April 1, 2025 • 32 mins
In this episode of How I Invest, Billy Libby, Co-Founder and CEO of Upper90, discusses how his firm is redefining venture capital through a hybrid investment model that combines equity and credit. He shares how Upper90 empowers founders to scale without excessive dilution and offers insights into navigating today’s venture landscape. Billy’s approach to alternative financing provides valuable lessons for entrepreneurs and investors alike.
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Episode Transcript
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(00:00):
A few years ago, Crusoe Energy approached usand said, this new asset, it's called an NVIDIA
(00:05):
GPU.
We think it's gonna change the world.
We think it's gonna be core to all AI cloudcomputing.
Will you help us figure out how to finance thisequipment?
At the time, it wasn't really well understoodby banks.
We look for these equipment oriented businesseswhere we can help kinda season before it
becomes well understood and well accepted as anasset class.
(00:26):
So today, there's institutions from Black Stoneand others that are financing Nvidia chips two
or three years ago.
If you can think about financing thosepartially with credit versus all with it.
(00:48):
Grubhub and Seamless merged in 02/2013.
The businesses were a similar size, but theGrubhub team owned a substantial larger stake
in their company.
Why is that?
My partner, Jason Finger, was a lawyer for amoment and had to go and order dinner for his
bosses and saw that he could get a 2% cash backon his credit card if you ordered it through
(01:12):
his own means for the order.
So that's kind of how Seamless started.
But he was educated in tax and finance.
And so when he raised money for Seamless, heraised a small amount of equity, like hundreds
of thousands of dollars.
And when he would sell that service, he wouldget the customer to, instead of paying over two
years, maybe to pay those two years upfront andfiguring out ways just to get access to working
(01:35):
capital lines and stretching dollars andeffectively thinking of using credit.
That really helped him grow the business whereequity would have been raised in much larger
quantums.
The vast majority of Seamless was owned by themanagement team.
The Grubhub team, which was Chicago based,ended up raising more of the traditional you
raise a seed round and then you prove theconcept, you raise the A round, you raise the B
(02:00):
round.
It's almost this like flight of passage.
It's like, how many announcements can you getand how big can those rounds be and how
preemptive can they be?
There's nothing wrong with that.
But when they ended up merging the businessesbecause of that capital structure and because
of the use of credit and just different tools,the Seamless team owned the majority of the
business and the Grubhub team owned theminority of their business, same business, same
(02:23):
size.
And I think when Jason and I connected, he'slike, most founders are just, they don't think
of these tools.
They're not taught about credit.
And that really drives his interest of Upper90and helping founders have different paths to
own more of their company.
When a lot of startups think about credit,there's this perception that it's only for
fintech companies.
What kind of startups can utilize credit?
(02:46):
That's a good point.
I mean, is very easy to understand because youkind of have some payment in the future and
you're factoring it or collecting it today.
And it's part of everything we do.
Everyone has a credit card and everyone has carpayments and it's kind of just normal.
So we do that and still think there's a role tohave a good early partner.
(03:08):
But the other things that we've seen have beenequipment.
There's a lot of new forms of collateral or newbusinesses where equipment's not yet well
understood.
A few years ago, Crusoe Energy approached usand said, There's this new asset.
It's called an NVIDIA GPU.
We think it's going to change the world.
We think it's going to be core to all AI cloudcomputing.
(03:29):
Will you help us figure out how to finance thisequipment?
At the time, it wasn't really well understoodby banks.
We look for these equipment oriented businesseswhere we can help season before it becomes well
understood and well accepted as an asset class.
So today there's institutions from Blackstoneand others that are financing Nvidia chips two
(03:49):
or three years ago for $90 If you can thinkabout financing those partially with credit
versus all with equity.
You have this new thesis on NVIDIA chips, andyou don't yet have the large institutional
investors, the Blackstone's, able to financethem because the thesis is too new.
How do you go about structuring the investmentin such a way that's both attractive to the
(04:13):
counterparty, but also attractive to you andyour investors?
It's a it's a really good question.
We always say, like, each facility we do is abit tailored.
With a NVIDIA GPU, the question was, how longis this NVIDIA GPU worth anything?
How quickly is the next GPU coming out?
How far ahead is NVIDIA versus AMD?
The big question for that was not demand.
It was what's the right life of thisinvestment?
(04:36):
And so in that deal, we said the most importantthing is having a fast payback period.
So having a shorter duration facility andhaving faster amortization and getting paid
down along the way.
So your breakeven is under two years.
And as you make the investment, the idea isthat if you're successful, you're going to be
(04:58):
taken out by a larger credit partner.
So talk to me about the incentives of thedifferent parties when it comes to getting
taken out of the credit facility.
Alignment is something we think a lot about.
There's a few ways that we accomplish this.
So number one is we've kept our fund size smallin the world of private credit.
And so our last fund's around $400,000,000 Wecan do 10,000,000 or $20,000,000 facilities.
(05:23):
Most people don't want to be bothered with thatsize, but that's often kind of what the company
needs when they're getting started.
So one is just fund size matters.
And number two is we typically, whenever we doa debt investment, we'll do 10% in equity of
whatever we do in debt.
It just forces us to really think about, is ita business we're excited about?
(05:45):
Plus, is it an asset that we think can pay backour debt?
And I also think most credit funds don't thinkabout it that way.
They view themselves as like, Hey, I'm going bein this for a period of time and then I'm not
going to be in this.
And it's like this very temporary relationship.
And I think when you see things not go well,that's why there's this adversarial
relationship often because it's like atemporary partner versus equity.
(06:07):
So the opposite of this also has some truth inthat a lot of great companies have been taken
down by facilities like venture debt or bycredit.
When should a start up think about bringing incredit versus equity onto their cap table?
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(06:27):
The first thing is Jason Gus, who has been alongtime partner, he runs Octane Lending.
We've done a lot with them.
He says, if you're a capital intensivebusiness, you should have upper 90 or a firm
like them on your balance sheet because you'realways going to have problems that come up.
Like even in fintech, I saw a company who had asystem outage and they ended up having a pool
(06:48):
of receivables that they needed to use equityto fund.
They have a new product they want to launchthat's outside of their buy box.
They want to work with a customer that's biggerthan the concentration limit allows for.
So often I see startups, they get equity orcapital from like six firms and there are six
VC firms that all solve the same problem.
It feels diversified, but you're really not.
(07:10):
So I think get two to three VC firms for hiringthe best talent in marketing and just rainy
day.
And at the same time of that round, bring in agroup like Upper90 if you have receivables or
equipment or do acquisitions, because it justallows you to have another tool and a kind of
part of the foundational DNA to grow.
It's like raise equity and then you think aboutdebt.
(07:32):
I would really encourage firms where capital iskind of a critical part of their business
strategy.
It should be part of that round as one versustwo step.
Double click on the financial metrics.
So what needs to be true within theprofitability of a company, either at Topco or
on a specific product before they should bringon credit?
(07:53):
Fintech, you can probably start with creditearlier because if you lend a dollar out, you
kind of know how to get that dollar back.
There's a lot of data of fintech receivablesand collections and pricing.
For roll ups, we learned a lot of hard lessonsin that Amazon aggregator space where they were
(08:15):
buying Amazon businesses and putting them intobigger entities.
