285. Non-Dilutive Financing Options, Fintech is Eating the World, Digital Asset Aggregation, and Quants Investing in VC (Billy Libby)

Billy Libby of Upper90 joins Nick to discuss Non-Dilutive Financing Options, Fintech is Eating the World, Digital Asset Aggregation, and Quants Investing in VC. In this episode, we cover:

• Walk us through your background and path to VC.
• What’s the thesis at Upper90?
• On the website, it says “We are not looking to finance major technology disruptors but rather the derivative businesses being created around them.” Can you explain what you mean by that?
• How do you underwrite and assess the risk of some of these platform-dependent technologies (channel choke)? If you build businesses that are dependent on top of Facebook, for instance, or on top of Slack, or businesses related to the Amazon ecosystem, like Thrasio, how do you think about the risk of the platform deciding they no longer want to play nice with you?
• What is the split of your fund – the equity versus the debt component?
• And the terms of the debt, are there multiple different forms and different terms, or have you standardized that?
• Do you do some debt in non-dilutive financing options for non-portfolio companies? Or is it always an investment plus the credit?
• Do you include rights in some of those agreements to convert into equity should you choose?
• We’ve seen a lot of players, sort of FinTech startup-ish players, springing up providing access to capital for working capital needs and credit needs. Like Pipe and Lighter cap and CapChase and all these players. How are you similar and different from them? And how do you think about that?
• Is there ever a conflict, you know, when you’re making an equity investment, but you also have debt in these companies? If they get in a tight situation? potential for conflicts?
• You said that you’ll enter at seed. Are there certain metrics or revenue levels that you’re looking for other structural dynamics, whether it be collateral or SAS subscription revenue? What’s too early would be another question.
• There are a number of market makers here in Chicago that have entered sort of the VC asset class, what skills or strategies from your experience in your background? What do you think lends well, no pun intended, to driving top returns in venture?
• Can we get your thoughts on big drivers and opportunities in FinTech over, let’s say the coming three years.
• What do you know, you need to get better at?

Guest Links:

• Upper90
• Billy’s Twitter
• Billy’s LinkedIn

Transcribed with AI:

0:00
Billy Libby joins us today from New York City. He is Co-Founder, CEO, and Managing Partner of Upper90 a hybrid fund that provides investment and non dilutive growth capital to disruptors in eCommerce, Enterprise and FinTech. They have invested in companies including Thrasio, Clearbanc, Octane Lending and Crusoe. Prior to Upper90, he was head of Quant Execution and Market Making Sales at Goldman Sachs. Billy, welcome to the show.

0:24
Thank you so much you’re hired.

0:28
So I see that in December, y’all announced the closing of the second fund at $195 million. Congrats on that.

0:35
Thank you.

0:36
But before we jump in to the fund, can you kind of quickly walk through your background and your path to venture?

0:42
Yeah, it’s it’s kind of been a random walk, I started at Goldman Sachs, and was thrown into the world of electronic trading. And in 2003, everyone coming out of college wanted to cover Fidelity or Wellington, or, you know, one of these brand name, long, short hedge funds. And my first client was a company called Gekko, which no one had ever heard of. And you know, it, it really is FinTech, it’s you know, how to use technology and data to make trading decisions. And Gekko at the time, traded more messages in a minute, then all of our clients combined at the firm in a day. And so it’s just you kind of get a real sense of the power of technology. And I think the early innings of FinTech was quant trading. And now, you know, data is everywhere. So everything we do is captured. So I think that has really helped me think of more efficient ways to finance startups. Because if you’re a startup now, like you grow with equity, and if you think about it, like there’s healthy parts of a business, there’s unhealthy parts of a business. And I think we can bring that mentality from kind of the public world to the private world and help founders grow with less dilution.

1:54
It’s amazing that you are one of the the early collaborators with Gekko. They’re sort of famous and infamous here in Chicago.

2:01
Oh, yeah, I forgot. Yeah, exactly. I mean, a lot, so much of the early. Yeah, from the CME definitely is the mecca of kind of quant trading started there.

2:10
So, Billy, tell us more about this thesis at Upper90. It’s it’s not just a traditional venture fund, you have this, this alternative approach? Can you tell us a bit more about that?

