September 15, 2022

8. Miguel Fernández, Capchase - Non-Dilutive Growth Financing

Miguel Fernández


Co-Founder & CEO



Today's guest is Miguel Fernández, Co-Founder & CEO of Capchase, non-dilutive financing to turn recurring revenue into flexible growth financing for SaaS startups. We discuss Capchase's unfair data advantage and how that underpins their underwriting success, why the company has focused exclusively on financing technology startups, and how thinking strategically about cost of capital is a secret weapon for successful startup founders. Please enjoy this conversation with Miguel Fernández.

Jared Klee: Hey, Miguel. Welcome to the show.

Miguel Fernández: Hey, Jared. Thank you so much having me.

Jared Klee: Let's back up, like all the way to, past history here, 2020, right? As Capchase is getting going. Even before we talk about like what Capchase is doing. If I was a startup founder in 2020, I needed access to financing in any of its forms. What was the world that was available to me pre-Capchase?

Miguel Fernández: The world before then, nothing has changed much, you know, at a very high level, it has changed a lot on every other level. But at a high level, you have pretty much like two sources of funding. Three, let's go three: one - equity, two - debt, three - subsidies or grants. Money that you get that doesn't cost you anything, right? So let's take that aside. That's really rare, and only at a very small scale, at very early stage, in some geographies.

So let's focus on debt and equity. First of all, the ratio of debt to equity, it is quite high in public companies and established companies. It is extremely low in startups, right? The reason why the startups usually burn money. So then when they went to the traditional companies that would give out financing like banks. The banks would look at a company that burns money and they would say, "okay, this doesn't work. No way I'm giving money to a company that's burning money." So then that's why debt was like very rarely used.

On the equity side, before 2020, most startups would fund themselves with equity until they got to a point where they could access some other form of financing. Traditionally venture debt. And then later states when they started printing money or they became very large, and profitable or public, you know, and there were proxies for them, then normal banks would start giving them debt. So on the equity side, you literally see companies raising rounds, getting diluted, and then using that equity money for everything. For investment in engineering, for investment in G&A, for investment in offices, in furniture, and even in user acquisition.

So what you see is that they will start sinking money into user acquisition - equity money, extremely expensive money - into user acquisition. And then, the faster they grew, the more money they burned. So they need to raise again and again and again and again, and then fast forward, when it was time to have an exit, the average funding team only held 15% of the original equity.

So you own a much smaller slice of a much larger pie. But then like you've just funded a ton of activities with equity money when that wasn't really necessary. So then people were thinking, "okay, how can I get other sources of financing that are not dilutive?" And then that's when venture debt that comes into play.

Venture debt is debt given to startups, so that they can compliment their equity with other sources of capital that are not diluting. But then the thing is that it takes a lot of time to set up those venture debt lines, or it took a lot of times. We're talking 8, 12, 16 weeks, sometimes half a year to set up. And then those venture debt lines, they would have: one - a diluted component. Way smaller. But they would have a warrant component. And to give you an idea, SVB made a hundred million dollars of the warrants from the venture debt they gave to Uber. It could be very significant, right?

Then, they won't really scale with the company. It wouldn't be that big, it would be like a few months of MRR equivalent or a percentage of the round. And then if you wanted to scale to get more financing from venture debt even if the company had grown a lot, it would require a full negotiation and sometimes even an additional round. Because in venture debt they really want to make sure that there's equity behind the business. And then it was a very asymmetric process. You just didn't know, as a founder, how good your company was compared to others and compared to what others were raising.

Highly dilutive, very cumbersome to dilute yourself less with any form of like non-dilutive financing, and then very asymmetric information because funders didn't know how their peers and proxies were doing.

Jared Klee: Best case scenario for a startup, let's say it takes six months to get the venture debt financing. Let's remember here, you're raising in your next round, like 18 to 24 months of burn. From like 25% to a third of your burn, just getting the debt in order. So by the time you get in order, first off, you're a totally different company, but secondly, you've now burned through a bunch of the equity dollars just waiting for the debt.

Give me the elevator pitch of Capchase. What is it now doing for startup founders for financing.

