Brian Parks CEO of Bigfoot Capital Interview

Over-Dilution – Are you giving away too much equity?

Steve Keifer:
I imagine most of the audience is familiar with the venture capital model and the positives of it, but maybe a little bit about kind of the downsides of potentially giving away too much equity and the dilution impact and that kind of stuff before we jump into the debt side.

Brian Parks:
Obviously dilution, right? There’s only a hundred points on a cap table. You can’t expand that and you know, who’s owning it at any given time. If you start a company and you start it with a couple of co-founders and you want to have employees of that company, that is a huge bet you’re making at the end of the day on the value of that equity. You should want to retain as much of it as you can for yourselves and your team as reasonable, right?

I’m not anti dilution. I’m not anti-selling of equity. I’m anti-frivolity with equity. I think way too many companies become too frivolous with their equity and effectively undervalue it because it’s almost like once you start selling equity, you get addicted to selling equity. You want a higher valuation the next time. You want more money the next time. It’s very easy to fall into that trap, I think, especially if you haven’t fallen into that trap before. Once you fall into that trap, and recognize it and look back to understand some of the potential negative impacts, you may not do it again. You may not do it in the same way. I think convertibles and really SAFEs have really contributed to that as well. So those have been deployed for the last decade plus, right? And it’s easier and we should just do this. You don’t have to put evaluation on it. Frankly, investors have pushed that narrative and which probably plays to their benefit.

At the end of the day, those are dilutive instruments. They’re meant to convert to equity if they’re not equity day one.  I’ve called that kind of like the convertible note overdose. You get in this cycle of doing it. So that’s really dangerous, it’s dilution. The other aspect of it is really the path that you’re putting yourself on. The bar you’re setting to have successful financial outcome for all stakeholders.  And that is a path that can be very hard to get off of.

What we’re trying to foster is successful financial outcomes for the folks running these companies and the folks putting equity capital into these companies. That’s what we’re trying to do with our capital and step into a situation where we still feel like everyone can have financial success. I think often times over equity capitalizing a company can really compromise that.

Generally speaking, the way enterprise value is going to be realized for these companies is an acquisition. It’s not an IPO. That like hardly ever happens, right?  However, there can be a lot of software acquisitions. I’d say most of those software acquisitions are below a hundred million dollars. If you raise $30 million of venture capital, that’s not a successful financial outcome, generally speaking, and your board may even block that outcome.

TAM or total acquirable market is another way I think about it. There’s only so many acquirers out there, be it financial acquirers, private equity firms, what have you, or strategics that can take down a half a billion dollar acquisition. There’s only so many that can take down a $300 million.

There’s a lot much higher likelihood and a much broader pool of capital and acquirers that can buy me for a hundred million, 70 million, 30 million. How do I orient my capital structure against that and preserve that optionality for myself?  That’s the way we want people to think about outcomes, right? I think all too often people don’t think about that and get caught up in.

Can you tell us more about Bigfoot Capital and why you decided to start a debt financing company for B2B SaaS?

Steve Keifer:
Can you share a little about your background, your story, and Bigfoot, and where you guys focus in the market to provide the audience with some context?

Brian Parks:
Bigfoot Capital is almost eight years old next month. I started Bigfoot in 2017. Prior to that, I graduated college in 2004. The prior 13 years was a hybrid of financial services and operational roles within software companies. Out of school, I spent about five years doing lower middle market investment banking outside of tech – helping companies achieve sales as a sell-side advisor.

In 2010 jumped into tech companies as  employee one at an online travel distribution business.  I then started an enterprise software company in the digital asset management space, marketing tech. I did a couple of other gigs at other startups and the last job I had before before starting Bigfoot was at a lending business for tech companies.

It was there that I incubated this idea for applying debt capital to software companies.  That’s where I had been operating and where my network lied and where I had raised angel and venture capital.   I had seen capital structures deployed effectively, as well as diversified capital structures back in my investment banking days. I got into tech and that just was not the case. Everything was equity funded. My question was – can we figure out how to provide an alternative capital solution such as debt to these companies.

That’s what we’ve been doing ever since.  It’s going quite well, and we’re very committed.  Our goal with conversations like these is to help inform people about the benefits of having a capital stack that’s not just 100 % equity. I’m not saying it should be 100 % debt. Sometimes, it can be, but that’s certainly not the norm. But I think we are certainly advocates of a reasonable application of debt in the capital structure of software.