2:21
Absolutely. So it really goes back to data. And when we started Upper90, and again, I’m not smart enough to predict where the world’s going or come up with this kind of new category. It as I said, it was kind of random. So about four years ago, I was at dinner with my partner, Jason Finger, Jason started Seamless and Grubhub which merged and I was looking at my phone. And so a lot of my investments were in like, companies like Gekko. So at the end of the day, you can see exactly how much your portfolio is worth, because they’re trading very short frequency stocks. And so Jason’s like, What are you looking at? And I said, my portfolio and Jason was flabbergasted that I had any sense of what I was worth, because this is kind of his pioneering entrepreneur, all of his investments are in startups. So he’s like, at this moment, I’m worth zero to infinity, you know, it’s just the world’s could not be more different. So he’s like, everyone in the tech world would want access to more liquidity oriented products. And I was like, every quant founder that I know, would want access to this startup opportunities you have. And we were joking. Like if I saw a tech investment at the time, it’d be like my private wealth manager at Goldman like, Oh, you know, you’re so lucky, you know, I have this great tech deal for you. It’s like, why the hell am I seeing that? You know, and the same thing if Jason saw quant deal, you know, so I’m a big believer, like, you should have a reason to see things. And so we put a club together of the 10 most interesting tech founders, and the 10 most interesting quant founders, and we all made a commitment to share our best deals. And through that, we just kept finding this in between. And I mean, I can give you a couple examples of kind of how that manifested. But there’s a company called FilmRise, which was our first club investments. They take data from Netflix, Hulu, Amazon, YouTube, and Roku. And as a, you know, as a podcast host and some of the media you, you get that you can track users, so they can see what people are watching digitally. And with that information we’ll see after The Crown and Bridgerton, like British miniseries are really popular. So with that information, they’ll go to like PBS, BBC, Discovery Channel, A&E very fragmented world of content, they look at their TV libraries from the 1950s and 60s. So like all this long tail programming that’s like on the shelf, and they’re licensing that content to sell on YouTube, and to sell on Netflix. And so they’re buying revenue at one time and selling it at nine times. And they’re raising equity. And so the quant side of our groups like why would you raise equity? You’re buying an asset you have locked in contractual revenue. Why would you not finance this and founders just are not aware of like, what are the different tools available to finance growth. And so we just kept finding these solutions from this group of kind of two different expertises to solve problems for founders. So in that situation, they actually were able to grow faster from getting a kind of an ABL debt structure from us and not have to sell nearly as much equity as a traditional VC round.

5:20
Love it. Yeah. And your your data example is well taken. And we’ve talked a bit on the program about last mile attribution and how much work needs to be done there to really understand…

5:29
Definitely

5:29
Sort of the graph, graph of consumer behavior and activities. I was speaking to one of our founders very recently that runs a food tech startup, okay, sort of local food tech. And they have a data science team. And they look at a lot of data on on trends and behaviors. And he said, but honestly, Nick, the single most important thing that indicates whether a consumer is going to become a long term customer of our local food business, is have they liked a Netflix documentary about food on their Facebook page.

6:05
It’s so random.

6:07
It’s so random.

6:07
It’s awesome. But it’s awesome.

6:09
But I mean, it’s It’s fortunate that they stumbled upon that, and they were deep enough to find that, but it just kind of it illuminates the fact that there’s so much data out there that just isn’t appropriately captured and utilized to to great effect yet.

6:24
Yeah, exactly.

6:25
Billy, on the website, it says that “We are not looking to finance major technology disruptors, but rather the derivative businesses being created around them.” Can you explain a bit what you mean by that?

6:38
Sure. So again, I wasn’t smart enough to know that Amazon would be what it is today. But Amazon is there. And now people are going to build businesses around Amazon. So people are building warehouses for 3PL shipping. People are building stores, you know, you and I could start a store after this call on Amazon, selling kits for people to do podcasts that come with a microphone and headset and headsets, we you know, we could start that overnight on Amazon because of the amazing infrastructure that they’ve developed. But all these small businesses that are starting an Amazon still need to inventory capital and still need marketing capital and still need payroll capital. So I think that there’s all of these kind of derivative businesses being started around these major platforms, YouTube, again, who was smart enough, you know, if we looked at YouTube’s deck whenever that was syndicated, 20 years ago, but now like, you can go and become a content creator, you can start your own TV channel overnight. And now you still need money for content creation, and you know, marketing. And so it’s kind of I always say like, what’s new is old. If we did this podcast 20 years ago, I’d be talking about the best idea, let’s roll up dry cleaners and coffee shops and all these physical stores. And they’re subscale. And now I feel it’s like a golden age to be an entrepreneur, you know, you can you have all the tools now to go and start your own business online. And from a tech infrastructure perspective, I think these platforms have really made that turnkey. But to get liquidity, and to get growth capital, like the financing hasn’t really kept up with the technology. And so that’s kind of the whitespace that I see for Upper90 is to help provide liquidity and capital to the gig economy and to all these new online businesses. You know, the FilmRise example I gave you 20 years ago, we’d be talking about buying syndication rights to sell Seinfeld, to TBS, you know, now we’re talking about buying the Sherlock Holmes TV show from the 1960s, you know, when selling it to YouTube International. So it’s the same like business concepts that just apply to kind of what’s happening online. But the online markets are just so much bigger than people can imagine. You know, like, how many sellers there are on Amazon? And how many, how many YouTube hours of content are watched. It’s crazy. So…

8:56
How do you underwrite and assess the risk of some of these platform dependent technologies? You know, many years ago, we talked about it on the show, and I just called it some, I called it channel choke at the time. And I think what most people are referring to it now is platform risk, right? If you build businesses that are dependent on on top of Facebook, for instance, or on top of Slack, or businesses related to the Amazon ecosystem, like Thrasio, like, how do you think about the risk of the platform deciding they no longer want to play nice with you?

