides of the table And I think over the last few years a lot of these numbers have come to light around You know the percentage of black founders or Latino founders that get investment And so we are focused in that area on the tech side But I think what we also have seen is that there are really talented founders that are just not in technology-based businesses and so what did they do and so You know during the time that I was developing the thesis around capitalized I was like you know When I see these you know diverse founders these amazing founders that aren't developing tech companies like what do they do? Where do they find capital because? Banks typically aren't reaching down below a company that's doing a million in revenue annually They're not investing or you know funding companies that are not profitable yet And so like there's not an opportunity for them to access bank debt But then also a lot of VC funds don't like investing in things that aren't tech And so there is a world of non technical founders that have very few options And so we wanted to incorporate that into our strategy for one reason being that we wanted to support these types of founders And so for example, we have invested in a coffee company So we're based in Chicago. We love to invest locally although we invest across the country But this coffee company, it's called creepy coffee. They were our first revenue-based investment and They had bootstrapped their way to doing about a million in revenue, but they had still not access bank debt And so we were able to come in we invested over two investments. We invested a hundred K total And then at that point we give those companies a six-month grace period And then they start making payments back to the fund as a percentage of revenue And so this percentage for them was like less than I want to say to maybe a little over 2% Of revenue on a monthly basis, so it's something that is bite-size And they are going to be making those payments back to us as a fund until they have returned us two and a half times our Investment and so that's kind of how we structure it But what we've seen is that this coffee company has then been able to Attract other types of capital with the opportunity that we gave them to increase their revenue kind of in the short term And so we've brought in partners of ours from the family offices that have invested in our fund to Double down and co-invest with us and that has been a really interesting opportunity. So I think we were kind of that like in between Financing vehicle that allowed them to then get to a point where they were attractive to Another larger funder who invested a lot more capital than we did in our case Yes, maybe one question for the audience. Can you raise your hand if anyone here is from Latin America or working in Latin America? Okay, great. We have we have a few I Think and it's great to hear Tessa first because I think there's some interesting similarities and differences between the challenges that We saw in Latin America and in designing impact of capital and what Tessa was describing. So some of the similarities There are geographic Disparities and biases when the US might be that San Francisco Boston, New York get almost all the venture capital in Latin America Where which is a region of 28 countries? Two countries get 60% Receive 6% of venture capital funding in five countries receive 90% To come to biggest economies in Latin America being Brazil and Mexico and so You have all the other the countries were focused on the Indian region, which has some of the smaller Forgotten countries. So there's there's biases there and then also the the similarity The diverse founders have trouble accessing funding diverse or unrepresented founders in Latin America Exactly what that means might look a little bit different than the US But the principle is the same female founders receive a very small percentage of funding indigenous founders receive a very small percentage of funding And so there's similar gaps in access to VC from that perspective And then of course the type of business as Tessa was describing not all businesses Can or want to access VC a couple of important differences in Latin America The VC market is much smaller and not as deep The US is 25% of global GDP and receives 50% of global venture capital funding Latin America is 1% Excuse me 6% of global GDP and we've received 1% of global venture capital funding So significantly smaller as a percentage of GDP and it's much harder for even a founder who might check the traditional boxes to Raise venture capital another important difference Is the banking system? It's a challenge for founders in Latin America to access the banking system But even more the banking system is even more conservative and less flexible than it then it might be in the US And companies can have millions of dollars in revenue and still not be able to take up out of bank loan without putting a guarantee putting down their their grandma. There's houses a guarantee or Having to go to other more extreme measures so Really those are the inputs that that led us to create impact of capital understanding the difficulty in access to VC on one side the difficulty in accessing Bank financing on the other side and understand that we needed to create a mezzanine instrument in our case revenue based revenue based loans They can they can fill that gap and they can work for founders who might not have access to other types of capital our investment structure works actually exactly exactly the same as what Tessa just described And I guess maybe one other point kind of in our journey of a fun design so impactor capital As a fund is a spin-off of impact though, which is an ecosystem builder that's been operating For almost 10 years as one of the main players in impact investing in Latin America accelerating over 300 entrepreneurs Impact startups from from all over the the region Also hosting impact investing events and really kind of seen we saw where the gaps were In the access to capital through that work And that's what us what what led us to to create the fund and in the end to go with this Alternative investment instrument and revenue-based financing specifically. Yeah, sure example of a deal There's a proving proving company that we invested in called Elsa My Len is here. If anyone gets a chance to meet her. She's amazing Elsa is a price of technology platform that allows companies to prevent sexual harassment in the workplace and companies that they use their tool see a 60% reduction in in sexual harassment In there in their organizations and they have great great traction or scaling quickly and really addressing something It's a huge problem not only in Latin America, but but globally and and very impactful in what they're doing Yeah, so I think the journey for Dincham was a winding path but it's really roots back to the policies that were Established to to generate wealth for select groups and