We still do some roll ups today, but we lookfor businesses that have profitable unit
economics and are profitable at the corporatelevel.
So for roll ups for equipment businesses, Ioften think that you want to kind of prove that
out, like Stacks Engineering.
(08:35):
We just financed they build barges for shipsthat come into port where they're charged an
emissions tax from the state of California fortheir diesel exhaust.
So Stacks builds barges with a vacuum cleanerattached that will suck out all of the diesel
exhaust into carbon free emissions at port.
And they built their first barge with equity.
(08:56):
They approved the model, had really good uniteconomics, had good customers and then said,
Okay, how do we build barge two through 10?
And so that's a great step for us to come in.
We did a $22,000,000 facility, built thosebarges, and now we brought in a bank to build
the next phase of barges.
And so they've been so capital efficient interms of equity to debt where they may have
raised a huge initial equity round and built alot more barges than they needed to, to kind of
(09:20):
go and get credit from the market.
Talk to me about the seasoning process.
Maybe talk about the NVIDIA chips and how youwent about seasoning this product.
What does it mean to have a seasoned financialinstrument that somebody like a Blackstone
would want to take out?
Yeah, I mean, the NVIDIA journey is prettyinteresting because we didn't start there.
Crusoe started capturing natural gas that wasbeing flared in the middle of the country, and
(09:44):
they were building portable data centers to goand capture this natural strain of energy to do
Bitcoin mining.
And at that time, the CEO came to one of ourevents.
We bring together all these really interestingfounders from different industries.
I think you've been to some.
And he's hearing another company talk about howthey're using credit.
He's like, My biggest expense is a generatorfor my data center.
(10:04):
It has nothing to do with being a startup.
It has nothing to do with being a Bitcoinminer.
But the traditional equipment financiers viewedthem as risk on risk on risk.
So we said, we'll finance your generator.
And we gave them an $8,000,000 facility.
We, as a small fund, can start small like that.
And that's really our seasoning.
It's like don't overextend and try to makethese initial phases bigger than they're really
(10:26):
designed to be.
Prove a concept right.
Don't over lever the business.
Get a good amount of equity.
We did $8,000,000 And then as he startedshowing good performance, we grew that to
$40,000,000 over time.
And then at that point, call it around a$50,000,000 capital, you have an endless number
of banks and institutions that will financethat.
It's almost kind of an RFP.
(10:47):
And so we said, great, the best thing for thebusiness is now that we have the metrics in
place and the financial team in place.
We helped kind of put that infrastructure inplace, not just capital.
He had everything he needed to go get bankfinancing.
And he said, Hey, I was like, What's the nextproblem?
He goes, Nvidia GPUs.
And so instead of going and using equity forthat, we then rolled into the next product and
(11:08):
got out of the product where he should getcheaper financing.
Last time we chatted, we talked about just themagnitude of capital that's going into these
opportunities once they're seasoned.
So how much capital is actually available foronce you're seasoned?
And what are the second order effects of havingso much capital waiting on the sidelines to
fund these projects?
(11:29):
I just talked to an LP earlier today and it'slike, hey, the market volatility, this must be
creating so many opportunities.
And I said, the amount of money that's sittingon the sidelines is huge.
I feel like you have to work twice as hard nowto find reasonably priced deals.
You really have to hustle.
And I'm sure it's the same in your world.
There's just a lot of money chasing a fewernumber of good opportunities at fair prices.
(11:52):
Our biggest thing is starting small.
And I would say the companies need to be itreally goes back to your first point.
If you're a capital intensive startup, fintech,equipment, receivables, acquisitions, roll ups,
you want to start investing in that earlybecause the bigger banks and bigger
institutions are going to want to see an audit.
They're going to want to see good financialreporting.
(12:12):
They want to see a controller or a finance leadoverseeing the product.
You want to adhere to all of their covenantsthat they're going to have in place.
So I think a lot of it's just kind of lookingthe part and having enough capacity.
There's a lot of concern of the consumersoftening right now, the consumer being maxed
out.
I was talking to some of our fintech companiesand they're saying they're getting tighter
pricing today from banks than they've evergotten in the past, which is fascinating.
(12:36):
And it just shows that there's just more moneyversus kind of good opportunities.
And I think these funds have all gotten too bigtime.
And I think if you're a small, nimble fund likeus, I think that's an advantage.
A lot of funds want to do the bigger deals.
What kind of returns are you looking to getinto these kind of investments?
Low to mid teens from the credit.
And we want to make sure the company we'reinvesting in is earning from the capital we're
(13:00):
giving them more so they can service our debt.
So venture debt, a lot of people often confusewith what we call asset backed debt.
Venture debt is usually giving money to acompany that's losing money.
The way that you get paid back is by thecompany raising more equity.
So it's more of a bet on equity supporting thecompany versus the company having profits to
(13:21):
pay you and service your debt.
So we want to make sure if it's an NVIDIA chip,how much more is Crusoe making when they rent
out an NVIDIA chip than they're paying us infinancing costs?
If Octane is going and doing powersportfinancing for jet skis and ATVs, how much more
are they able to charge a consumer than they'repaying us?
(13:42):
And that's kind of the excess spread.
That's a really important metric to make surethe company is providing a service that's
valuable enough where they can charge a ratethat's higher than their cost of funding.
And I think that's like a really importantmetric for us.
And you have to find these nichey businesses.
We just financed a company called Sunbound, andthey're built technology software for nursing
homes.
So nursing homes like Jason, when he startedSeamless, are offline and antiquated, and they
(14:07):
help Toast or Seamless kind of control andcapture all of your bill pay and finances as an
independent nursing home.
Somebody takes a bed in a nursing home andSunBound's getting paid sixty days later from
insurance.
Is there a way for us to kind of provide someof that capital upfront and collect it for the
nursing home?
And that's where Upper90 steps in as a capitalpartner to Sunbound to offer a new solution in
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a vertical niche industry.
This factoring like product, it's not somethingthat they could get from typical banks.
And why are there no other solutions for that?
So there are being able to really move quickly.
These are fast growing companies.
They want somebody that can come in and solvetheir problem quickly.
So that's one.
Often it might take a long time.
Like imagine going through a mortgage and howlong it takes to get approved.
(14:48):
So there's just an inherent time cost whenyou're dealing with a bank.
So that's one.
Number two is we really say, look, we want tobe your partner for this space.
So we'll do a $30,000,000 facility.
We're not doing ROFRs and locking you up forthe next 100,000,000 which really might see a
substantial drop in cost of capital.
So that's number two.
And then number three is how many credit firmshave a partner who started a tech company?
(15:12):
And so we come in and say, here's the otherthings that we think we can help you with.
Like, hey, before you raise your next equityround founder, have you stacked your QSPS to
get maximum treatment for yourself?
It's like we're kind of operating as thiscapital markets conciliatory or partner to
really help the founder.
And I don't think a lot of other credit firmsare designed to do that.
So it's like our capital is greener and I don'tthink people 2% delta here or there isn't going
(15:37):
to make or break the business.
Another founder in our portfolio from Mundy, hesaid, When you're deciding who your capital
partner should be, often people think cost isthe biggest factor.
It's really certainty of capital, speed,flexibility.
Can I use this in a way I need it?
And then cost.
I see so many facilities where they get reallycheap financing, but then it doesn't really
(15:59):
allow them to use the facility.