Miguel Fernández: So we're helping SaaS companies to grow faster with non-dilutive capital, with insights, and with tools. So non-dilutive capital: a way better alternative to any non-dilutive capital out there, like any venture debt or any other form of revenue based financing. And then insights. We're trying to bridge the gap between that asymmetric information that I mentioned, so that founders actually understand how they're doing, how others are doing, how they're comparing to the best in class SaaS companies right now, and then are much more informed, to run their business. And then eventually when they need to raise.

Now funders, instead of just using equity or venture debt, what they can do is they can access their ARR ahead of time so they can reinvest parts of it into you know, user acquisition so they can keep growing without tapping into VC money.

What you see is that founders before Capchase, the faster you grew, the more money you burned, the less run where you had, the more money you needed to raise... Now with Capchase, the faster you grow, the more money you get up front to reinvest in the more growth. So the faster you grow again, and that's without using your equity money for that. So then the faster you grow, the more wrong you have, the less you need to raise and so on.

Jared Klee: There's no question for a startup right now. The fundraising environment has gotten a lot tighter. It is a lot harder to raise money. Valuations are lower. I have to imagine, Miguel, that is a phenomenal environment for Capchase, both as the company and your ability to help startups. Your service must be more valuable now than it ever has.

Miguel Fernández: Totally. For a few reasons, right? On the one hand we already have a brand we've been doing this for two years. We're the number one in this space. People know us and they think about it.

Two: there's more and more second and third time founders that really want to optimize their capital structure. Because in the event of an exit, they want to own a lot of the company, not little bit of the company, right. So they're always thinking about how can I complement equity with other sources.

And three, as you said, interest rates have risen. What we saw is that valuations as a consequence, you know, they got discounted massively. The tech was down by like 60, 80%. And then like all the funds that can invest in public and private, they were like, " why would we invest in private at a hundred X revenue multiples if I can invest in the public proxies that are much more liquid at ten X?" As a consequence, they don't invest in private and then slowly valuation private assymptote towards valuation of the public sector. What that means for founders is that the people that raised money in the last, let's say six months before now, they're raising at 30, 50, a hundred X revenue multiples. And now their proxies or the competitors are raising right now are raising at 10 X revenue multiples. Which means that if they were raising now, they would probably be raising at way lower evaluation. So that presents an opportunity, you know, like they could have raised a lot of money before at a very good evaluation, but now, it presents a problem. They actually need to grow into it. Right. Everybody hates stand rounds. It demotivates the team. It demotivates the founders. Previous investors get very annoyed. The way down round, now these funders have to face a really tricky choice. Let's say that revenue multiples have compressed three X, right? So to grow into the valuation, but they raised at, they need to grow three X as fast as they thought. And usually, you know, when you're raising a round, you always say, you're gonna grow faster than you actually do. So then they need to grow a lot. They need to grow very, very fast or they need a lot of time to grow into the valuation, right? To achieve the level of revenues that will warrant the same valuation or higher at a much lower multiple of EV to revenue.

So then the choice is like, "what do I do? Do I get more money to grow faster now? Or do I spend less money to get more time?" But then you grow slower and then your multiples probably compress even more. So then that has made a lot of founders think about how do I get more money right now to get more runway and more growth. And if you are looking again at the two choices that we shared earlier, you can get equity because of the valuation problem. So you need to get something else. And that's why everybody is looking right now for non-dilutive capital to grow.

And ideally, you know, non-dilutive capital that actually scales. You don't want a million dollars. You want as much as you can, because if you're growing, you don't want to stop and then raise. You want to keep going. So you need something that scales with you like Capchase, right? So, we weren't forecasting such growth when we planned a year, six months ago.

Jared Klee: You're talking about a, a level of thoughtfulness about how to fund a company that I think is kind of absent the mainstream conversation. But as you're making clear, especially as times get tough, especially as we look like interest rate rise and whatnot, it becomes more and more critical to the conversation.

I want to come back to the start. I mean Capchases, this frankly, Miguel, has been an extraordinary journey. The company's just over two years old. I think you've raised debt equity couple dollars shy of almost a billion dollars. You've extended over $2 billion. You've got 3000+ clients now across 10 countries. So how did this start? Where did it start? You, your co-founders... How did you guys get so big so quick? I'm looking for like the Marvel superhero origin story here.