excluding other groups in this case black Americans So you think of things like the GI bill That allows for folks actually build wealth We were you know, my ancestors were excluded from those opportunities And other asset-building opportunities So that's really the root of all of this and Dincham really I wouldn't have said this at the beginning of Starting Dincham, but we really strive to kind of be the rich auntie and uncle that we all deserve That we would have if it wasn't for those exclusionary practices Yeah, and and the whole approach we use revenue-based financing as well And the reason for that is because I saw companies like lighter capital doing this for sass business Businesses, and I just figured we deserve that as well. We deserve flexibility for seasonality of business of owning a business and Yeah, just opportunity to really focus on growth as opposed to paying back debt So that's really what went into creating the the approach that we have My favorite examples are very first loan, which is Jacob Willard home is a vintage furniture store He referred he is like a fanatic of vintage furniture You would have never guessed it, but he's like he'll go in if he sees a piece of furniture It'll be like, oh, I know what year that was made who made it The the economy at that time he'll go all the way in but he was he was in business for five years Was actually thinking of closing just because he was having a really hard time His showroom was actually more of like a warehouse He wanted to use our that initial loan to kind of clean it up and make it more of a actual showroom Where people can actually test the furniture out And so he was at this crossroad of either clothes closing down his business and starting something else or going back to You know to work for another company Or taking out this loan Let me backtrack a little he's actually he actually had experience as a mortgage lender And he had never applied for a business loan because he knew that on paper He would not he would be looked at as a risky loan So he didn't even try to apply for a loan and that's actually true for a lot of black-owned businesses So he got to know each other You know, he learned about what we were trying to build with Dencham And he felt comfortable enough to take out a loan from us. And yes and sin. He's actually had some of his best years Especially during the pandemic a lot of people like getting getting new furniture during the pandemic And he had it all Oh, yeah That's great. Those those Case studies are examples. I think really like bring home these concepts And so maybe let's double-click on the entrepreneurs for a minute in particular You all have come to the conclusion based on your observations that you have there's a solution for a market need In each of your communities there's entrepreneurs with capital needs that are not currently being met by their local capital markets and You have an idea for a solution that doesn't take the shape of a traditional Debt product or nor traditional equity investment as some would say and it's kind of nuanced It's unique and you see the way in that it works and creates these kind of like shared mutual incentives with entrepreneurs It models out as a portfolio over the course of the lifetime of your fund Which is good for you all as a business But how do you get the entrepreneur to understand this novel capital product and what's the experience of that? Like it's costly I imagine in the sort of time and energy that you spend with entrepreneurs or maybe it's not but I'm curious What's your experience? Like helping entrepreneurs understand something that is otherwise, you know Not market standard for the way they capitalize their businesses We can go we can go inverse orientation inside. Yeah, I mean I'm gonna say this as many times I can it comes down to Relationships like with Carl the first loan We got to know each other for probably Like five months before we move forward with any actual loan conversation I Was a client. I bought something of his that I probably Didn't actually use But just to show him that I'm investing in his business and I'm coming I'm not just coming to try to sell a loan to him And I think like for some of our other partner or other clients It just takes a really long time for them to trust any kind of lender in the first place It helps a little bit that I'm from the community and that I am also an entrepreneur So we can connect on that level but actually just being really clear like look our loan is 1.1 X return on a $10,000 loan It's a $1,000 fee when we spread that out evenly over the 36 months So they're actually only paying for the fee For the time that they're holding the loan And so I try to be as clear as possible in the early days when it was just me With our with our potential borrowers that this is really a low-cost Accessible loan that's meant to help you grow And we keep our all of our documents as clear as possible And even then they might not read the whole thing right like I don't know another show of handsplush And how many of y'all if how many of y'all on a home? How many of y'all read and understood everything in your signing documents there we go. Hey, I need to hang out with you because that was But we try to make it as simple as possible and and not not not Not dumb it down, but just say like look these This is how this works if you have any questions Let us know and then even after the loan is already out there like let's continue to learn about it Right because it's not going to be clear on the on the first day in our case Our team our funds been operating for a little under a year teams talked to somewhere between four hundred and five hundred startups Or founders I should say I Don't we don't keep this check this metric would be interesting But I'm guessing probably less than 10 had heard of revenue is financing before the conversation with us and so It's a it's a completely different experience the revenue is financing fund talking with the founder because you have to allocate 15 minutes of the meeting to Explaining how your fund works and and why it's interesting. I Mean I'm sure those of us who are in this world. I think we we sort of accept that This requires more effort and more time and more passion than than VC VC investing because of the time you need to spend with that with entrepreneurs And also with with LPs with I think we'll talk about later. So I think we're always very honest Revenue is financing is not the best solution for every business And I think you have to have an honest conversation with with entrepreneurs Explain how the instrument works what the advantages are And say in your case, I don't think you should take I don't think you should Continue the investment process with us because this isn't the right financial solution for you There's very few I talked a little bit about the the restrictiveness of the banking system in Latin America There's very few debt funds. So there's very