9:26
You know, I think it’s a it’s a great question. And it’s a question that persists. So I’d love to get actually your take on it. And you know how maybe you thought about it a few years ago, and how it’s evolved. I can maybe talk to Thrasio. So Thrasio is our largest position and Upper90, we were the first investor in the company. I think it’s the fastest profitable unicorn in the US history. And so the problem Thrasio solving is there’s 10s of 1000s of independent sellers on Amazon selling hiking poles and whiteboards and you name it, but they’re all subscale. So Thrasio is going in rolling them up into one holdco, where they can provide inventory, capital supply, chain expertise, etc. And if you think about it in a few ways, it’s like, you have to applaud Amazon to allow these people to become their own business owners. I don’t think Amazon gets enough credit. Number two, Thrasio you have to give credit to their they’ve probably made 50 or 100 millionaires, that are small business owners that didn’t have a way to sell their business. So now the question is, what’s the relationship between Thrasio and Amazon is kind of what you’re saying. And Amazon, in my opinion, like wants to offer the best products at the highest quality at the lowest price. small business owners get to a certain point where they can’t do that. And so the fact that Thrasio can come in and kind of provide the r&d and the inventory, and the ability to keep innovating, and increasing quality reducing supply chain dependencies, I think you kind of need it. And you’ve seen this in the offline world. You know, what’s happened in the physical world of franchising is kind of what I think is going to be happening online. Like it’s just inefficient for there to be 100,000 independent sellers versus 1000 Thrasios. And so I think that there’s a lot of things Thrasio that Amazon likes about it. But I think for Thrasio to to continue becoming like a unicorn going to a deca corn, you have to be omni channel. Like I think there’s a certain I wouldn’t say there’s like an existential risk for Thrasio, I think it’s just like, you’re not going to get the multiple you may deserve unless you show that you can operate omni channel. But I think there’s some mutual benefit here. At this point in time, when we started raising money for Thrasio, we were the first investor in this eCommerce aggregator space. And nobody, I mean, I had hundreds of calls, you know, we were raising money. It’s such a capital intensive business. And everyone got fixated on this Amazon point, like, well, Amazon’s gonna kill it, you know, read the really everything book. And yeah, I think Amazon really like this actually creates more innovation in a way. And now more people are actually starting businesses on Amazon, to sell to the aggregator. So it’s a it’s this, this marketplace that Amazon’s develop, I think it’s still in its infancy. And now the biggest question we get is not choke risk or platform risk from our investors. It’s supply chain risk. So like, if we have a geopolitical event with China, we’re like 90 plus percent of all these products are created, what happens? So the question is no longer like the Amazon risk. It’s actually like supply chain risk and geopolitical risk with China. And I think Amazon also they are, they really are leaders in his concept. Now Walmart wants to get into it. And MercadoLibre. So I think Amazon has actually incentivized to kind of work with these players. So it doesn’t create air for like these other platforms that don’t have this third party seller market to kind of gain steam. Again, that’s at this moment, you know, like five years, we might have, as I’m curious, like, how you answered it when you think about it from before to now and…

12:55
Well, from a platform risk standpoint? I don’t know is the answer. I mean, we’ve looked at a lot of businesses that are focused on one platform. And it’s it’s a challenging question that we haven’t figured out I, what I do see as an interesting parallel is I worked for a number of years at a company called Danaher, and we would aggressively hire a lot of small businesses and plug them into a machine that was very efficient at manufacturing, inventory management, and effectively optimizing for cash flow. But these often not in all cases, but often were subscale businesses, they’re just legacy oriented. And I kind of see, you know, a similar frame here, just digital, digital first businesses that can leverage so many advantages of being a part of a, a bigger operation than they could as you know, an entity.

13:44
I agree with you. I’ve been trying for a long time. And you know, maybe as a marketing guru, which I’m not. You are. Like, how do you put a name on on this space? Like, I think there’s parallels to franchising you know, like, there used to be sub shops now there’s Subway and like Jersey Mike’s and made as a huge industry, but it’s very institutional. I also think of it as like digital real estate, you know, real estate’s all about location, location, location. on Amazon, specifically, you’re buying reviews. Like, if we had a weighted blanket company, we probably couldn’t even start a product in that category. Because the way Amazon works is it really is dependent on the quality of your product. And that’s a social review number. So like to be relevant in that category, you need to have like, 10s of 1000s of reviews.