Miguel Fernández: We actually started this out of business school. So we were at HBS and we started right at the end of the first year. Basically our background was in SaaS on both sides of the table. So operating a SaaS company and then investing in SaaS companies. Three of us working the same SaaS company. I joined when the company was in the pre-revenue stage. I joined as the first person in sales, and then I built and led sales customer success on international. Two of my cofounders were running the product team there and we took the company from zero to a few million dollars over three years.

The fourth cofounder, Przemek, was also with me at HBS. He came from the growth equity investing side, right? So he was seeing the same problems from the other side of the table.

So the problems that we're seeing was that, you know, in every single deal from day zero until I left, every company, every customer wanted to pay monthly or later, you know, thirty, sixty, ninety, a hundred twenty days after the invoice. But us as a VC by SaaS company, we needed the cash up front for every deal because we needed to recover all the CAC, all the marketing, salaries, sales commissions, implementation costs, data costs... like you name it. We need to get the money up front. Because we couldn't finance our customers. We couldn't finance their monthly payment without equity.

And the solution that we had was give a large discount to get paid up front. You know, we'll give a large discount, we'll get paid up front, we'll recover the CAC and we'll move on. But then large discounts really hurt because large discounts means that your customers are financing you, but a 20% discount. That is like a 45% APR equivalent. Right. So, yeah, you're getting the money up front, but it's costing you a lot of money and then that's hurting not only the financial cost of it, but it's hurting your annual contract value, your lifetime value - you're never gonna get that customer to pay the original price no matter what you do - and then as a consequence your valuation. It was a choice that you had to make.

Fast forward a few months when I left, we started looking at the intersection between SaaS and fintech. And after talking with a few founders and so on, the first idea that we had to solve that gap was to offer SaaS companies a tool so they could extend terms to the customers, so the customers could pay monthly or quarterly or late or whatever, but the SaaS company would always get the money up front. So we started talking to founders. This was like in the middle of HBS.

They were like, this is amazing. This is the Holy Grail of SaaS because we can reduce our sales cycle because of offering flexible payment terms, and we can increase our average contract value. Which is like impossible. Usually it's a tradeoff.

Jared Klee: Let's just rewind the clock way back. Like Amazon starts in 2000. What you're talking about is, " Hey, as a company, I can get paid up front." That's a licensing based model. We know exactly what that was like. But the problem with the license is you sell it once and you never see the customer again. So you charge this massive upfront thing that the economics don't make sense for either party. But the nice thing is like now you've got at least your business funded, but the lifetime value goes down.

Part of the benefit of SaaS is like, "Hey, I can do it over time." But now as a startup, you're funding your clients. "Hey, I take all my costs now and you pay me back over 12 months." That's not great. You're basically creating this middle ground where it's like, "Hey, I can get the financial benefits as the startup of this license based model, big upfront, without taking that 12 month hit. So I retain the lifetime value. I've retained that relationship. I give flexibility. There is a middle ground. Who knew?

Miguel Fernández: Exactly. Buyers can get the best, can get flexible payment terms. For them it's also not a hit to pay up front. So they can get very low working capital needs. And then the SaaS company is getting all the cash up front and also automating a bunch of workflows to do Capchase right.

When we brought this to customers, they loved it. They were like, "Hey, this is amazing." But they were saying, "Why can't I do this for all my customer base that I have already instead of doing it on a forward looking basis, on a deal by dea basis?" So we said, "Ok, actually what you want is financing to grow your business without getting the diluted." So then that was the first product that we launched. So we launched at the end of August.

Jared Klee: I have to rewind here because January 2020, you're like, we got this idea. August 2020, you got your first client. Everybody is locked in their homes, in their apartments, can't talk... we're in the depths of COVID and you're like, "This would be a great time to go launch this company."

Miguel Fernández: It was the perfect timing, I think. On the one hand, we were able to learn so much during those eight months, because we're lucky enough to have the HBS email. So literally anybody would answer our emails. And then everybody was sitting at home. So everybody had time to have a chat with you, to go through a discovery call, to give you advice... so we're getting feedback just within a day. We're learning within a day new things. That was amazing. And then another thing that also was really good for the timing was that every single founder, all over the US, Canada, the European Union, and the UK... they got some form of COVID relief subsidies from the government in the form of debt. But then they started to see that, "Hey, money's green, I can invest my Sequoia dollars into this thing, or I can invest my government EIDL plan in the same thing. And it's also going to better return.