Like, Hey, we have this amazing customer, butit's going to be 6% of our total portfolio and
your concentration limit says 5%.
And they're like, I'm getting paid 8%.
Why would I take any more risk?
No upside.
So you alluded to it earlier.
How do macroeconomic cycles and just the stockmarket, the economy play into how you deploy
(16:24):
your capital?
One of our LPs said, it may be like a StanDrunkenmiller quote, The hardest time to deploy
is always today.
So any environment you're in, it's like themarket's ripping and there's more capital.
So it's just always hard to find good deals.
We built our LP base.
We have almost 300 LPs and most of them arefounders.
We kind of said, Hey, let's build it aroundsourcing.
(16:45):
If we see problems, we're good problem solvers.
That's kind of how we built it.
I think a lot of funds are like, How much moneycan you raise?
And then we'll figure out how to createincentive programs and affiliate programs and
relationships to get deals.
So I think it's always hard to find good deals.
The things that we've learned now that we're inour third fund are it's really important to be
diversified, get paid to take more concentratedbets like you do in venture.
(17:09):
So I think just really diversification is yourfriend.
Right now, it's kind of an environment whereyou might want to earn, even with rates being
higher, maybe a little lower return than tryingto chase return because there feels like there
could be a lot of unknowns around.
Does the IPO market open up or not, or does theconsumer really get stressed to a level that's
(17:29):
almost like earn less even when rates arehigher and people think you should be earning
more because of some of these uncertainties inthe market.
Yeah, we see a lot of top institutionalinvestors cycling from just long equity to
structural solutions like asset backed credit.
That's one of the ways that institutionalinvestors are playing it.
(17:49):
You have 300 LPs, a lot of venture funds orother types of funds have thought about having
this kind of network driven fundraisingprocess.
What are the pros and cons of having 300founder LPs?
Pros are you're just interacting with so manyinteresting people that are really in the
middle of unique opportunities.
(18:12):
When we had our first upper 90 dinner, I thinkit was 10 people from the quant world where I
came from.
And Jason brought 10 people from his techworld.
And we were joking.
If the quant side of the room saw a tech deal,it's like how many people in the tech world
said no to this deal?
That somehow it trickled down to the financepeople.
And in the same thing the other way, the bestdeals are capacity constraints.
(18:36):
So if Jason or somebody sees a quant deal, howmany people said no?
Or is that fund just too big?
So I just love interacting and learning fromthese people.
Vertical.
And the best ideas often occur when you bringtogether two different groups.
So I spend most of my day kind of uncoveringopportunities or engaging that group to win
(18:56):
deals.
The firm that's probably done the best versionof this is lead edge capital and really made
that programmatic to open doors for customers.
The challenge is, and we learned this in Fundthree, some of the bigger deals in our
portfolio require more capital and morecertainty.
So there's a role for institutions to speak forbigger dollars because in their broader
(19:18):
portfolio, it's still a small position.
So I think that we learned it's like the LPsthat we have that are the entrepreneurs, it's
really for deal sourcing and deal winning, notnecessarily for more capital and kind of
relying on institutions to fill the capitalvoid that we didn't have in Fund one and two.
So you want to have a diversified capital pooland you want larger checks that can move
(19:39):
quickly.
What about from a time management standpoint?
Is it tricky to have so many LPs and how do youdeal with investor relations aspect?
It's hard.
I mean, I think any business, it's like 20% ofyour customers derive 80% of the value.
So I think really kind of thinking of who arethe people that see the most deals and be more
(19:59):
proactive with them and engaging them.
And so I think it's just like kind of anybusiness, probably your most valuable
customers, like you have to be intentional andadd value to them and kind of deserve their
time.
And a lot of people have time and might takeyour time.
So I think it's just being more proactive withthe people you really want to make sure you're
(20:21):
spending the most time with versus whoevertakes your time.
As you transition from Fund two to Fund three,you start to incorporate more institutional
practices.
What are some of those practices that you hadto implement in order to become successful in
Fund three?
I view it as like a startup, like as a companythat we often deal with.
You need to really invest in operations andreporting and compliance and being able to go
(20:45):
through each month and develop, provide areally robust reporting package to your
institutions.
To go through a regulatory exam, to go throughSo you have to your You to be big enough where
you can have the best accounting firms and thebest compliance firms and the best tech third
parties.
It's hard being a small fund, especially incredit.
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So it's like you have to have kind of a minimalviable size to do all the things that
institutions expect and get from the biggerfunds.
We already had a pretty material investment onthe investment team and the IR side, but you
kind of have to do a lot of things well thatinstitutions are just prerequisites.
Today, it's 2025.
What's the minimum viable fund size for aninstitutional quality fund?
(21:30):
It's interesting.
I think that this number is going up, you know,because like the allocators, the big
institutions have so much.
They have to write big checks too.
I feel like on the credit side, like$500,000,000 what do you think it is on the
equity side?
It depends on the asset class.
We like to come in when there's like$300,000,000 roughly in capacity.
(21:52):
Cause then to your point, you could get$20,000,000.30000000 dollars that aren't higher
than 10% concentration limits that someinstitutional investors have.
In credit, I think for us, I see like, okay, ifyou're under a billion dollars, you can still
do these $30,000,000 facilities.
I see a lot of funds that are kind of creepinginto this 1 to 5 or 1 to $10,000,000,000 And
(22:13):
everyone's like, Hey, we're just going to sell.
Adelaias sold to Blue Owl.
If we get to this size and we'll just sell Idon't think there's going to be that many of
those outcomes.
So I think you either have to kind of staysmall and stay focused, like first round's done
for a long time in equity, or you have to bereally big, like Apollos, the Blue Owls, the
Blackstone.
I just feel like there's a lot of funds in themiddle and everyone's looking at the same
(22:36):
deals.
There's a thesis out there that there's goingto be a couple hundred private equity funds in
the future because of consolidation, because ofthe push from retail in the future, which is
going to be a substantial drive on the LP side,so there's a lot of economies of scale, and
because of the liquidity in the secondarymarket with the Blue Owls, the GP stakes
players, so there's that aspect.
(22:57):
There's also this aspect that you alluded to,which is the chicken egg.
You have to get to a certain size in order toget the institutional investors in and to get
the institutional quality people.
It's not just service providers.
So hiring the top CFO, the top investorrelations person, because it's a market.
The labor market is a market, so you'recompeting against bigger firms that could offer
(23:21):
bigger incentives.
Startups, it's hard to say that your creditfund is going to change the world more than
another credit fund.
I completely agree.
I think the talent point's really interesting.
We looked and did an extensive search in IR fora partner level hire, and it's amazing.
It's like bank levels, starting salaries andbonus guarantees.
(23:41):
It's a very tight and hot market for sure.
It's a good point, like, to attract and retaintalent.
Most CEOs that have taken private companiespublic, once they start to look for their
public CFO, they immediately realize they wentdown the wrong career path.
They should have become a CFO, wait until acompany's about to go public and get 5% of
(24:02):
equity of the company, and that's a much betterdeal than being CEO.
And for us, I think also having little of thatequity flavor, 90% private credit asset backed,
10% equity.
And everyone's like, Why do you do that?
Why don't you just ask for warrants?
And I said, Most credit firms kind of viewthose warrants as a call option.