14:28
Right.

14:29
So like, you either have to buy the top of the page, you know, like buying the center of the shelf, like remember, in college, like this grocery store revolution book, like, you know, when people walk into a grocery store, like you should pay a lot more for like the eye level space versus like the bottom of the deck. It’s a it’s a, it’s a it’s common sense, but like I think it was like a revolutionary concept. And on Amazon, it’s like there’s these reviews and like, you can’t even really build it’s like you have to buy.

14:55
Yeah, I was asking a group. We have a group of undergrads that are kind of an extension of our firm that, you know, get some training and VC and whatnot. And I was I was asking the group, what are the top three search engines right night? I heard, you know, Google and Bing and some other names. And I said, What about Amazon? What about the app store? I mean, these a lot of people don’t realize power of the search engines and in connected what you said, the real estate of occupying, you know, the first page of results.

15:23
Yes, exactly. And I think it’s just the other thing that I’ve learned is, I think, Upper90. We’re like this consigliere. We want to help founders, like I just thinking about my day, before we started, we had a call with a founder helping him thinking about estate planning, because before he goes and raises his next big round of equity, how do we help him think about trusts and where how he should like, optimally think about post tax. Most founders, if you look at a cap table, their name is on it. That should never be the case. You know, but, and then we had a call with a founder who was about to raise a $20 million Series A, and our slogans kind of been like delay your A. So I went through what he’s going to use that $20 million for, and he’s like, 6 million is going to go to like r&d, 5 million of hiring, and then five into marketing and five in inventory. I was like, Well, why not just raise 10 of equity. And then we’ll give you 10 of debt. And like, at these early stages, it’s massively changes your cap table, and dilution was like, well, the VC said, they’ll only invest if they can own 20%. I was like, This is such crap. Like, it’s so I think, like founders who are taking the risk, should be owning more of the financial outcome. And I think it’s kind of flipped, you know, investors are making more than the founders. And I’m not saying no equity, I’m just saying like less equity.

16:37
What, what is the split of your fund the equity versus the debt component?

16:42
We do about 80% debt, and 20% equity. So we really want to partner with early stage VCs, like we’re the best friends to early stage VCs, because they don’t have the growth equity sleeve. They’re really trying to help founders at the early stage gets a product market fit, right? And you can kind of say, that’s the risk, riskiest part of the lifecycle. And then you have growth equity that comes in that has, you know, you could say it’s much, it’s a much better return per dollar of risk to be a later stage investor than an early stage investor. And so I think we’re disrupting later stage. It’s like, the later stage investors, they try to get all the data, they try to kind of form a really strong opinion, and then they try to lean in. And so like when Thrasio was scaling, and got to 10 million of EBITDA, you know, every VC, I’m not kidding, every growth VC was like, we’ll give you 20 on 100, you know, 10 on 80, right? Look, Josh, you’re buying really high quality assets, you’re showing that you can stabilize EBITDA, and you’re growing them, like we’ll just give you 10 more of debt. So he was able to basically skip this kind of like this badge of honor, where it’s become like, how much equity Have you raised on how much you own. But what excites me for Upper90 is that going back to data, Every business has some part of it, that should be financed with Upper90’s capital, like there’s always some part of your business that has a little bit more predictability or collateral. And then you mentioned Crusoe Energy. They do Bitcoin mining. So can you think of an industry that is more binary? Would you ever think that like, if there’s a venture bet to make it’s like crypto plus startup, you know, what could be protected? You know, if you’re an investor Upper90, like, how could I feel? You’re gonna protect my principle, like, how could this work? So the founder is an amazing person, Chase Lochmiller, we’ve known each other he actually worked at Jump Trading and Gekko, we’ve known each other for a long time. And he’s built this unbelievable company, where he’s built portable data centers that go to stranded oil fields. So there’s US is drilling has become the largest, if not the largest driller of oil in the world. And when you drill, the natural gas, if there’s not a pipeline it has to get burned off, it’s just not worth enough to ship off the site. There’s more natural gas in the US that’s getting flared every year than the amount of energy consumed in Japan. So it’s huge. So he’s like, there’s a stranded energy kind of ESG problem. And on the other side, we have so much data that there’s not enough like energy to do all this computational data analysis. So he built this amazing company that builds portable data centers, brings them on site to these oil fields. He’s basically getting paid to take the natural gas. And he’s then converting it to energy onsite to mine Bitcoin.

16:44
No, shit.