So then a bunch of funders start to work with that when they had never even thought about it. So that was also a mind shift that really, really helped. You know, we launched at the end of August, we started growing like crazy. And then, we just tried to hire a bunch of people to invest in product. Then we start series A with QED in February, 2021. And then our series B in January, 2022.

Jared Klee: Let's go back that venture debt: it's taken six-ish months to underwrite. They're doing it one time. It's not ongoing. It's lump sum. How do you get the insights where you're able to underwrite differently than a bank?

Miguel Fernández: What they're doing is they're not underwriting the company. They're underwriting the investors. If Sequoia founds a company, historically, Sequoia will just follow on in additional rounds. And if they can't follow on, because the companies are struggling, they'll somehow find a home for the company in most of the cases, unless it's a spectacular blowup that we all know about. So, what venture debt does is they're underwriting the investor, not the company. Takes a lot of time. It leaves a ton of the companies out of eligibility for venture debt.

Also like they want to have a share their success. So they would get all these warrants, but they don't really want to trip their fingers too much. So it's a very limited amount, right? So they'll have those limitations. And then the process is very annoying. You can go and raise from a VC if you have a great story, a great company, great metrics in a week. I guarantee you you'll not be able to raise debts in less than six months, with one of these like venture debt funds and banks. And the reason why is because VCs either lose - sure, they lose one X, they lose their money. If they win, if it goes well, they can make three, ten, a hundred, a thousand X the money. The investors on the contrary, if they lose, they lose all the money and if they win, they make maybe two X their money. If everything goes really well for a lot of years, usually they they're gonna make 10% per year. So not a lot.

What we brought to the table, the innovation was instead of underwriting the investors, we would underwrite the company and the quality of its revenue. Right? So SaaS companies, they have retention, they have cohorts, they have lifetime value. They have very high gross margins. So what we were underwriting was the probability of the company to survive for the next 12, 24 months, right? Based on, you know, the current operations, they burn multiple... a million different metrics and a bunch of benchmarks against other companies, but really trying to understand, "Hey, if this company, as it is today, it stops this investments, in marketing, growth, whatever, what is the, value of all that revenue coming through?"

That was a very dramatic change to produce in the writings. And then something that you could extract, instead of qualitatively by interviews and whatever, you could extract with data. So then again, the process turned from like six months to 24 hours because instead of like talking with a bunch of people, processing a bunch of Excel, we're just synchronizing in real time, with accounting data, banking data, and revenue data.

And with that, we'll reconstruct such company bottoms up to understand everything I mentioned earlier in order to give availability and an indication of price, amount, and terms to the founder, and then to do the same thing every single day in the future. So as the company evolved, the founder will constantly see updates, and how much money it could be taking and lower prices and longer terms and so on. So they could just focus on building as opposed to focusing on like managing cash and liquidity.

Jared Klee: So, if I'm going to the banking world, traditionally, I'm a lend against hard assets. I'm gonna have something like a loan to value ratio. If the building's worth a million dollars, I'll give you this amount. If I'm a founder, I've got however many dollars of predictable revenue over the next 12 months as determined by Capchase. What kind of terms can I get? What is the loan guaranteed against? How much can I take out? Just help me get a sense of the shape and size of what that financing looks like.

Miguel Fernández: So the first thing is like, if you look at a SaaS company, there are no assets. So you go to a bank and they're there are no assets. What you do have is that you have recurring unpredictable streams of payments.

And then, you know, a funder can usually think that, "Hey, if they come to Capchase, they can access between, let's say 20 to 60% of the ARR off their next 12 months revenues ahead of time to reinvest into growth. The beauty of it is that, let's say you have a million dollars in ARR you decide to take 20%, $200,000, and you reinvest that into growth over the next couple months then your ARR goes from 1 million to 1.2 million. So then your availability grows again. So then you can do the same motion again. And again, and again. And in reality, you're only paying back when your customer's payments are coming in. It is very aligned. You're not dipping into your reserves to pay back. You're actually paying back with the additional customers you've signed. So you can turn this into a circular motion to grow much faster without using VC money.

It is super cost efficient. You can go between like 4 to like 10% per year. And now in this environment, we're rates increasing. We are holding the rates because we got really good relationships with our funders. So that's massive advantage for founders of SaaS companies.

