• Andrew Hutton

Building Your Capital Stack Beyond VC: A Deep Dive with Thomas Rush


Venture capital has exploded over the past few years.


Both as an ecosystem and as a growth mechanism, it’s always in the news. Raising VC can be great for some founders and equally bad for others. It all depends on a handful of factors.


Last week, Day One hosted Thomas Rush, Founder of Bootstrapp and Head of Platform at ConsenSys Labs.


As the Founder of Bootstrapp, Thomas is passionate about helping founders find the right source of capital for them, and his platform has indexed over 100 alternative sources of startup capital and provides advice and direction on how to navigate the funding landscape.


We sat down with Thomas to run through his experience in fundraising, bootstrapping, equity, debt, alternative financing, and everything in between.


Fundraising Trade-Offs


Depending on the type of company you’re building, you may need a lot of funding early on, or venture really might be a poor choice for your business.


I always like to ask, why are you fundraising in the first place? You’d be surprised by how many people will raise for things that they can achieve without outside financing.


At an early stage, it’s critical that you understand how taking on venture funding today could affect the future, whether that’s next week or five and ten years down the road.


On the day you close a round, venture capital really does give your company a lifeline. It can protect you from the unexpected, like a pandemic and any other twists and turns that you’ll encounter. Once you’re on a time table with investors, you're expected to spend your venture dollars to grow and to hit milestones to raise more money before you run out.


If you take venture, you need to be aware of the trade-offs. Venture investors typically take board seats, and after a number of rounds, you're likely to end up outnumbered by outside board members, and you'll be a CEO working for your company.


Lines Over Dots


But if you go down the venture path, investors want to invest in lines, not dots.


As a founder, you need to develop a real relationship with an investor based on continued “dots” of notable progress and quantitative traction at every point. Not to mention, throughout this period you’re developing trust and rapport, which is equally critical in early-stage investing.


It’s the same for advisors. Selecting an advisor boils down to one thing: value they’re bringing to the table. The more structured you are in defining that value, the better the relationship.


Engaging with investors early on and maintaining that relationship is incredibly important, especially at the seed stage. If I’m being completely honest, pre-seed investors are really just talent investors. They invest in you and your vision of the future, not companies.


Investors want to know that founders are going to create value from every dollar being provided. While raising, there’s no magic formula for success and nobody is going to hand you anything.


On a practical note, I’ve found it incredibly useful to build out a basic CRM with your ideal funds and strategic angels. One element I’ve come to like is listing out the exact people who can make introductions, not just the investors themselves.


The operators, angels, and consultants across the industry are massively valuable in this process because of their vast networks. Put simply, the more detailed the CRM, the stronger your capital raise and your investor roster will be.


Acme Incorporated


Here’s a common hypothetical that illustrates the pitfalls of going the venture route, and why it's not always rosy even when you "succeed". Let’s call this pretend company Acme Inc.


Acme’s founder really believes in the business, so he puts in his own money. Even though the business is doing well, the founder realizes he lacks the capital to realize Acem’s full potential. He raises a seed round, which allows the business to grow, but not only was he diluted, the investors received preferred equity and sit at the top of the capital stack.


Suddenly, a big company wants to acquire Acme, but they value your company based on the revenue and the IP at some amount that is less than all the money that's been put in.


This is the crux of a capital stack. As you go up the capital stack, you have to pay off your debt first. You can’t sell the company with a bunch of personal debt. Then you have to pay off the seed investors based upon the legal requirements of the contracts you signed with them.


All of sudden, you’re stuck in this gap where you end up with nothing.


The core takeaway is this: you can build a brilliant company without a particularly great outcome for yourself. Creating value for your company is different from capturing it for yourself. It’s critical that you understand the nuances of equity and debt and the various trenches of your stack.


Venture Debt and Alt Financing


In addition to understanding the trade-offs that come with venture, specifically as it relates to your capital stack, it’s critical that you’re aware of alternative financing options as you scale.


It’s important to note that when it comes to venture debt, you don't actually have to be profitable or even have a perfect cash flow position. In the process of extending venture debt, lenders are basically banking on the strength and the diligence of the VCs in the deal or whoever is on your cap table. Because of this ease of diligencing an investment prospect, especially with high signal VCs in the round, venture debt has become quite popular in early and growth stages.


On the other hand, your typical SBA loan or asset-backed line of credit is going to involve pretty serious quantitative diligencing in which the lender will run through a deep dive of your data room. Essentially, bankers go through the motions of a traditional underwriting process.


During that exercise, you’ll be put through a range of questions. Do you have enough cash on hand to service this debt? Have you been around for more than a couple of years? What are your growth metrics and net margins? Are your team’s hiring plans sound and scalable?


Finally, revenue-based financing has also become very popular. That being said, I'm definitely in an echo chamber and am quite aware that the market for it is still immature. Though, based on recent reports, there’s well over $12 billion of capital that’s primed to allocate. Notably, revenue-based financing has become increasingly common in the e-commerce ecosystem due to the embedded difficulty in traditional inventory and accounts receivable financing.


Despite the fact that alternative financing like debt doesn't make the news or headlines, it’s still incredibly important to understand as an emerging founder going through your first raise.


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