few access to debt Period for early-stage entrepreneurs Or even even later stage entrepreneurs So understanding having the conversation with entrepreneur of why is should you look at debt? I mean, there's this culture I think this is just globally is this culture of equity culture of the announcing the valuation of the of the startup And how much money was raised and knows no startup ever announces. I read, you know We reached five million dollars and in revenue today It's all about the the financing that's raised and it's all about equity rounds And so having that honest conversation entrepreneur and saying debt exists and you as a founder you can raise debt And not only that there's this interesting, you know, mezzanine debt flexible capital that we're offering and this is why it's interesting So it takes it requires a lot of education I'm hopeful in the earliest parts of our journey, but I'm hopeful that it's also a virtuous cycle Where our portfolio companies talk to other entrepreneurs and entrepreneurs in general try to start to hear more about Alternative financing instruments and also, you know, there needed to be a lot more funds doing Doing what we're doing and hopefully over the coming years There are a lot more Latin American funds doing that and it becomes a normal thing for entrepreneurs to for the first step of a fundraising process To be what type of capital should I raise not I need money. I'm gonna raise venture capital Yeah, my experience is actually very similar to yours Justin so I have had conversations, so I'll just say a lot of founders step into the fundraising world and they're like I need VC and I think it's not talked about enough that VC is not the silver bullet for all companies And so and we market ourselves as a VC fund like we are 90% a traditional VC fund with this very interesting feature And that's how I kind of describe it to LPs, which we'll get to but I think So we've had we have founders come to us thinking we're a traditional VC fund and We get into the first conversation and I'm like immediately telling them, you know We invest in in consumer brands a little bit differently and this is how we do it And so we spend part of the meeting talking about that and I like to be very upfront about it And so we've had experiences where founders take that very well but then we've also had experiences where founders like really don't take that well and and so I Do share with them that you know, this is a more expensive Offer than a traditional Commercial loan like it's just it's a more expensive vehicle for you, but it also has these benefits that debt doesn't have and that equity doesn't have and so I spend time talking about How you know? debt is this Consistent, you know payment on a monthly basis that has very little flexibility But at the same time it doesn't take ownership in your company versus equity that is Long-term, you know, you don't have to pay anything back But it's taking a large portion of your company from you potentially and so we're right here in the middle where we're offering you this growth oriented type of Funding vehicle. We're aligning ourselves with your growth And at the same time offering you the opportunity to buy back your equity over time And so for a lot of founders like after having some, you know parts of that conversation they They want to learn more and they're more interested in it. And so we've had Conversations all across that spectrum But I think what we've learned is that through our process. It makes the most sense to Put something in front of them as soon as possible so we've made the mistake of going through like an entire diligence process and like explaining it to them but Getting to the end of it and getting to like a term sheet stage and they're like wait What are all these different terms like what's going on here? And so we actually after a first conversation we say, you know, we want to make sure this is the right fit for both of us And so we're gonna ask for your financials and in return We're gonna send you an example of a term sheet that resembles Something like what the steel is gonna look like so that you can look at it You can talk to your advisors about it. You can talk to your team about it. You can show it to anybody But ultimately that helps us align in Conversation to on whether this makes sense to them whether it makes sense for us and then from there our diligence process really is just like us Confirming those numbers that we sent them in that early term sheet And so that's how we've kind of shifted our entire process and kind of flipped it on its head To make sure that we're being extremely transparent with founders and we're kind of helping them learn as we go As I'm listening to you all talk about the time and energy you spend investing with entrepreneurs educating them I'm struck by how the future of innovative fund managers will all benefit from the hard work that you're doing now That your funds may not be able to benefit from but 10 20 years from now when these things are market standard You will have paved the way with the hundreds of conversations you have with entrepreneurs who now are more familiar But weren't a fit maybe at this point so you'll be owed a debt of gratitude Maybe if this is recorded somebody 10 20 years from now watch it back and give you guys your flowers So we mentioned this or alluded to this several times There's the complex issues of explaining and educating entrepreneurs on these non-traditional capital products But ultimately it sounds like when it's a fit it's understood by both parties and entrepreneurs who need capital understand that this capital is well-suited for their business when When it's clear that that's the case for both parties in all of your instances the RBF structures revenue-based financing structure Has unique components which sort of align your interests with theirs in ways that other investors may not They're not just one of a spray-and-pray strategy in a venture capital portfolio They're also not just a fixed-interest term loan which otherwise, you know repays on the same schedule regardless of your Interventions post deal and so there are all these sort of like ways that you are Incented so I can see how entrepreneurs come to eventually understand it the other issue then is the upstream Education which is for the investors that would capitalize your funds or your strategies So I wonder how has it been for you all and how do you educate? How do you communicate your non-traditional fund structure to the institutions that that capitalizer would capitalize your funds? Maybe Justin you want to go first? Sure, I don't know which is harder educating entrepreneurs educating LPs, but they're both difficult I Guess our journey We started fundraising for impact to capital locally in Ecuador talking with with Ecuadorian families and individuals and I Don't think we could have chosen a harder place to start because We were talking to a group