18:08
So and now. They just they’re raising a huge round of equity, like amazing business, but Chase is an LP and Upper90. All of our LPs are founders going back to that club. It’s just this amazing network. So half our LPs are like quants and half are tech founders, and we’ve kept that DNA. And so Chase saw the Thrasio structure of how we kind of isolated the acquisitions. And he’s like, you know, Billy, my biggest expense is the data center. There’s a Caterpillar generator, to power it that has nothing to do with crypto, that has nothing to do with being a startup. But because I’m both equipment financing from Caterpillar and GE, wherever, won’t give me financing, so I have to raise more equity. And so we created a project finance facility to isolate, just financing the generator from Caterpillar that can be repurposed to anything. So we give him a $40 million facility to go and kind of build his whole fleet of data centers where he would have had to raise that in equity. And so just I’m highlighting it because like, you know, it’s it’s really founder education and awareness and having a partner that’s kind of willing to try to figure out how we can and we did equity. So we did, you know, $40 million of debt and probably 10 of equity. But it just gave him an ability to own his market. Grow faster with credit. And because we’re an aligned partner, if he can go get cheaper capital in a year, that’s like an equity positive event. So we’re, it’s not like we’re making the money on the debt and like, hoping we stay outstanding forever, and hoping, you know, we can take over his business at a cheap price. It’s like, we’re meaningful equity, meaning holders, and we’re giving you debt because it’s helpful to you as a founder. But I think the key is like being able to work with founders to figure out what is that right part of their business? And how can they finance it that way? Because it’s not in the West Coast Silicon Valley dialogue, it’s like, the more equity you raise, like, the more successful you are is kind of the current model.

21:24
And the terms of the debt, are there multiple different forms and different terms or have you standardized that?

21:30
No, I think one of the things I’m really proud of is, in the asset management worlds, it’s how much have you raised. Like, how much AUM do you have like, how many, and what happens is, if you become too big, which all these funds have become, then every deal has to be really large, which is really might not be what the founder needs. Like we can start with like a $5 million facility, that’s just not good time for big funds. Number two, we’ve worked so hard to build this network of LPs that are high net worth entrepreneurs. So we have a lot of flexibility in how we can solve problems. Like if you’re a big institution, and you go and get insurance money, they only want you to do one thing. So like the flexibility is so critical, but it comes with a type of LPs. And it comes with the size of the fund that you’re trying to build. So in the Crusoe deal, you know, we were able to do a rev share. So each dollar of Bitcoin he mines, we do a rev share until we get to a certain return on our money, which is kind of a cool way to share alignment. In the Thrasio deal it was more like a low teens interest rate where they could draw the money and be able to go and acquire assets, and more of a straightforward senior secured term loan. In Clearbanc, it was more like a receivables based financing. But there’s another deal where we had an LP, who was going to buy his business back from WeWork. And we figured out kind of how to help him do that. So you know, it’s all about like collateral and access spread. And like having Jason who’s a tech founder and my background in quant, and my other partner, Alex comes in credit like we can underwrite businesses like across equity and debt. So like, you know that a business is worth “x” because it could be sold to somebody else at “y” not just because like there’s a receivables tape that any credit fund can underwrite. So you just kind of kind of look at the world differently, because there’s too much money out there.

23:18
Got it. And do you do some debt in non dilutive financing options for non portfolio companies? Or is it always an investment plus the credit?

23:28
No, we always try. I feel like life’s too short. Like I always, I want to be a long term partner with these companies. So we have selectively done if we find a great founder and an amazing company, we just want to find a way to work with them. And you know, if the opportunity is to just just be a debt provider to get involved and show how we can add value, we’ll do it. So Octane Lending another amazing founder, Jason Guss. It was, I think, August of 2018. So he’s built a point of sale and financing platform for power sport vehicles, jet skis, ATVs, motorcycles, like the industry is like 80 billion in the US, it’s huge. And he dominates it. And he had raised money in the spring. And he was scaling super fast. And so he was growing, who basically outgrowing his bank debt facilities. So either he had to slow growth, because he was going to trip a bank covenant or he to raise more equity, kind of his haircut capital.

24:28
Yep.

24:28
And he called me up. Ribbit, which is a great fund that we work closely with in the West Coast called me up. He’s like, his, this is an amazing founder, kind of a special sit. You guys should chat. So Jason Guss is like, Look, I don’t want to raise more equity because I’m going to get tethered back to my last round a few months ago. And I don’t want to slow down. So he’s like, if I could get to the spring, which is the big power sports season, I will be profitable. I’ll raise it a huge premium, like, I can be closer to securitization, all these things. So in 24 hours, we gave them an eight million dollar demand note for four months to just bridge him to April and there was no strings. And it wasn’t like, will you have to give us this, it was just like, we want to work with you, we want to help solve your most challenging growth problem. And he’s paid it back six times to us in terms of helping us get into the next round of equity and we upsize our facility and like that partnership, it’s just that flexibility to move fast and solve creative problems, I think just doesn’t really exists. And if it is, it’s like a lender. It’s not like an entrepreneurial fund.