They're freebies, right?
If it works, great.
If it doesn't, no, skin off their back.
(24:23):
To the founder, those warrants have value.
I mean, that's why they wake up every day, isfor the equity value of the business.
So if a founder values them, they're going tosay, Fine, I'll give you warrants.
But then I'm going to have looser covenants andI'm going to have a lower make whole and I'm
going to have a less cash pay and more pick.
So we're like, Let's get the best debt termsthat we can, and then let's invest in the
(24:45):
company.
And if the company really does well, like theCrusoe's Rocktains, we'll kind of let our
investors participate as that equity, not inour fund, but as that grows in certain
situations.
Think you need to have a little bit of anequity mindset in this world because it's hard
to build an enormous credit fund.
When I was a founder, I would almost demandthat my debt investor have a little bit of
(25:06):
equity in the game.
It just changes the whole relationship and howthings transpire if things don't go perfectly.
As you were transitioning to being aninstitutional fund, you're meeting with
institutional investors, what catalysts do theyneed in order to end up pulling the trigger on
Upper90?
One is, are you able to originate unique deals?
Are you able to secure deals that you'regetting a premium for the risk and that others
(25:30):
in the market are not seeing first?
So that was one.
Two, for the institutions, can you generate coinvestment opportunities?
So you're getting in early.
And as these companies grow, is there a rolefor us to play as your partner to help size up
those investments where they outsize the fundsconcentration limits?
So those are the two major things.
And then do you have an institutional gradeteam that can make sure that there's not going
(25:53):
to be a black eye in any part of your business,like IR, investments, portfolio monitoring,
compliance, risk, ops, tech.
Those to me would be like the three majorcriteria.
And also let's say you had an, say you have avery high bar and hyper competitive market and
you didn't choose the right HR person or techperson.
Did you talk about being a placeholder and howdid you handle that conversation with
(26:16):
investors?
It really kind of goes back to the first thingyou asked me is like, when should a company
think about credit?
When should they If you know this is somethingthat's in your roadmap, you want to get that in
place early.
So we had ahead of people, even in FUN2, forculture and for hiring and best practices.
We were very fortunate to hire a great CFO thathad come from a bigger firm that wanted to do
(26:38):
something more entrepreneurial.
My partner who leads the investment team hasbeen with us since inception.
If you're not planning, I think it's reallyhard to say, Hey, we'll do it.
You kind of have to start thinking and buildingthat in early and have that part of the
foundation and part of the culture.
So if you're a startup, you're like, Hey, I'mgoing to need to think about raising credit.
I think if you're like, Hey, now that I'vegotten to this phase, now I'm going to start
(27:00):
thinking about credit.
I think it's going to be a lot harder for youto kind of It's not part of the DNA.
It's not a senior function in the company.
It makes it a lot harder to close that gapversus making an investment early.
I want to double click on your hiring strategyin terms of hiring people ahead of when you
need them.
What's your rationale for doing that?
Walk me through the decision making on when youdecide to hire somebody.
(27:23):
Sure.
So you don't have to hire the most seniorperson.
Like if you just say, look, I want to make surethat the finance function for my fintech
business or for my infrastructure business,like I really have to understand my unit
economics.
I'm really going to need to get credit now orin the future.
This is a critical function in my company.
You should have somebody who's a VP of financeor hire, just like you would have a head of
(27:46):
sales.
If that's going to be part of your criticalroadmap, that should be viewed as a critical
function day one.
If you try to go and do that later, you oftenare playing catch up.
The person they're not fully integrated intothe business.
And also, like, you have time.
Like, you might hire the wrong person.
You might need a junior person, you might needa more senior.
You can kind of iterate like you would with anyrole in the company.
(28:08):
I think a lot of companies, when they try to gofor that, hey, shit, I need to hire a head of
capital formation or CFO.
Often those big home run hires, like don'twork.
So I think it just gives you more ways tofigure out what that right role is for your
company if it's a critical function in yourcompany.
You hire when it's on the path, the criticalpath to getting the company to the next
milestone.
(28:29):
What do you wish you knew right before startingupper 90?
Diversification.
Like our first fund was around $100,000,000which is just a little too small for credit.
So I think just starting with maybe a largerfund or partnering with somebody so that our
average position size was smaller, just havinggreater diversification.
That's something I wish I had thought about.
(28:49):
We did a really good job.
One of our views is if banks are coming into atrade that we're in, it's probably a good time
for us to not be in the trade.
So I think we did a very good job of lettingour facilities refinance to banks into larger
institutions, which is good for the company andalso good for our LPs.
It's probably when you refinance a debt, a goodtime to also seek liquidity for the equity,
(29:11):
kind of a natural endpoint for our relationshipand value add for the company.
And I think everyone was so excited aboutequity and momentum.
It's kind of everyone wanted to keep the equityrunning, just being more programmatic of
looking for equity liquidity when you're beingrefinanced out of debt versus kind of letting
one run and retiring one.
Some chips off the table.
I think so.
Doing it a bit more programmatically becausethere's always a reason to kind of convince
(29:35):
yourself, well, this one we should keep andthat one we shouldn't.
And I just think people's expectations ofreturns just got a bit out of whack.
I mean, I've played soccer in college and mywhole life, and everyone wants to go and score
three goals in a game and have a hat trick.
If you were in the US national team and youscored one goal a game, you would be the best
player in the history of US soccer, probably ofthe world.
(29:56):
So I think like two Xs, three Xs, those areexceptional returns if you can do it
consistently.
I think everyone just kind of viewed those asaverage returns.
You could build a big business, especiallydelivering X returns to LPs over I don't see
two Xs.
I think that everyone just thinks it's easy toThey hear that Union Square Ventures, which is
(30:16):
an exceptional firm, that 12X.
And everyone's like, Well, do we do that?
I mean, that's not normal.
You mentioned diversification.
As you were talking to more institutionalinvestors, how did you deal with the lack of
diversification in your first fund?
Talk to me about that conversation.
In life, it's better to be lucky than good.
So we ended up having good DPI and we had goodreturns.
(30:40):
It was kind of the reason they said, Hey, canyou deploy your strategy in the same way, being
this really early partner to companies?
Can you do that at a 400 or $500,000,000 fundversus a $100,000,000 fund?
So a lot of it was like, how big can yourstrategy be without Drift?
And so that was a big part of what does ahypothetical portfolio look like and how much
(31:02):
could you deploy into this?
So that was kind of number one.
And then number two is we really want positionsizing to be 3%, four % per company.
Process.
What would
you like our listeners to know about aboutUpper90 or anything else you'd to share?
Mike Lazaro started Buddy Media and Golf.comand with his wife Cass, and they're just
(31:24):
awesome people.
He's like, Anytime you have a complex capitalsituation in a company that you really like,
call up or not.
And so I think we just want to help partner andfind solutions that really help founders.
Often we're equity, which is a very powerfulbut very singular tool.
We want to help solve some of these otherthings through credit.
(31:45):
I listen to your podcast a lot.
We're still trying to figure out what do welook like?
What does the next phase look like?
And so what are the different ways?
There's Evergreen Funds now, there's BDC.
There's so many different There's SBIC funds.
I always feel like maybe we should partner withsomebody who's figured out a lot of the capital
formation side of things.
And we really should just focus on findingdeals and building that community of unique
(32:07):
LPs.