of people Who had didn't know what impact investing was had never invested in a close-end fund? had never invested in a Startup or in a fund that investments had never didn't understand that world and then adding on top of that this this innovative Financing model is revenue-based financing so the educational process was Was was difficult and And to and takes time and building relationships We're by our nature were ecosystem builders and so building up the LP ecosystem Is something that we're proud of and hopefully those LPs invest in other funds and and not just in ours and we can have more local capital from Latin America from From the region investing in entrepreneurs in the region when a lot of families with wealth in Latin America have most of that wealth in Outside of the region and their home countries. So that Really the conversations there Touched, you know the model and and what we were doing, but it was so many new things to that group of LPs That it was it was part of a larger conversation the other half of the capital we've raised in the fund comes from more traditional us investors individuals families and foundations in the US and they're similar More familiarity with all the other aspects I mentioned, but the but the revenue-based financing World is quite small and and and most people Don't necessarily understand it. So a lot of education on that front. I mean the risk return profile of a mezzanine debt investment like revenue-based financing is Different than the risk return profile of venture capital and that's true at the fund level and it's true at the LP level So a venture capital fund will go into an LP's Office and and have a chart showing the top Decile venture capital funds have a 30 35 percent IRR and And that sounds great. If you look at the reality the median venture capital fund has very mediocre returns Investing in mezzanine debt fund has different is not has different returns And you can't even pretend that you're gonna have those kinds of returns So understood a lot of LPs think at least the LPs that we talked to you think only in return In terms of return and don't think about risk And the debt investment has a different different risk profile than than equity investment So those are some kind of some of the the questions that we got and the conversations we had There's a very small group of LPs that are very passionate about Alternative financing and hear revenue is financing and get excited If anyone else in this room is is get down the same path that look for those LPs They're they're amazing, but but they're few and far between hopefully in the future. There'll be more so with capitalized we have a pretty diverse group of LPs in our fund But it didn't start that way and so when I decided to go about this journey I spun out of another VC fund and I went out to raise and My network looked very different from a lot of the other LPs and funds Historically and so I was raising from people who are women who are people of color who are first-time LPs And when I went out to have that conversation, you know, hey, I'm starting a VC fund Do you want to invest it was like, okay? Well, what is your minimum commitment or minimum commitments 50k? Okay, well, that's doable for me, but when do I get my money back? And that was kind of the conversation I had multiple times over and so I realized very quickly that Returns or like liquidity was important to this demographic of LP and that those were the LPs that I had access to in those early days and so We were able to pitch our fund in a way that allowed us to say You know to these individual LPs these high net worth individuals that we could ultimately See some returns from the fund come back to us in years five to ten And so that was really exciting to them And so we started out raising from strictly high net worth individuals and that was our first probably two or three closes And then we were continuing to kind of figure out the pitch as it related to larger institutional investors And if anybody in this room is a larger institutional investor, you know that You don't really care about early returns What you care about is maximizing the capital in the return of the fund And like you were saying like they want to see, you know 30% IRRs and 3x plus cash on cash returns. And so for those investors We had to figure out how to tell the story in a different way and so we were able to kind of Create a structure That allowed us to then recycle those early returns for a subset of our LPs And so that's ultimately what we're doing and what's worked for us in having those conversations is to say Well, look, we're getting these early returns, but we're recycling them into the fund And that's enabling us to actually cover off on a lot of the costs of the fund that you know come out in the form of management fees or fund expenses and so We are we have yet to see like obviously the results of that But I think the LPs that we're talking to either understand it or they're like look This is like a little complicated, but we trust you like we are open to this Concept and we want to see how that works and these are institutional investors like Corporates or fund of fund LPs. We have some family offices as well, but like We're talking to a foundation now. And so it's like There's Opportunities out there, but it's definitely like you have to learn how to tell the story in a way that resonates with them And a way that actually makes like financial sense to them because if you just go out there and tell them you're changing everything That's existed for centuries like they're gonna be like what like no, thank you So that's kind of been our journey and how we've been able to circumnavigate it Yeah, I think for Dincham it's Less about educating because we're still learning ourselves one of my favorite Phrases that I kind of live by is make the road by walking So instead of like trying to educate potential investors. It's more about learning together And and building relationships keep going back to that We have probably a handful of investors that have really supported us over the last five years And I think from there You know the idea is that they will be able to explain their journey with Dincham And then we can kind of grow in a methodical pace like that And I feel so blessed to have the the time space and resources to be able to grow that way Because that's exactly what we're trying to afford for our clients as well So yeah, again, I think it's and I was a teacher So education I take it very seriously and actually that phrase I got from Paula for Harry if anyone knows who that is Anyone know who Paula for Harry is yeah, he has he has a book called make the road by walk and I recommend it But yeah, education is is very important to me, but I think in this case it's about learning together Yeah, yeah, that's really good. Thanks, Dan. So in terms of communication with those folks that you all just mentioned the Investors the