25:30
Do you include rights in some of those agreements to convert into equity should you choose?

25:36
We try to keep it really simple. Like another thing that I’ve learned because I don’t really come from the credit world I view it’s more of like a equity mindset versus credit.

25:43
Okay.

25:44
We don’t charge all these hidden fees. Like when you see a credit term sheet, it’s like, well, this is really cheap debt. And then you’d like there’s this like, origination fee, and there’s like this huge prepayment fee. And, you know, like all these firms make a lot of their money, like on restructuring, like not the return. So we say, look, we just want to be your partner will keep the debt really simple and clean. Like we just want to be the debt. We don’t want to be like subordinated like, if the if it’s too complicated, we don’t do a deal.

26:11
Got it.

26:11
But then we say, look, we love your business, we’re happy to buy the equity. We just want to be your partner. So we’re not trying to like hide warrants and get freebies, it’s just like, we want to do businesses that we’re excited about the business think we can add value, we can solve a problem with a credit. It’s almost a tool, and then we want you to want us as a partner, and we’re happy to buy and participate in equity. And that’s kind of how we’ve done it. Bespoke.

26:34
Billy, we’ve seen a lot of players, sort of FinTech startup-ish players springing up providing access to capital for working capital needs and credit needs. I mean, like Pipe and Lighter cap and CapChase and all these players like how are you similar and different than them? And, you know, how do you think about that?

26:52
Sure. So, you know, we were the first, you know, major investor in Clearbanc, which I think has done exceptionally well, I mean, to me, I’ll answer that question. But like, you know, FinTech, to me is about customer acquisition, you know, can you efficiently acquire customers and get data and then you can build everything else? Like there’s no one better on the planet in that than Michele Romanow at Clearbanc? No one. So I think that’s their perpetual edge, because like, look what happened in Lending Club and So-Fi and Prosper, like, ultimately, the cost to get a new customer went up so much, and you couldn’t make money anymore? Like…

27:24
Yeah.

27:25
So I think Clearbanc is in a league separate from all these other players. So I just don’t think it’s that simple. Like, I think there’s room for all of them. Like, if you have SAS revenues, yeah, you should factor those, like SAS is kind of like real estate. You know, if you think about it, like, you know, if you’re spending $1 on marketing, and you’re making $4. Yeah, you should factor that. So we’re almost like a partner to a lot of those early platforms, like the Clearbancs, the CapChases. I think we’re different because my thesis is FinTech is not vertical. FinTech is a horizontal. Every business is, uh, it has a FinTech component. And so I think every business has some part of their business, that Upper90 can help finance. So I think that we just want to be a smaller fund and work in a more concentrated way with great companies like Octane. I mean, just think of the companies I mentioned, Octane, Crusoe, Thrasio, like they’re also different. So we really want to be kind of a more specialized partner. And we want to be a long term partner to these companies. I think the issue with a lot of those companies is like your best credits outgrow you, you know, okay, you know, thanks, Pipe, like you’ve given me the ability to become more mature now. I’ll go to a bank. So I just feel like those businesses, it’s hard for me to get comfortable with like a Pipe valuation.

28:47
Got it? Is there ever a conflict, you know, when you’re making an equity investment, but you also have debt in these companies? If they get in a tight situation? Potential for conflicts? I mean, how do you get?

28:59
Yeah, we just had it like a town hall last night. And this question was asked, I think that’s, you know, we’re lucky to have, you know, great advisors, and great legal, we use SRZ. And I think it’s something we just have to you know, that’s one of the challenges that our model is managing that conflict, we really feel like the biggest hole that we can fill right now in the market is this starter credit facility, where, you know, companies raised a seed round, it’s working, they’re ready to scale. And instead of like, the next step, raising a big series A, if we could give them a five or $10 million dollar credit facility to keep proving it out.

29:32
And you can enter that early after a certain round?

29:34
Yeah. Yeah, we want Yeah, that’s, that’s really like before the A, you know, cuz, you know, once an institutional VC comes in, it’s like, you know, the model changes. It’s like raise equity, get cheap debt. And it’s just like, that’s actually a pretty expensive combination. And so I think for a lot of these businesses, FilmRise, Clearbanc you’re not taking the early stage company risk, you know, in FilmRise, you’re taking the risk that Netflix is paying the contract. And Clearbanc, you’re taking the risk that allbirds is paying Clearbanc back. So you can you can move the risk to a different Counterparty earlier. So I think the ability for us to offer credit a lot earlier, is really viable. And it’s good for investors in our fund. And so that’s kind of the sweet spot. And then I think if we can get an early we can give the founder more optionality to grow.

30:23
Very good. You know, and what, you said that you’ll enter it seed, are there certain metrics or revenue levels that that you’re looking for other structural dynamics, whether it be collateral or or SAS subscription revenue? What’s too early would be another question.