Thanks for listening to my conversation withBilly.
If you enjoyed this episode, please share witha friend.
This helps us grow and also provides the bestfeedback when we review the episode's
analytics.
Thank you for your support.
A few years ago, Crusoe Energy approached usand said, this new asset, it's called an NVIDIA
(00:05):
GPU.
We think it's gonna change the world.
We think it's gonna be core to all AI cloudcomputing.
Will you help us figure out how to finance thisequipment?
At the time, it wasn't really well understoodby banks.
We look for these equipment oriented businesseswhere we can help kinda season before it
becomes well understood and well accepted as anasset class.
(00:26):
So today, there's institutions from Black Stoneand others that are financing Nvidia chips two
or three years ago.
If you can think about financing thosepartially with credit versus all with it.
(00:48):
Grubhub and Seamless merged in 02/2013.
The businesses were a similar size, but theGrubhub team owned a substantial larger stake
in their company.
Why is that?
My partner, Jason Finger, was a lawyer for amoment and had to go and order dinner for his
bosses and saw that he could get a 2% cash backon his credit card if you ordered it through
(01:12):
his own means for the order.
So that's kind of how Seamless started.
But he was educated in tax and finance.
And so when he raised money for Seamless, heraised a small amount of equity, like hundreds
of thousands of dollars.
And when he would sell that service, he wouldget the customer to, instead of paying over two
years, maybe to pay those two years upfront andfiguring out ways just to get access to working
(01:35):
capital lines and stretching dollars andeffectively thinking of using credit.
That really helped him grow the business whereequity would have been raised in much larger
quantums.
The vast majority of Seamless was owned by themanagement team.
The Grubhub team, which was Chicago based,ended up raising more of the traditional you
raise a seed round and then you prove theconcept, you raise the A round, you raise the B
(02:00):
round.
It's almost this like flight of passage.
It's like, how many announcements can you getand how big can those rounds be and how
preemptive can they be?
There's nothing wrong with that.
But when they ended up merging the businessesbecause of that capital structure and because
of the use of credit and just different tools,the Seamless team owned the majority of the
business and the Grubhub team owned theminority of their business, same business, same
(02:23):
size.
And I think when Jason and I connected, he'slike, most founders are just, they don't think
of these tools.
They're not taught about credit.
And that really drives his interest of Upper90and helping founders have different paths to
own more of their company.
When a lot of startups think about credit,there's this perception that it's only for
fintech companies.
What kind of startups can utilize credit?
(02:46):
That's a good point.
I mean, is very easy to understand because youkind of have some payment in the future and
you're factoring it or collecting it today.
And it's part of everything we do.
Everyone has a credit card and everyone has carpayments and it's kind of just normal.
So we do that and still think there's a role tohave a good early partner.
(03:08):
But the other things that we've seen have beenequipment.
There's a lot of new forms of collateral or newbusinesses where equipment's not yet well
understood.
A few years ago, Crusoe Energy approached usand said, There's this new asset.
It's called an NVIDIA GPU.
We think it's going to change the world.
We think it's going to be core to all AI cloudcomputing.
(03:29):
Will you help us figure out how to finance thisequipment?
At the time, it wasn't really well understoodby banks.
We look for these equipment oriented businesseswhere we can help season before it becomes well
understood and well accepted as an asset class.
So today there's institutions from Blackstoneand others that are financing Nvidia chips two
(03:49):
or three years ago for $90 If you can thinkabout financing those partially with credit
versus all with equity.
You have this new thesis on NVIDIA chips, andyou don't yet have the large institutional
investors, the Blackstone's, able to financethem because the thesis is too new.
How do you go about structuring the investmentin such a way that's both attractive to the
(04:13):
counterparty, but also attractive to you andyour investors?
It's a it's a really good question.
We always say, like, each facility we do is abit tailored.
With a NVIDIA GPU, the question was, how longis this NVIDIA GPU worth anything?
How quickly is the next GPU coming out?
How far ahead is NVIDIA versus AMD?
The big question for that was not demand.
It was what's the right life of thisinvestment?
(04:36):
And so in that deal, we said the most importantthing is having a fast payback period.
So having a shorter duration facility andhaving faster amortization and getting paid
down along the way.
So your breakeven is under two years.
And as you make the investment, the idea isthat if you're successful, you're going to be
(04:58):
taken out by a larger credit partner.
So talk to me about the incentives of thedifferent parties when it comes to getting
taken out of the credit facility.
Alignment is something we think a lot about.
There's a few ways that we accomplish this.
So number one is we've kept our fund size smallin the world of private credit.
And so our last fund's around $400,000,000 Wecan do 10,000,000 or $20,000,000 facilities.
(05:23):
Most people don't want to be bothered with thatsize, but that's often kind of what the company
needs when they're getting started.
So one is just fund size matters.
And number two is we typically, whenever we doa debt investment, we'll do 10% in equity of
whatever we do in debt.
It just forces us to really think about, is ita business we're excited about?
(05:45):
Plus, is it an asset that we think can pay backour debt?
And I also think most credit funds don't thinkabout it that way.
They view themselves as like, Hey, I'm going bein this for a period of time and then I'm not
going to be in this.
And it's like this very temporary relationship.
And I think when you see things not go well,that's why there's this adversarial
relationship often because it's like atemporary partner versus equity.
(06:07):
So the opposite of this also has some truth inthat a lot of great companies have been taken
down by facilities like venture debt or bycredit.
When should a start up think about bringing incredit versus equity onto their cap table?
Thank you for listening.
To join our community and to make sure you donot miss any future episodes, please click the
follow button above to subscribe.
(06:27):
The first thing is Jason Gus, who has been alongtime partner, he runs Octane Lending.
We've done a lot with them.
He says, if you're a capital intensivebusiness, you should have upper 90 or a firm
like them on your balance sheet because you'realways going to have problems that come up.
Like even in fintech, I saw a company who had asystem outage and they ended up having a pool
(06:48):
of receivables that they needed to use equityto fund.
They have a new product they want to launchthat's outside of their buy box.
They want to work with a customer that's biggerthan the concentration limit allows for.
So often I see startups, they get equity orcapital from like six firms and there are six
VC firms that all solve the same problem.
It feels diversified, but you're really not.
(07:10):
So I think get two to three VC firms for hiringthe best talent in marketing and just rainy
day.
And at the same time of that round, bring in agroup like Upper90 if you have receivables or
equipment or do acquisitions, because it justallows you to have another tool and a kind of
part of the foundational DNA to grow.
It's like raise equity and then you think aboutdebt.
(07:32):
I would really encourage firms where capital iskind of a critical part of their business
strategy.
It should be part of that round as one versustwo step.
Double click on the financial metrics.
So what needs to be true within theprofitability of a company, either at Topco or
on a specific product before they should bringon credit?
(07:53):
Fintech, you can probably start with creditearlier because if you lend a dollar out, you
kind of know how to get that dollar back.
There's a lot of data of fintech receivablesand collections and pricing.
For roll ups, we learned a lot of hard lessonsin that Amazon aggregator space where they were
(08:15):
buying Amazon businesses and putting them intobigger entities.
We still do some roll ups today, but we lookfor businesses that have profitable unit
economics and are profitable at the corporatelevel.