would-be investors a lot of them probably ask about the outcomes from your Innovative fund models or the capital products that you're providing I know you're all very early in your efforts and kind of like early days, but I'm curious How do you quantify both the impact and the pure financial metrics? That you keep track of for your funds or for your strategies What is success look like for you and how do you plan on sort of communicating the inevitable? Information that you collect to your LPs to the investors to the community at large to help folks understand whether this is something worth doing themselves It's a clearly a nascent Community in general and you're some of the front runners doing this with like a few years experience under your belts respectively But curious how you're all thinking about the issue of sort of like impact measurement Quantifying outcomes and what are the what are the kind of variables that for you move the needle? For us, I think the ultimate Display and the way that this will ultimately catch on is through the founders through founder stories and successes And so I think you mentioned earlier kind of something along those lines, but We are really trying to ultimately amplify our founders and have them share it with their founder communities To all to ultimately get more founders kind of thinking about this instead of just like going straight to VC I Think from in the LP perspective. I mean we are Tracking the number of companies that we're investing in like this. So we've done to so far We have a pipeline of like 10 that we're kind of in conversations with it at this time And so just showing them that like this market exists I think is an interesting metric for them to understand because Oftentimes they're like, what are you talking about? Like this isn't a problem And and so I think by showing them that there are founders that are open to this is helpful for them and then we are also I think Seeing that one we're seeing returns come back. So like on that hundred thousand dollar investment I mentioned in the coffee company It's been almost two years since our initial investment and we've already seen over 50k come back So as soon as we do our final close We will be paying that out to a portion of our LPs and we'll be recycling it to the other portion of our LPs And so they'll be experiencing this like real-time with us and we're tracking that on a Quarterly basis so that they can keep up with us on that side of the table But I think something that we are Seeing that's really interesting is that we're also Co-investing with our LPs on some of these deals and that I think is a pretty interesting piece of this is like a lot of and and these co-investors are our Family office LPs and so what I'm seeing is that for these CPG companies They're oftentimes hiring more in their local communities Which is impact and that's the impact that a lot of family offices that are locally You know investing want to see and so there is this opportunity for deeper impact in communities Which we're tracking by thinking about hiring local talent And creating jobs, but also seeing that increase in investment downstream As we're bringing on co-investors alongside of us For us on the financial side, I guess the one thing I would say I don't know if we have any LPs in the in the audience, but The in the VC world funds often talk about Talk about the multiple on the fund Talk about a three times or a four times fund is a good outcome the I think Understanding the LPs understanding that kind of as Tesla was saying that the return on that is coming after Five seven to ten years. I think I saw some of the average VC fund now is is is 12 years and some up to 15 years So sometimes we're multiple on Capital for the fund that sounds attractive actually isn't that attractive in IRR terms in in the VC in the VC world and I think That's we talk a lot about really talk focus on IRR Because I think that's the most relevant metric for for revenue is financing fund and a way to differentiate On the on the impact side. So we're an impact investing fund. So that's a key part of what we do. We're only investing in Companies that are that have a deep social impact among vulnerable communities or a strong environmental impact and we are Working with those companies to develop develop impact metrics and define impact measures in our loan documents We include those impact metrics and require them to report quarterly Their progress on those metrics and we we report those to our to our LPs both at a company level and a portfolio level And our P's are our LPs are really motivated By the impact is that's being generated by the fund and they like the fact that we're we're an impact investing fund So that's a key part of what we do. We do and and how we report to our LPs and And also talk about externally to the general public the the impact that we're generating through the companies That we invest in and their beneficiaries Yeah, I think for us Attention we are like really checking in on our clients So I mean the reporting to our our funders Is important but more importantly is the world being of our clients and then from there We can say, you know, the reasons why our borrowers came to Dencham We can look at the traditional things like how many jobs were created or how the revenue increased But really at the end of the day, it's how is your quality of life as a borrower because of this product that we provided for you? Yeah, so it's the priority is for Advention the priority really is our borrowers and I think our investors are our values aligned with that and they understand that so we don't We don't compromise our mission and vision for the impact reporting with that said, you know in order to reach higher levels We have to make sure that we are you know following best practices But still at the core it's always the well-being of our client. So That's what it is It's great. Thank you all I want to make sure we have a lot of time for Q&A. I hope that everybody who has questions has gotten access to a card This is a good actually moment to check raise your hand if you have a question for these panelists Proudly got to see him. Love it. Thank you so much. So proud Okay, great. If you've got a question, have you been able to write it down same hands? Yeah No, okay. Well, if you have a question, let's make sure you can write it down Would love to get those from you all I want to give our panelists one chance to have kind of a final word On the subject if each of you I didn't prep you for this So shooting from the hip here if each of you have a common misconception or something you'd like to clarify or one thing You'd like folks to understand about the innovative capital product that you provide or the sort of nature of Not traditional capital for entrepreneurs in general There's anything you can think of that you you wish you could clarify or that a room full of folks who've signed up to hear about This