30:40
It’s a great question. I think one of the things if I’m kind of critical on myself, and where we need to evolve as a company is, when you have flexibility, you can solve a wide range of problems. And you can use credit to tailor solutions. But you have to narrow and you have to focus. And so I think we want to see that there’s been equity raised in the business, we want to see a team, we want to see them having done some initial initial acquisitions or some initial loans, we want to see that they’re ready to scale, like they’re at that inflection point, like, we had a thesis to start the business, it’s working. And our point is, like, instead of then, just going and raising equity for growth, like we want to come in, and then that, that bridge, it’s like the seed to a, I think things that are too early are when they haven’t done any originations. And, you know, or they are looking to do something really risky. You know, you’re an early stage company, and now you have an ability to get like a huge customer. But to get that huge customer, you need to like, do a huge loan. And so doing these, like very concentrated binary events, again, that’s more like equity to debt, you know, and so I think you want to just make sure that they have like a good way to build a diversified pool of clients, and they have like a head of underwriting in place. It’s not like we’re gonna hire a head of underwriting. So it’s, it’s still very subjective. But we’re not trying to be like the first dollar in.

32:08
Got it. You know, Billy, transitioning just a bit there, of course, a number of market makers here in Chicago that have entered sort of the VC asset class, what skills or strategies from your experience in your background? Do you think lend well, no pun intended to driving top returns in venture?

32:29
It’s a really good question. I see a lot of parallels to going full circle to this conversation. Like when I started in sales and trading, the heroes of the market were stock pickers. I’ve studied Tesla. And Elon Musk is the best and electronic, like electronic cars are coming and government subsidies and they individual feels like they’re going to be able to form some amazing opinion that like the whole market doesn’t see. And the quants came in and be like, Okay, I’m gonna buy data from satellites to see how much runtime the Tesla factories that I’m going to see how many employees are coming in the parking lot. I’m gonna see how many cars are leaving a lot. I’m gonna buy from every insurance company anytime buys a Tesla, those insurance companies actually sell every time a policy has been made. I’m going to buy from mint.com anytime someone’s put a down payment on the cybertruck they basically been like, if you have data, you are going to make better decisions, then the person is trying to make decisions themselves. And maybe there’s like a top 1% that like sees the market differently. Right. So quant has decimated long short, I think we can all agree to this. So kind of what excites me is like if you look at venture, it’s the same thing, right? It’s like, wow, this founding teams amazing. And look at the TAM and this guy has grit or This girl has grit and you know what, look what’s Stripe did in the US and there’s going to be the stripe of you know, South America. It’s just a momentum trade. Everyone’s a genius over the last 10 years, like every assets up and so I think you’re gonna have like the first rounds and Sequoias and Bessemers like and people that really have like a, you know, founders come to them first and they’ve built the network. And but I think most VCs and growth equity firms are going to underperform the market over the next 10 years because (a) founders are going to start wising up to like why am I selling so much income to people like us? And then number two, I just think people are gonna start using data, you know, to make some of these decisions and it’s not going to be perfect because it’s a relationship right? You need to partner with people. It’s not like you’re trading a stock. So it’s somewhere in between, but I would bet a lot of money that I would not want to put a lot of my net worth into like 10 year lockup, VC and PE funds right now at this stage in the market.

34:48
That must be an interesting discussion point when you’re talking to LPs.

34:52
Yeah

34:52
Especially those that have a lot of positions in in many of the venture brands out there. Billy would love your quick take. On, I know you say you don’t predict the future and you’re not trying to do that. But can we get your thoughts on big drivers and opportunities in FinTech over, let’s say the coming three years.

35:10
So, you know, kind of like everyone becomes a FinTech is a big area of excitement. And for me, so any platform that has customers, and data, we’ll start offer financing. So Slice, which offers technology to independent pizzerias. I’m a personal investor, and they just raised it, you know, almost a unicorn level amazing company, their customers, you know, have account receivables needs, and they should be doing bulk buying of products. And so Slice is going to start offering Slice Capital. So I think this whole embedded finance to me is very exciting. Because again, it kind of turns FinTech to like its own vertical to kind of like a horizontal across every business. So I think that, you know, it’d be called think as a service or embedded finance, like, I think allowing platforms to offer services to their customers is going to be a big theme. That’s one. And I think it’s great for Upper90, because like we can be that finco partner, like Slice doesn’t need to go and hire like the entire, you know, finance team and go and raise capital. I think Upper90 can solve that. And I just don’t think the Pipes of the world, it’s they’re building like a generic platform, each one of these businesses is really nuanced.

36:18
Right? There’s, there’s so much low hanging fruit. I mean, you talk about Octane Lending before and it’s just to think about all the lack of financial solutions and, and products exist in a pervasive way across many different industries.