So for roll ups for equipment businesses, Ioften think that you want to kind of prove that
out, like Stacks Engineering.
(08:35):
We just financed they build barges for shipsthat come into port where they're charged an
emissions tax from the state of California fortheir diesel exhaust.
So Stacks builds barges with a vacuum cleanerattached that will suck out all of the diesel
exhaust into carbon free emissions at port.
And they built their first barge with equity.
(08:56):
They approved the model, had really good uniteconomics, had good customers and then said,
Okay, how do we build barge two through 10?
And so that's a great step for us to come in.
We did a $22,000,000 facility, built thosebarges, and now we brought in a bank to build
the next phase of barges.
And so they've been so capital efficient interms of equity to debt where they may have
raised a huge initial equity round and built alot more barges than they needed to, to kind of
(09:20):
go and get credit from the market.
Talk to me about the seasoning process.
Maybe talk about the NVIDIA chips and how youwent about seasoning this product.
What does it mean to have a seasoned financialinstrument that somebody like a Blackstone
would want to take out?
Yeah, I mean, the NVIDIA journey is prettyinteresting because we didn't start there.
Crusoe started capturing natural gas that wasbeing flared in the middle of the country, and
(09:44):
they were building portable data centers to goand capture this natural strain of energy to do
Bitcoin mining.
And at that time, the CEO came to one of ourevents.
We bring together all these really interestingfounders from different industries.
I think you've been to some.
And he's hearing another company talk about howthey're using credit.
He's like, My biggest expense is a generatorfor my data center.
(10:04):
It has nothing to do with being a startup.
It has nothing to do with being a Bitcoinminer.
But the traditional equipment financiers viewedthem as risk on risk on risk.
So we said, we'll finance your generator.
And we gave them an $8,000,000 facility.
We, as a small fund, can start small like that.
And that's really our seasoning.
It's like don't overextend and try to makethese initial phases bigger than they're really
(10:26):
designed to be.
Prove a concept right.
Don't over lever the business.
Get a good amount of equity.
We did $8,000,000 And then as he startedshowing good performance, we grew that to
$40,000,000 over time.
And then at that point, call it around a$50,000,000 capital, you have an endless number
of banks and institutions that will financethat.
It's almost kind of an RFP.
(10:47):
And so we said, great, the best thing for thebusiness is now that we have the metrics in
place and the financial team in place.
We helped kind of put that infrastructure inplace, not just capital.
He had everything he needed to go get bankfinancing.
And he said, Hey, I was like, What's the nextproblem?
He goes, Nvidia GPUs.
And so instead of going and using equity forthat, we then rolled into the next product and
(11:08):
got out of the product where he should getcheaper financing.
Last time we chatted, we talked about just themagnitude of capital that's going into these
opportunities once they're seasoned.
So how much capital is actually available foronce you're seasoned?
And what are the second order effects of havingso much capital waiting on the sidelines to
fund these projects?
(11:29):
I just talked to an LP earlier today and it'slike, hey, the market volatility, this must be
creating so many opportunities.
And I said, the amount of money that's sittingon the sidelines is huge.
I feel like you have to work twice as hard nowto find reasonably priced deals.
You really have to hustle.
And I'm sure it's the same in your world.
There's just a lot of money chasing a fewernumber of good opportunities at fair prices.
(11:52):
Our biggest thing is starting small.
And I would say the companies need to be itreally goes back to your first point.
If you're a capital intensive startup, fintech,equipment, receivables, acquisitions, roll ups,
you want to start investing in that earlybecause the bigger banks and bigger
institutions are going to want to see an audit.
They're going to want to see good financialreporting.
(12:12):
They want to see a controller or a finance leadoverseeing the product.
You want to adhere to all of their covenantsthat they're going to have in place.
So I think a lot of it's just kind of lookingthe part and having enough capacity.
There's a lot of concern of the consumersoftening right now, the consumer being maxed
out.
I was talking to some of our fintech companiesand they're saying they're getting tighter
pricing today from banks than they've evergotten in the past, which is fascinating.
(12:36):
And it just shows that there's just more moneyversus kind of good opportunities.
And I think these funds have all gotten too bigtime.
And I think if you're a small, nimble fund likeus, I think that's an advantage.
A lot of funds want to do the bigger deals.
What kind of returns are you looking to getinto these kind of investments?
Low to mid teens from the credit.
And we want to make sure the company we'reinvesting in is earning from the capital we're
(13:00):
giving them more so they can service our debt.
So venture debt, a lot of people often confusewith what we call asset backed debt.
Venture debt is usually giving money to acompany that's losing money.
The way that you get paid back is by thecompany raising more equity.
So it's more of a bet on equity supporting thecompany versus the company having profits to
(13:21):
pay you and service your debt.
So we want to make sure if it's an NVIDIA chip,how much more is Crusoe making when they rent
out an NVIDIA chip than they're paying us infinancing costs?
If Octane is going and doing powersportfinancing for jet skis and ATVs, how much more
are they able to charge a consumer than they'repaying us?
(13:42):
And that's kind of the excess spread.
That's a really important metric to make surethe company is providing a service that's
valuable enough where they can charge a ratethat's higher than their cost of funding.
And I think that's like a really importantmetric for us.
And you have to find these nichey businesses.
We just financed a company called Sunbound, andthey're built technology software for nursing
homes.
So nursing homes like Jason, when he startedSeamless, are offline and antiquated, and they
(14:07):
help Toast or Seamless kind of control andcapture all of your bill pay and finances as an
independent nursing home.
Somebody takes a bed in a nursing home andSunBound's getting paid sixty days later from
insurance.
Is there a way for us to kind of provide someof that capital upfront and collect it for the
nursing home?
And that's where Upper90 steps in as a capitalpartner to Sunbound to offer a new solution in
(14:27):
a vertical niche industry.
This factoring like product, it's not somethingthat they could get from typical banks.
And why are there no other solutions for that?
So there are being able to really move quickly.
These are fast growing companies.
They want somebody that can come in and solvetheir problem quickly.
So that's one.
Often it might take a long time.
Like imagine going through a mortgage and howlong it takes to get approved.
(14:48):
So there's just an inherent time cost whenyou're dealing with a bank.
So that's one.
Number two is we really say, look, we want tobe your partner for this space.
So we'll do a $30,000,000 facility.
We're not doing ROFRs and locking you up forthe next 100,000,000 which really might see a
substantial drop in cost of capital.
So that's number two.
And then number three is how many credit firmshave a partner who started a tech company?
(15:12):
And so we come in and say, here's the otherthings that we think we can help you with.
Like, hey, before you raise your next equityround founder, have you stacked your QSPS to
get maximum treatment for yourself?
It's like we're kind of operating as thiscapital markets conciliatory or partner to
really help the founder.
And I don't think a lot of other credit firmsare designed to do that.
So it's like our capital is greener and I don'tthink people 2% delta here or there isn't going
(15:37):
to make or break the business.
Another founder in our portfolio from Mundy, hesaid, When you're deciding who your capital
partner should be, often people think cost isthe biggest factor.
It's really certainty of capital, speed,flexibility.
Can I use this in a way I need it?
And then cost.
I see so many facilities where they get reallycheap financing, but then it doesn't really
(15:59):
allow them to use the facility.
Like, Hey, we have this amazing customer, butit's going to be 6% of our total portfolio and
your concentration limit says 5%.