you wish they understood is there anything that strikes you? Deon maybe first. Sure. Yeah, I guess I would just say While there is a greater movement For the whole BIPOC community each member of BIPOC has unique needs That needs to be addressed So we are very intentional that our costs are low and accessible for black entrepreneurs and this is This is because we have unique needs in each community, right black indigenous and all POC So I think it's good to have the collective and we need to make sure that we are addressing the needs of each one of those And then yeah, we're intentionally keeping our costs low So 1.1 X is very very low a lot of people look at me like I'm losing it But it's by design where a social-purpose corporation and we're going to continue to do that We'll never pass our costs on to our clients. I think whether you're an entrepreneur and investor Funder Let's let's kill the cult of VC Nothing nothing against VC and test of us as a VC model as well. The first question any Entrepreneur or investor should ask is is what's the right type of capital for this company? at this moment and We're skipping that and for for some percentage of the company the answer is VC and and and I think VC is an amazing innovation and an important part of The ecosystem, but we're skipping that question and I think the answer to that question for for a lot of entrepreneurs is Alternative financing Sources whether that be you know revenue financing is just one we're all revenue financing investors here But that's just one type of alternative capital structure. We need more innovation There's more and more investors that are innovating and and we need to also make sure that entrepreneurs Know about this this and and that everyone in this room, whatever your role can be evangelists for alternative capital structures I Think mine is something I touched on a little bit earlier today, but I Be just because we're doing some revenue-based financing doesn't mean we are discretionary or like not going to be Achieving or going after the you know venture scale returns ultimately at the end of the day because there are Interesting things you can do behind the scenes in order to recycle capital in ways that still allow you to achieve that Awesome. Thank you all Got some great questions here from the audience. Looks like we've got some more being sourced If I don't understand your question completely I'll just ask you to clarify it and I hope I don't call you out by doing that You're feel free to ignore it if I botch it and you don't want to claim it So I'm just gonna read these on the fly How is venture capital and revenue-based investing for small minority and underserved not the same thing as Predatory lending at a 2x repayment on RBI and giving up ownership percentage for VC. Does the flexibility justify the means mmm Let me read it again. Yeah, yeah How is venture capital and revenue-based investing for a small minority underserved? I imagine that means for a small minority and underserved business business owner Not the same thing as predatory lending at a 2x repayment on Revenue-based investing and giving up ownership percentage for VC I think an important clarification here is that between the three panelists on this stage. They are aiming to serve a wide variety of entrepreneurs and so while 2x sounds like a very expensive rate For an entrepreneur to pay for borrowing money, especially when compared to like bank rates, for instance Deon serves clients in the Seattle area with RBF at a 1.1 rate Very competitive and is a much more flexible lender than any credit provider in the region would be willing to be Deon's organization Densham provides capital without any of the formal underwriting rigmarole that even CDFI's in the region are typically providing and so that serves small business borrowers that may be going after credit now For instance, some of the borrowers that would come to a Tesla or come to a Justin at their firms These folks would otherwise be seeking the sorts of high-risk growth capital that if they were successful in achieving venture capital money for Their business would cost them Exorbitantly more than 2x 20x 200x for the cost of capital in terms of what they give up an ownership of their business And so I think it's all relative in the sense of what are the in what competitive landscape is each of these options playing I think it's a great point 2x is not a cheap rate for money But it is certainly much cheaper than a venture capitalist buying 30% of your business Especially if you become completely whole and ownership of your business again after the the money is repaid to the investor So we wouldn't give We wouldn't go into business with a company that couldn't handle it So we're we're talking to companies and our diligence process really is it's like okay What are your margins like what are your growth rates? How have you grown over the past two years and what are your projections for the future? And so we have to see companies that are high growth enough to handle this type of capital And if it's not the case then like we were saying earlier like there are times where we have to say like this isn't gonna work It's not in your best interest and then I think also what we've seen are like things like Shopify capital and Tools like that that are asking founders to pay back in the next six months or the next eight months And so I think it also depends on the time frame of that payback of 2x or in our case two and a half X We are looking over a much longer times Timespan of you know five plus years and so when you take that into account I think the rates become a little bit more palatable rather than like You know a lender in the south that might be trying to take advantage of founders and you know ask them for 2x in the span of Next month or whatever it is. So I I think there is Just yeah some discrepancy on the type of company that this works for and then also the time span that we're asking for that repayment Thanks, that's a great question. I have a real Technical question for the three you how do you account for these investments on your balance sheet? Do you support your investees or recipients of the capital so that they can understand how to account for them on their balance sheets? I imagine you all have separate answers for this. Maybe you could quickly go down the line For instance, I imagine this question is alluding to are you holding these assets or these liabilities as? Debt or equity on your balance sheets. How do you encourage entrepreneurs to account for our BF? I'm not an accountant important But yeah, so they these are loans on our on our balance sheet We have that's a really good point. I never thought about how to coach our clients, but that's not really our role But I think in the formative TA that we provide the one-on-one relationship building and support Setting up your accounting system is like number one for all of our clients And so I instead of