36:34
Exactly. And then the other thing that I think will just is still really early, even though it’s like kind of a hot topic that we helped create, is this just idea of like, rolling up digital assets, or online assets so like the the Amazon aggregation, I think you’re gonna see the Mercado Libre aggregation, you’re gonna see the YouTube channel aggregation, you’re gonna see, I think the ability for like, entrepreneurs online to get access to capital to grow and be their own boss, like, Dumpling is a company that Forerunner invested in who were very close with. And they’re a great one of the best VCs in branded DC area Dumpling, like, let’s the top Instacart shoppers build their own store. So instead of going to Instacart, like, if you’ve built up a reputation and a brand, now you can start your own store on Dumpling, instead of so people kind of once they build a relationship with somebody, that person can kind of be an entrepreneur, and build their own small business. So I just think you’re gonna see more and more like this golden age of entrepreneurial activities, like more and more people will be their own boss. And I think that there’s going to be more and more like FinTech or financial innovation to like that, SMB, and that gig economy universe.

37:45
Very good. Just to wrap up here, Billy, what do you know, you need to get better at?

37:49
I think that we have to get better at saying no, as a company. You know, the best thing for a founder is a quick Yes. And the second best thing is a quick no. And then number two is I would use a word like segmentation. How do we spend more time with our largest LPs versus the noisiest LPs? You know, how do we spend more time with the companies that we think really have escape velocity versus the companies that like, I think there’s a little bit too much in our fund of like equal weighting. And then I just didn’t keep innovating, like what are other products like the ecommerce fund, you know, was a first product we built, we just raised a $55 million ecommerce fund to invest in Amazon, in ecommerce roll ups globally. And so we think that, you know, the consolidators will consolidate, like you saw with Uber and Groupon. So like, what are the other like, we’re getting paid to learn and credit. And so what are the other products and opportunities that we can create around that, that are like maybe incubations, or equity. So I think just figuring out how to hire great talent, like we’re hiring a lot of people at our company, now we, you know, in a year, we’re going to have a growth equity lead, who’s at a VC who wants to kind of be more in this hybrid world, you know, we’re going to do joint ventures with our portfolio companies. So we looking for someone to kind of run incubation. So, you know, we’re looking to hire CEO that can really help streamline a lot of our processes. So we can do more spvs and do a larger number of smaller deals. So I think we have to use technology better and data better to do like to do that and create more kind of call options in our book. So…

39:25
Very good. And then finally, Billy, what’s the best way for listeners to connect with you and follow along with Upper90?

39:31
So I have a pretty active LinkedIn page, Billy Libby, you can email me Billy at Upper ninety.io. We are you know, we have a kind of a quarterly newsletter that we send out to our LPs that we’d be happy to include, you know, listeners on and I think just we’re just trying to figure out how to connect more with early stage VCs. And I almost joke it’s like, all the early stage VCs, you know, like there’s the Four Seasons and the Marriott’s of the world, which is like the big boy VCs that have billions, General Catalysts and Legacy. And let’s say that’s like, Yeah, exactly. And like, let’s say that’s like the Four Seasons or, you know, the Marriott. And then like all these boutique hotels that are really great and everyone loves creating the boutique hotels of the world to like work together. And so like, I just think like all these smaller funds, like in businesses, like why aren’t we working more together and having better economic sharing, like if you send us a great deal, like it’s ridiculous, if I get one more bottle of wine or whiskey for like, making somebody 10s of millions of dollars in a deal? Like it’s ridiculous. You know, like, I don’t need I can buy I can buy a bottle of wine.

40:36
Right, right. Yeah, yeah. It’s funny when you get those shipments, but maybe a roll up is in order, Billy, I don’t know,

40:44
Or some type of just a better ratio for collaboration.

40:47
Thrasio for VCs.

40:47
Yeah, or just ways to like to basically like, if you have capacity and or pro rata rights in a deal, like there’s got to be a way to create an economic model that works for people that have the capacity.

40:59
Right.

40:59
I don’t know that it just, but without like working for someone else, like we all yourself, like we’ve we’ve left big firms to do something entrepreneurial. So it’s not like you just have a relationship to like source deals for bigger funds. Like, there’s got to be a better someone else to be like, Oh, that’s blockchain. I mean, I don’t know what that means. You know, that’s just like, this is like, a database. But there’s, there’s got to be better ways to create alignment, like we do with founders. I’d love to think of how to do that with earlier stage VCs.

41:26
It’s a good point. Well, Billy, this was a huge pleasure.

41:30
Thank you so much.

41:30
I always like having people on the program that have a different lens and different approach to venture and you You certainly do, and I can see the value. So you know, best wishes with the new fund and…

41:40
Thank you.

41:40
… and hopefully we can find something to work on together.

41:42
I love that. Thanks for having me.

41:44
All right. Thanks, Billy.

Transcribed by https://otter.ai