Unlocking Capital: The Power of Venture Debt for Startups with Billy Libby of Upper90

Understanding Venture Debt: Insights from Billy Libby of Upper 90

Welcome to another episode of the Interplay podcast. I’m Mark Peter Davis, managing partner of Interplay, where our mission is to help entrepreneurs advance society. Today, we’re delving into an insightful conversation with Billy Libby, CEO and co-founder of Upper 90. Upper 90 specializes in providing credit to early-stage startups through an innovative approach to venture debt. This discussion will shed light on how this type of financing works, its benefits, and how entrepreneurs can leverage it effectively.

What is Upper 90?

Overview and Mission

Upper 90 was established in 2018 with the goal of making credit available to technology companies earlier in their lifecycle. Unlike traditional venture debt that underwrites based on equity and the presence of prominent equity investors, Upper 90 focuses on companies that have assets or revenue streams that can be collateralized. This approach allows founders to secure funding without having to give away a large portion of their company.

Typical Stage and Approach

Most companies consider venture debt around their Series A or B rounds. However, Upper 90’s unique model enables them to provide credit even earlier. They focus on underwriting the healthier parts of a business’s operations, such as recurring revenue or tangible assets, ensuring that the credit extended can be repaid independently of future equity raises.

How Does Upper 90's Model Differ from Traditional Venture Debt?

Asset-Based Lending

Upper 90’s model is distinct because it underwrites based on assets rather than equity. For instance, a company that has receivables, inventory, or equipment can secure funding through Upper 90. This method ensures that founders retain more ownership of their company, potentially owning up to twice as much compared to traditional venture debt models.

Examples of Assets Used for Collateral

1. Receivables and Factoring: Companies that have delayed payment cycles, such as app developers or trucking companies, can use their receivables as collateral. Upper 90 advances funds based on these receivables, smoothing out cash flow.
2. Equipment Financing: Companies with significant equipment costs, such as those in the energy sector or tech-enabled services, can leverage these assets to secure credit.
3. Subscription Revenue: Businesses with recurring subscription revenue, such as SaaS companies, can also use this predictable income stream as collateral.

Who is Billy Libby?

Background and Experience

Billy Libby’s journey to founding Upper 90 is unique. With a diverse background that includes working in the White House and banking in Hong Kong, Billy eventually found his niche in quant trading and electronic trading. His experience in using data to predict future prices combined with his passion for technology led to the creation of Upper 90. Alongside his partner, Jason Finger, they aimed to bridge the gap between efficient capital allocation and the burgeoning startup ecosystem.

How Do Macro Economic Trends Affect Venture Debt?

Current Market Dynamics

The current economic climate is marked by rising interest rates and increasing defaults, particularly in real estate. This environment poses challenges but also opportunities for venture debt. Billy emphasizes the importance of finding sectors with inefficiencies, where spreads are wide enough to accommodate fluctuations in interest rates without impacting the ability to service debt.

Tailwinds vs. Headwinds

Billy’s experience in quant trading taught him the value of having a macro tailwind. In the current market, certain sectors like real estate are highly efficient and sensitive to interest rate changes. However, niches like app receivables or YouTube royalties offer higher yields and more room for error, making them attractive for venture debt.

When Should Founders Consider Debt vs. Equity?

Framework for Decision Making

Founders often default to raising equity without considering other options. However, a strategic approach to financing can significantly impact the founder’s ownership and the company’s growth trajectory. Here’s a simple framework to help decide when to consider debt:

1. Presence of Collateral: If your business has receivables, inventory, equipment, or recurring revenue, it might be a good candidate for debt.
2. Capital Intensive Activities: Companies involved in acquisitions or those with significant capital expenditures can benefit from debt to finance these activities.
3. Early Discussions: Engage with potential debt providers early in the process, ideally before closing an equity round. This allows for a more balanced and less dilutive financing strategy.

Diversification of Capital Sources

Billy advises against relying solely on equity investors. Instead, founders should consider a mix of equity and debt to diversify their capital sources. This approach not only preserves ownership but also brings in specialized partners who can offer tailored financial solutions.

What Should Founders Know Before Seeking Venture Debt?

Choosing the Right Partner

Not all debt providers are the same. Founders should look for partners who understand their business stage and needs. Large institutions may not be the best fit for early-stage companies. Instead, firms like Upper 90, which focus on being the first credit partner, can provide the necessary support and flexibility.

Equity and Debt Alignment

Upper 90’s model includes both debt and equity components, with 90% in debt and 10% in equity. This alignment ensures that Upper 90 has skin in the game, fostering a collaborative relationship where both parties are invested in the company’s success.

FAQ: Common Questions About Venture Debt

What is the primary difference between Upper 90 and traditional venture debt?Upper 90 focuses on asset-based lending, providing credit based on the company’s assets and revenue streams rather than equity and investor backing.

At what stage should a company consider venture debt?Companies can consider venture debt as early as the Series A round, especially if they have collateral such as receivables, inventory, or equipment.

How does the macroeconomic environment affect venture debt?Rising interest rates and economic fluctuations impact different sectors differently. Niche sectors with higher yields and inefficiencies offer better opportunities for venture debt compared to highly efficient sectors like real estate.

What should founders consider before raising debt?Founders should evaluate their capital needs, engage with debt providers early, and choose partners who understand their business stage. Diversifying capital sources and aligning equity and debt interests are also crucial.

How can venture debt impact a founder’s ownership?Using venture debt can significantly reduce dilution, allowing founders to retain more ownership compared to raising large equity rounds.

Conclusion

Understanding venture debt and its strategic application can provide significant advantages for early-stage startups. By leveraging assets and revenue streams, founders can secure funding while preserving ownership. Engaging with partners like Upper 90 early in the process ensures tailored financial solutions that align with the company’s growth trajectory. For more insights and detailed discussions on startup best practices, listen to our Interplay podcast and explore our resources. If you’re an entrepreneur looking for support, consider joining our Interplay Incubator.

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