Why should B2B SaaS companies consider venture debt in addition to equity-based funding?

Steve Keifer:
What are some of the advantages of mixing equity with debt and how does debt financing work?

Brian Parks:
Two potential disadvantages of taking equity are, of course, the dilution and then the path you’re putting yourself on. The inverse of that with that is you aren’t incurring dilution, or you’re incurring minimal dilution if there are some warrants attached for venture debt facilities – not dilutive. I think you’re not putting yourself on some path that you can’t get off of. The job of the lender is not to over-lever you. That’s not lend you so much money that it compromises a healthier company.

If the amount of money lent to a company is reasonable, which everyone should want it to be, then it is much less risky a part of your capital structure than the equity, not just for the person providing the capital, but for the company itself. It doesn’t put you on some path that you can’t get off of. You can get the debt repaid somehow and some way. It’s not there in perpetuity. People think it’s way more risky to put on to a company than it necessarily is and into the capital structure.

The equity is there in perpetuity. You can’t get away from it, right? The only way you can get away from it, you know, if you sell the company and it’s successful.  The only way you can get away from it in another scenario is by recapping the company, which is going to come with a lot of pain often times. So long as it’s moderately applied, we never want our capital to back someone into a corner or put them on the path because we are so understanding that again. We want people to have a broad array of potential outcomes available to them. 1) Raise an equity round, 2) don’t raise an equity round, 3) sell the company, or 4) IPO the company. We don’t want to turn off any option. And our best way of doing that is by not over-levering companies.

How long does it take to raise venture debt?

Steve Keifer:
What’s the process like to raise debt? One of the things that I always don’t like about equity is it’s just so time consuming, distracting, it goes on for three to six months.  You’re caught up in all these debates about the valuation. I just feel like it just such a distraction for the management team. How’s the debt process in terms of timeframe and what’s involved in it?

Brian Parks:
It can be a quicker process. I would say it’s still a comprehensive process, though. I’d say six to eight weeks from kind an initial conversation to a funding. If it’s a bank, it’s probably double that, let’s just say, three to four months. Banks are slower. It’s not the world’s worst process, but it’s also not, at Bigfoot Capital we don’t provide kind of click-button capital. And many others, I would say, providing millions of dollars don’t or maybe shouldn’t either. I’d say if you’ve been through an equity raise before, it shouldn’t be a painful process at all to go through say our diligence process or most lender’s diligence processes. You should have your stuff organized; you should have it together. You’ve been there, done that. And you just know what to expect.

What types of financial statements and operating metrics are needed for  underwriting venture debt for a B2B SaaS company?

Steve Keifer:
What do B2B SaaS companies need to provide to be considered for debt financing?  Do you need audited financials?  Is it just the three primary financial statements?  What kind of what the operating metrics you guys look at?

Brian Parks:
We, at Bigfoot Capital, don’t require audited financials. Where we’re generally playing is sub $10 million revenue software companies. They generally don’t have audits. We will start to expect an audit once a company clears that level of revenue ($10M). It’s a good idea if you can afford one to have an audit. Looking even beyond this debt financing and looking out into the future for potential acquirers, to have done that. But for us, no, audits are not required.

The monthly reporting is pretty straightforward, not overly onerous. We’re not taking a board seat. We don’t take a board observer seat. Some may. We say, look, we like to be informed. We expect to be informed with the information. And if we’re informed, two things, we’re more comfortable, which is to your benefit, and we can probably be more helpful as well.

That’s in the form of financial statements. Hopefully you have an accounting system producing financial statements. Get those to us and a compliance certificate, which is one page.  I’m adhering to my covenants and we can get to covenants and what those look like. And maybe some customer level reporting. Asystem like Ordway is great, honestly, because then all that stuff is organized and it is easy to provide. And we can consume it and frankly not bother you.

What is the typical term for venture debt with a B2B SaaS company?

Steve Keifer:
What’s the typical term for a SaaS company that’s less than 10 million in ARR? Is it three years?  Is it five years?

Brian Parks:
It be as short as 12 months, can be as long as call it 60 months. That is also scale dependent. If you’re very early stage with not much revenue and it’s a really small loan, it may be expected to be repaid quite rapidly. If you have more scale, 10 million plus, let’s just say 20 million plus, you may get five year money. Somewhere in the middle and again, where we play, it’s generally three year money.