And they're like, I'm getting paid 8%.
Why would I take any more risk?
No upside.
So you alluded to it earlier.
How do macroeconomic cycles and just the stockmarket, the economy play into how you deploy
(16:24):
your capital?
One of our LPs said, it may be like a StanDrunkenmiller quote, The hardest time to deploy
is always today.
So any environment you're in, it's like themarket's ripping and there's more capital.
So it's just always hard to find good deals.
We built our LP base.
We have almost 300 LPs and most of them arefounders.
We kind of said, Hey, let's build it aroundsourcing.
(16:45):
If we see problems, we're good problem solvers.
That's kind of how we built it.
I think a lot of funds are like, How much moneycan you raise?
And then we'll figure out how to createincentive programs and affiliate programs and
relationships to get deals.
So I think it's always hard to find good deals.
The things that we've learned now that we're inour third fund are it's really important to be
diversified, get paid to take more concentratedbets like you do in venture.
(17:09):
So I think just really diversification is yourfriend.
Right now, it's kind of an environment whereyou might want to earn, even with rates being
higher, maybe a little lower return than tryingto chase return because there feels like there
could be a lot of unknowns around.
Does the IPO market open up or not, or does theconsumer really get stressed to a level that's
(17:29):
almost like earn less even when rates arehigher and people think you should be earning
more because of some of these uncertainties inthe market.
Yeah, we see a lot of top institutionalinvestors cycling from just long equity to
structural solutions like asset backed credit.
That's one of the ways that institutionalinvestors are playing it.
(17:49):
You have 300 LPs, a lot of venture funds orother types of funds have thought about having
this kind of network driven fundraisingprocess.
What are the pros and cons of having 300founder LPs?
Pros are you're just interacting with so manyinteresting people that are really in the
middle of unique opportunities.
(18:12):
When we had our first upper 90 dinner, I thinkit was 10 people from the quant world where I
came from.
And Jason brought 10 people from his techworld.
And we were joking.
If the quant side of the room saw a tech deal,it's like how many people in the tech world
said no to this deal?
That somehow it trickled down to the financepeople.
And in the same thing the other way, the bestdeals are capacity constraints.
(18:36):
So if Jason or somebody sees a quant deal, howmany people said no?
Or is that fund just too big?
So I just love interacting and learning fromthese people.
Vertical.
And the best ideas often occur when you bringtogether two different groups.
So I spend most of my day kind of uncoveringopportunities or engaging that group to win
(18:56):
deals.
The firm that's probably done the best versionof this is lead edge capital and really made
that programmatic to open doors for customers.
The challenge is, and we learned this in Fundthree, some of the bigger deals in our
portfolio require more capital and morecertainty.
So there's a role for institutions to speak forbigger dollars because in their broader
(19:18):
portfolio, it's still a small position.
So I think that we learned it's like the LPsthat we have that are the entrepreneurs, it's
really for deal sourcing and deal winning, notnecessarily for more capital and kind of
relying on institutions to fill the capitalvoid that we didn't have in Fund one and two.
So you want to have a diversified capital pooland you want larger checks that can move
(19:39):
quickly.
What about from a time management standpoint?
Is it tricky to have so many LPs and how do youdeal with investor relations aspect?
It's hard.
I mean, I think any business, it's like 20% ofyour customers derive 80% of the value.
So I think really kind of thinking of who arethe people that see the most deals and be more
(19:59):
proactive with them and engaging them.
And so I think it's just like kind of anybusiness, probably your most valuable
customers, like you have to be intentional andadd value to them and kind of deserve their
time.
And a lot of people have time and might takeyour time.
So I think it's just being more proactive withthe people you really want to make sure you're
(20:21):
spending the most time with versus whoevertakes your time.
As you transition from Fund two to Fund three,you start to incorporate more institutional
practices.
What are some of those practices that you hadto implement in order to become successful in
Fund three?
I view it as like a startup, like as a companythat we often deal with.
You need to really invest in operations andreporting and compliance and being able to go
(20:45):
through each month and develop, provide areally robust reporting package to your
institutions.
To go through a regulatory exam, to go throughSo you have to your You to be big enough where
you can have the best accounting firms and thebest compliance firms and the best tech third
parties.
It's hard being a small fund, especially incredit.
(21:06):
So it's like you have to have kind of a minimalviable size to do all the things that
institutions expect and get from the biggerfunds.
We already had a pretty material investment onthe investment team and the IR side, but you
kind of have to do a lot of things well thatinstitutions are just prerequisites.
Today, it's 2025.
What's the minimum viable fund size for aninstitutional quality fund?
(21:30):
It's interesting.
I think that this number is going up, you know,because like the allocators, the big
institutions have so much.
They have to write big checks too.
I feel like on the credit side, like$500,000,000 what do you think it is on the
equity side?
It depends on the asset class.
We like to come in when there's like$300,000,000 roughly in capacity.
(21:52):
Cause then to your point, you could get$20,000,000.30000000 dollars that aren't higher
than 10% concentration limits that someinstitutional investors have.
In credit, I think for us, I see like, okay, ifyou're under a billion dollars, you can still
do these $30,000,000 facilities.
I see a lot of funds that are kind of creepinginto this 1 to 5 or 1 to $10,000,000,000 And
(22:13):
everyone's like, Hey, we're just going to sell.
Adelaias sold to Blue Owl.
If we get to this size and we'll just sell Idon't think there's going to be that many of
those outcomes.
So I think you either have to kind of staysmall and stay focused, like first round's done
for a long time in equity, or you have to bereally big, like Apollos, the Blue Owls, the
Blackstone.
I just feel like there's a lot of funds in themiddle and everyone's looking at the same
(22:36):
deals.
There's a thesis out there that there's goingto be a couple hundred private equity funds in
the future because of consolidation, because ofthe push from retail in the future, which is
going to be a substantial drive on the LP side,so there's a lot of economies of scale, and
because of the liquidity in the secondarymarket with the Blue Owls, the GP stakes
players, so there's that aspect.
(22:57):
There's also this aspect that you alluded to,which is the chicken egg.
You have to get to a certain size in order toget the institutional investors in and to get
the institutional quality people.
It's not just service providers.
So hiring the top CFO, the top investorrelations person, because it's a market.
The labor market is a market, so you'recompeting against bigger firms that could offer
(23:21):
bigger incentives.
Startups, it's hard to say that your creditfund is going to change the world more than
another credit fund.
I completely agree.
I think the talent point's really interesting.
We looked and did an extensive search in IR fora partner level hire, and it's amazing.
It's like bank levels, starting salaries andbonus guarantees.
(23:41):
It's a very tight and hot market for sure.
It's a good point, like, to attract and retaintalent.
Most CEOs that have taken private companiespublic, once they start to look for their
public CFO, they immediately realize they wentdown the wrong career path.
They should have become a CFO, wait until acompany's about to go public and get 5% of
(24:02):
equity of the company, and that's a much betterdeal than being CEO.
And for us, I think also having little of thatequity flavor, 90% private credit asset backed,
10% equity.
And everyone's like, Why do you do that?
Why don't you just ask for warrants?
And I said, Most credit firms kind of viewthose warrants as a call option.
They're freebies, right?
If it works, great.
If it doesn't, no, skin off their back.