us coming in because we aren't taking equity and we aren't here to tell them what to do But we can do our best to connect them with the resources they need to actually put their business on more of a system Especially with accounting So that's that's that's our approach We ours are revenue based loans so their loans on on the balance sheet of the fund and their their loans for the entrepreneurs and and really the accounting is Is is the same as it would be for for any other loan And ours is basically a convertible note So we have the option to convert at times So and and so we hold it as Convertible debt and then they also do hold it as convertible debt Yeah, that makes sense from what we've seen across the industry many folks encourage entrepreneurs or at least may suggest With the caveat that they are not accountants themselves that entrepreneurs consider the principal repayment and the Anything above the principal repayment for instance the amount up to that 1.1 cap that the entrepreneurs receive from Dencham to be effectively the interest expense on this and it's It's you know, they account for it as such spread out over the term of the loan this also means that RBF investors are typically receiving income that's qualified as Earned income rather than capital gains, which affects the fund structure So certainly a lot of nuance and details there to be explored further And I'm sure these folks can at least point you in the direction of their accountants for specific responses This is not a this is not a open and shut Sort of issue though And there's a lot of discrepancies even today and how folks tend to think about the accounting for RBF in particular So it's a great question There's a secondary question on this one Which maybe we can just give a nod to which is given the size of the investments It sounds like valuations would be incredibly costly. So I assume you avoid valuations with your RBF portfolio we We don't value but we do have convertible we have convertible notes basically so we put a valuation cap on the companies that we invest in to Kind of be able to calculate our ownership at investment and then as I mentioned over time. They're buying that ownership back and So typically I mean we're looking at CPG companies so consumer based companies and We're usually valuing them Somewhere around like five maybe sometimes ten times revenue depending on the industry In our case There there are revenue based loans or pure loans and we're not valuing the company I think it's a good question because it's I didn't mention it none of us mentioned I think but one of the advantages for Of revenue-based financing versus Investing in equity is that a lot of the conversation with VCs comes around to the valuation of the company and We don't have to touch that point with the with the entrepreneurs that we invest in This is a question in a similar vein Which is this person says they've heard that RBFs can discourage future equity investors from participating Have you experienced anything like this with the entrepreneurs? You've supported have you heard this that maybe your RBF could discourage future equity investors and how do you even think about? entrepreneurs taking on equity after you make an RBF investment in their business I Can I mean I can speak to this because we we recently closed an investment that the company week we closed a revenue-based loan the company has Raised capital from for for venture capital or impact venture capital funds raised equity I should say from for a venture capital and impact funds and And we were very excited to co-invest with these funds. They're very excited to have us I mean there's different It's a fair question because there's different logics that different VCs can have VCs might say Well, why are you raising debt because every dollar that you go back to that goes to interest expense is a dollar that could Be invested in into the business into scaling But it's non-dilutive capital I mean, I think that's an important thing to remember so it's really in the interest not only of the founders who maintain ownership of their company but in interest of the other VCs for For companies to raise capital without diluting the ownership of those VCs We've seen companies kind of do a blended strategy. So we invest alongside of VCs. We invest alongside of Banks and I think within the types of companies we're investing in they have a lot of like Inventory expenses Team expenses and I would say the other thing is like marketing is a huge thing that a lot of these companies need to do And so what we've seen is that our capital is potentially better for like that inventory side of things And then and maybe some team, but then venture capital is better for like the marketing side of the table And so and we've seen that kind of work across the portfolio Yeah, for us I think probably less than 10% of our portfolio is like looking for that type of investment and one example I can think of right now is a I'm gonna try to get this right a telerobotic surgery company But they needed a loan to be able to get Equipment to be able to you know build up their data and and and kind of prove that what they're doing will work So they have their plan and set or a set already for raising after they you know gather their data So this that's those this was our it was an atypical loan for us, but they understood our Mission and they chose to come with us. They could have gone to another lender, but they chose to come to us because of our mission This this question has to do with incentives And I figure maybe I would reiterate on one of the points that we touched on before Which is that all three of these investment fund managers use revenue-based financing in some capacity like we've talked about Tessa's fund uses what it's this redeemable equity instrument treated like a convertible note And then Dion's organization Dencham has a much more loan adjacent product But all of that have this unique Incentive structure which kind of aligns the entrepreneur and the investor in a distinct way That's different than maybe an equity investor or a term lender for instance This question says how does revenue-based financing change the incentives for early exits versus long-termism? New phrase I like that compared to equity-based financing in parentheses So I wonder if you could talk about sort of like what are the incentives that RBF termed capital Establishes between you and your borrower your investee that you think are an asset or makes you interested in doing this And maybe like could be compared to alternatives like for instance equity investing Yeah, so we incentivize early payback Don't look at me like I'm weird when I say this but You don't pay for the fee if you already paid the principal down So if you pay the 36 month loan off or a 10,000 dollar loan 36 months If you paid off in 18 months, you're only paying $500 for a $10,000 loan and that's so we can get the money back and keep