Is repaying money in 12 months a good thing? I have hard time understanding how you get much value out of that capital, frankly, and how you generate return on it. I caution people on it. Am I just having to continuously borrow and repay it rapidly?  Then you’re on a borrowing hamster wheel, but it just is not that beneficial for you.

Over thinking 60 months is what we’ve seen across 50 plus companies that we’ve worked with.  If we put out 36 months of money, it’s typically repaid sooner.  It’s fine if it goes to the full term of five years. However, often it’s not going to go anywhere near that long. And you may be paying some other form of premium to get that extra one to two years that you don’t need.

How much venture debt can B2B SaaS companies raise?

Steve Keifer:
When we’re taking out debt, can you raise as much debt as you do equity?  Is there a ceiling on it?

Brian Parks:
The answer is that it depends. I’ll separate venture debt from non-venture debt lending to tech companies. We, at Bigfoot Capital, are a non-venture debt lender to tech companies. You could class this as like an ARR lender, lending truly against the revenue, regardless of how you’re capitalized, frankly, from an equity standpoint.

A venture debt lender is different.  The way they are going to size their loans is as a percentage of the equity that you just raised, which will generally be something like 30 % of the equity you just raised. If you raised 10 million bucks, here’s three million bucks in debt. They’re then representing effectively 25 % of your total capital structure. So “no,” you’re not going to be able to get as much debt, pure venture debt as you can equity.

For us (Bigfoot Capital), who are more of an ARR lender, you very well could raise more debt.  Some of it’s stage-dependent.  We’re providing 25 to 50 % of the ARR in debt for companies under $5M ARR. Once you clear $8M ARR top line,  you can get 50 to close to 100 % of your ARR as a loan. 100 % is gonna be stretching it. Once you clear 10 million, you can get 1X ARR, Once you clear 25 million, you may get up to one and a half X ARR.

What are the downsides of venture debt for B2B SaaS companies?

Steve Keifer:
Are there any downsides on the debt side? You mentioned a few minutes ago that governance is relatively light, I think, compared to what we’re used to on the equity side.  What about debt covenants?  Do you take any kind of collateral? What are some of the potential downsides that people should just be aware of?

Brian Parks:
We, at Bigfoot Capital, do take collateral, ourselves and others, generally the senior secured lender. So we’re filing a blanket lien on all assets, including IP. And so these are asset like businesses as we’re all aware. you can kind of say, how valuable is that collateral at the end of the day? That’s kind of suspect, but we still are the secured lender.

Being a secure lender can be important because you still set the top of the stack, which even though you’re not on the board, gives you some protection and potentially influence. That’s meaningful to senior secured lenders. So there’s that. In terms of downsides you do have to service the debt. You have to repay it. You don’t have to repay equity.

Hopefully you do repay the equity and deliver a return because that’s good for you. You have got to pay us interest and you got to pay us our loan back. If you’re unable to do that, we’re not heaping personal risk upon you. We’re not taking personal guarantees, but there is potential risk to the business and the equity that is funded the business. Because again, we’re top of the stack. Any senior secure lender in an absolute downside protect capital scenario is going to try to get as much of their capital back as possible. They may be successful. They may not be successful.

You could say that by servicing the debt, we can put less back into growth. I understand that. It is a use of money that does not hire that other person, but it’s also a source of money that has helped you hire those other people prior to having to repay it.  You’re not incurring dilution. That’s a real thing to consider.

What is the ideal mix of equity vs debt for B2B SaaS companies?

Steve Keifer:
Is there kind of a perfect ratio at different stages or is it really just situational and different for every company?

Brian Parks:

The answer is that it is stage dependent. If you start at the late stage, publicly traded companies in the NASDAQ, they are approximately one to one deck to equity currently. That moves on a quarterly basis.  Currently, it’s something close to one to one meaning that 50 % of the capital stock is debt, 50 % is equity. For where we play at Bigfoot Capital 10 to 25 percent of the capital structure is debt.  It is certainly not 50 to 50 and not zero because obviously we’re funding them with debt.  Prior to us getting involved it may have been 0 % debt 100 % equity.  Often times there’s not some incumbent lender. At the earliest stages it is 100 % equity funded. But as you progress, that 0% goes up to 50%.