(24:23):
To the founder, those warrants have value.
I mean, that's why they wake up every day, isfor the equity value of the business.
So if a founder values them, they're going tosay, Fine, I'll give you warrants.
But then I'm going to have looser covenants andI'm going to have a lower make whole and I'm
going to have a less cash pay and more pick.
So we're like, Let's get the best debt termsthat we can, and then let's invest in the
(24:45):
company.
And if the company really does well, like theCrusoe's Rocktains, we'll kind of let our
investors participate as that equity, not inour fund, but as that grows in certain
situations.
Think you need to have a little bit of anequity mindset in this world because it's hard
to build an enormous credit fund.
When I was a founder, I would almost demandthat my debt investor have a little bit of
(25:06):
equity in the game.
It just changes the whole relationship and howthings transpire if things don't go perfectly.
As you were transitioning to being aninstitutional fund, you're meeting with
institutional investors, what catalysts do theyneed in order to end up pulling the trigger on
Upper90?
One is, are you able to originate unique deals?
Are you able to secure deals that you'regetting a premium for the risk and that others
(25:30):
in the market are not seeing first?
So that was one.
Two, for the institutions, can you generate coinvestment opportunities?
So you're getting in early.
And as these companies grow, is there a rolefor us to play as your partner to help size up
those investments where they outsize the fundsconcentration limits?
So those are the two major things.
And then do you have an institutional gradeteam that can make sure that there's not going
(25:53):
to be a black eye in any part of your business,like IR, investments, portfolio monitoring,
compliance, risk, ops, tech.
Those to me would be like the three majorcriteria.
And also let's say you had an, say you have avery high bar and hyper competitive market and
you didn't choose the right HR person or techperson.
Did you talk about being a placeholder and howdid you handle that conversation with
(26:16):
investors?
It really kind of goes back to the first thingyou asked me is like, when should a company
think about credit?
When should they If you know this is somethingthat's in your roadmap, you want to get that in
place early.
So we had ahead of people, even in FUN2, forculture and for hiring and best practices.
We were very fortunate to hire a great CFO thathad come from a bigger firm that wanted to do
(26:38):
something more entrepreneurial.
My partner who leads the investment team hasbeen with us since inception.
If you're not planning, I think it's reallyhard to say, Hey, we'll do it.
You kind of have to start thinking and buildingthat in early and have that part of the
foundation and part of the culture.
So if you're a startup, you're like, Hey, I'mgoing to need to think about raising credit.
I think if you're like, Hey, now that I'vegotten to this phase, now I'm going to start
(27:00):
thinking about credit.
I think it's going to be a lot harder for youto kind of It's not part of the DNA.
It's not a senior function in the company.
It makes it a lot harder to close that gapversus making an investment early.
I want to double click on your hiring strategyin terms of hiring people ahead of when you
need them.
What's your rationale for doing that?
Walk me through the decision making on when youdecide to hire somebody.
(27:23):
Sure.
So you don't have to hire the most seniorperson.
Like if you just say, look, I want to make surethat the finance function for my fintech
business or for my infrastructure business,like I really have to understand my unit
economics.
I'm really going to need to get credit now orin the future.
This is a critical function in my company.
You should have somebody who's a VP of financeor hire, just like you would have a head of
(27:46):
sales.
If that's going to be part of your criticalroadmap, that should be viewed as a critical
function day one.
If you try to go and do that later, you oftenare playing catch up.
The person they're not fully integrated intothe business.
And also, like, you have time.
Like, you might hire the wrong person.
You might need a junior person, you might needa more senior.
You can kind of iterate like you would with anyrole in the company.
(28:08):
I think a lot of companies, when they try to gofor that, hey, shit, I need to hire a head of
capital formation or CFO.
Often those big home run hires, like don'twork.
So I think it just gives you more ways tofigure out what that right role is for your
company if it's a critical function in yourcompany.
You hire when it's on the path, the criticalpath to getting the company to the next
milestone.
(28:29):
What do you wish you knew right before startingupper 90?
Diversification.
Like our first fund was around $100,000,000which is just a little too small for credit.
So I think just starting with maybe a largerfund or partnering with somebody so that our
average position size was smaller, just havinggreater diversification.
That's something I wish I had thought about.
(28:49):
We did a really good job.
One of our views is if banks are coming into atrade that we're in, it's probably a good time
for us to not be in the trade.
So I think we did a very good job of lettingour facilities refinance to banks into larger
institutions, which is good for the company andalso good for our LPs.
It's probably when you refinance a debt, a goodtime to also seek liquidity for the equity,
(29:11):
kind of a natural endpoint for our relationshipand value add for the company.
And I think everyone was so excited aboutequity and momentum.
It's kind of everyone wanted to keep the equityrunning, just being more programmatic of
looking for equity liquidity when you're beingrefinanced out of debt versus kind of letting
one run and retiring one.
Some chips off the table.
I think so.
Doing it a bit more programmatically becausethere's always a reason to kind of convince
(29:35):
yourself, well, this one we should keep andthat one we shouldn't.
And I just think people's expectations ofreturns just got a bit out of whack.
I mean, I've played soccer in college and mywhole life, and everyone wants to go and score
three goals in a game and have a hat trick.
If you were in the US national team and youscored one goal a game, you would be the best
player in the history of US soccer, probably ofthe world.
(29:56):
So I think like two Xs, three Xs, those areexceptional returns if you can do it
consistently.
I think everyone just kind of viewed those asaverage returns.
You could build a big business, especiallydelivering X returns to LPs over I don't see
two Xs.
I think that everyone just thinks it's easy toThey hear that Union Square Ventures, which is
(30:16):
an exceptional firm, that 12X.
And everyone's like, Well, do we do that?
I mean, that's not normal.
You mentioned diversification.
As you were talking to more institutionalinvestors, how did you deal with the lack of
diversification in your first fund?
Talk to me about that conversation.
In life, it's better to be lucky than good.
So we ended up having good DPI and we had goodreturns.
(30:40):
It was kind of the reason they said, Hey, canyou deploy your strategy in the same way, being
this really early partner to companies?
Can you do that at a 400 or $500,000,000 fundversus a $100,000,000 fund?
So a lot of it was like, how big can yourstrategy be without Drift?
And so that was a big part of what does ahypothetical portfolio look like and how much
(31:02):
could you deploy into this?
So that was kind of number one.
And then number two is we really want positionsizing to be 3%, four % per company.
Process.
What would
you like our listeners to know about aboutUpper90 or anything else you'd to share?
Mike Lazaro started Buddy Media and Golf.comand with his wife Cass, and they're just
(31:24):
awesome people.
He's like, Anytime you have a complex capitalsituation in a company that you really like,
call up or not.
And so I think we just want to help partner andfind solutions that really help founders.
Often we're equity, which is a very powerfulbut very singular tool.
We want to help solve some of these otherthings through credit.
(31:45):
I listen to your podcast a lot.
We're still trying to figure out what do welook like?
What does the next phase look like?
And so what are the different ways?
There's Evergreen Funds now, there's BDC.
There's so many different There's SBIC funds.
I always feel like maybe we should partner withsomebody who's figured out a lot of the capital
formation side of things.
And we really should just focus on findingdeals and building that community of unique
(32:07):
LPs.
Thanks for listening to my conversation withBilly.
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