it moving So, yeah Simple as that One conversation we have with with founders who have yet to raise equity capital is Really the implications of going down the VC path which VC funds need an exit in the end they need to exit their investment I should say that that can sometimes come through secondaries, but usually Often they're looking for an exit of the company and for an entrepreneur You know that means being prepared to to sell your company or or go public if you're you're able to do that in often in five to seven years and so, you know entrepreneurs who are Maybe looking to build a company for the long term maybe looking to build, you know Multi-generational company and have that that vision that last decades that's one of the reasons that VC might not be a good fit and Revenue based revenue is financing as we're talking about things different forms but revenue based Financing generally as what's called a structured exit, which means a fancy way of saying you don't need to sell the company for the investor they have their money back and so it Creates that depending on what the incentives are for the entrepreneur and what they what they want and what their ambitions are There can be a really good alignment there Yeah, basically echoing both of them We do incentivize early payback because well, I'll say when we invest We are aligning ourselves with the company to help them increase revenue and so because that's how we get paid and so We want to do anything possible that we can to help them do that So when we're looking and talking about portfolio support We're always open to helping our founders do whatever it is that they need to do But we do incentivize early payback for the founders They pay back a smaller multiple if they can pay it back faster And we're incentivized by early payment as payback as well because that's a higher IRR for our LPs and so I think we're both aligned there and then in Conversations that we're having with founders in a first call one of my questions always is is like where do you want to take this like? What is your goal? Do you want to get acquired in the next five years or do you want to grow this and? Potentially like pass this down to your children and it is there's no bright answer I just want to understand how the founders thinking about it so that we can figure out, okay Is this a super high-growth company that we're gonna want to price in a specific way when we do our diligence or is this a more long-term play? That and either of those are okay We just want to know what we're getting into and how we can then work with the founder on the terms that we're offering them Yeah, there's a great you guys This is a question that I think maybe takes a bite at the opposite end of the the sort of like high rates question Which is that it's it if I'm going to read between the lines on this question It's like it sounds like you guys are taking a lot of risk with a lot without a lot of downside protections How do you get comfortable with the fund that seems like it has capped returns? There's only so much you can make with each deal. There's no unlimited upside like a venture capitalist might have But your downside is unlimited more or less you you could lose it all And there's you know a maximum return you can make on each deal and therefore on the fund level How do you sort of get comfortable with that as a fund model? And is that something that you that keeps you up at night or that you've thought of much about with the fund overall? So we have the ability to Uh structure these deals in innovative ways and so We have sometimes offered you know this full payback and then we ask we have asked for a warrant on the side really to take part in any upside that Happens in the future and then we've also structured this in ways where We've asked the founder to pay back like 90 of our agreement And then there's still that kind of 10 of the agreement. So not 10 of equity in their company, but 10 of our agreement That we keep in residual ownership So this is kind of like the indie VC model if any of you guys are familiar with that fund And So we as a VC fund we Our LPs would be very upset with us if we weren't able to participate in those upside scenarios And so we have kind of thought through that and we structure our deals accordingly We we have a little bit of a different model in the sense that we we do have our upside cap Don't don't take equity long term and or or warrants So I think a lot of the conversation about I'll turn to financing and and and mezzanine instruments starts the the starting point for the conversation is VC But there's an entire industry the private credit industry Where you know the large asset managers are raising raising billions and trillions of dollars for private credit Which is just a fancy way of saying making loans to companies And and this Are often, you know, senior secured loans that are they're very low risk And and thus the return on those private credit funds is very low Now the risk is also very low and there's an entire industry and LPs who look for that type of capital. So There's a spectrum of course of risk in return and and us as mezzanine investors were in between Our best return isn't going to be as good as the return of the best VC fund But the risk is lower than a VC fund The question sort of came from that angle of the sounds riskier than Then a senior secured loan. Yes. Yes, it is But the return is also higher and that's part of the conversation sometimes If you calculate the the implied cost of capital or IRR for of a revenue-based financing for entrepreneurs Interest rates or the the effective cost of capital can sound like high like big numbers Sometimes entrepreneurs get scared by that But that's what compensates us as investors for taking that risk And what I always say to entrepreneurs is the risk for the investor is flexibility for you And if if you want more flexibility, it's like a six months grace period like pain based on the performance of the company You know, not having not needing collateral the price of that is Is is higher higher rate higher effective cost? because the higher risk for the For the investor There are innovative amazing innovative models with things like blended finance and films about the capital and ways to To reduce the cost to the entrepreneur and reduce the risk to the the investors But talking kind of in a in a more basic fund structure sense It you know have to understand where this falls in the risk return spectrum All right, I think for us, uh, we just have to do a really good job of what we do I mean, we really have to go deep and and do the best that we can and the things that are in our Things that are in our control will We'll do that and the things that are out of our control. We can't control it. Um, and I think if I could do a metaphor You know, we'd love to be a perennial, but if we're an annual, we're going to be one of the most beautiful annuals you've ever seen