The other product innovation that we built was that every founder has this like mindset of, "I need as much money as possible right now, even if I'm not gonna use it." By definition, when we raise a round, when everybody raises a round, you have money, that's sitting in your bank account, that's unused for, let's say 24 months. So then that's very inefficient.

Instead of, encouraging funders to take as much money as possible from us, when in reality, again, if you don't use the money immediately, you've got to be paying interest for money that's not generating any returns. The product innovation is that looking at the data, we can tell funders, what is the right amount to invest every month. So then they're taking very granular, smaller draws at a much more frequent interval and then they're investing it directly, usually into activities that have a higher return than the cost of our capital. So things like user acquisition or implementation cost or working capital... things that are gonna have returns that are gonna be way higher than the cost and relatively short term, 12 to 24 months. That really aligns draws with deployment and the cost, the actual cost of dollars is lower than anything they can access.

Jared Klee: What you're saying is from a startup founder's perspective, first off I can get rates cheaper than anywhere else I'm gonna find. I get a credit facility that I can pull down basically at will up to, depending on my company, 60% of next year's revenue, and I can get it in 24 hours. And it grows with me.

So I've got this package here. That's wild. On the flip side, I'm not giving up warrants. I'm not giving up equity. I don't have claims against my company. Capchase is so confident in its predicting, so confident in its data, it's saying we're gonna just lend against the revenue, not against the rest of the company. We're gonna claim against the revenue. We're that confident in what we are doing.

Miguel Fernández: Exactly. And we've seen crazy cases. Our companies going from $400k of ARR to $30 million over 12 months. Going from $70k to like $16 million. So cases are incredible of companies that have figured out the unique economics really well, and the timing of those economics, and then they have to do the circular motion again, of like, "Hey, I'm getting money that I'm supposed to make 12 months from now today. I'm reinvesting it. So the money that I'm supposed to make 12 months from now, today, like grows and then do it again and again and again." So doing like weekly draws, draws every couple of days, and then, just building this massive snowball of revenue, and, building a lot of wealth and value in the meantime without getting diluted.

Jared Klee: At a deep level, we're talking the revenue based financing today, but fundamentally you're now a third option. You're helping founders think differently about financing. I think what's particularly interesting for me is like, if you're a founder and you've grown the company into a million or 2 million, $3 million run rate, you could probably get into series B series C and financing is just not gonna be the core competency of the CEO. Perhaps they have the background and they know it, but it's not make or break for the company.

What you are offering here, frankly, it requires a fair amount of thought and understanding on the founder's part. But if they get it all of a sudden, they've got this new tool in their toolbox to grow the company, to keep ownership of the company, frankly, to make the company healthier financially than they ever had before.

What are the other options available? Cause I have to imagine, like, if you're doing just the revenue based financing, you could pay interest as you go. You could do it at the end. The I'm sure they're spending lots of money. These big one time purchases. I've gotta imagine you guys are working on like 20 different ways. How can I help a founder think more strategically about financing across the entire company.

Miguel Fernández: It all comes down to a point of like you taking money today and you're going to return a bit more at some point, right? Like either month of the month, or all at the end, or in the form of warrants, or in the form of accrued interest, whatever. You can really get lost in detail. To give a few explanations, right? Like you have venture debt, for example, and then let's talk about revenue based financing. We can talk about bullet payments, things like that. And then we can talk about Capchase. And there are some little nuances.

Venture debt, you are gonna get some percentage of your round or some percentage of your ARR today. You're gonna give up warrants. You're gonna pay like legal costs and so on. But Hey, like it is really like an insurance policy, right? You are probably gonna pay only interest for 12 to 24 months, and then you're gonna pay interest and amortized for the next, 12 months or 24.

Longish term, let's say between two to four years, you're gonna end up paying interest and warrants. Between 35 to 50% of the principle in terms of some sort of fees.

But it does have a purpose, right? It is way cheaper than equity. If you're growing at a hundred percent year over year - which most of startups we are growing faster than that - and you're raising rounds and your valuation is growing a hundred percent year every year, your cost of capital nearly a 100%, right? Like the average VC return or the industry as a whole returns between 20 to 30%. But you have to take out all the losers that return zero. So then like for our successful startup, the cost of equity can be over a thousand percent.

Expensive, but way cheaper than equity, right? Then you have, revenue based financing, which basically means that you take money and then you repay that money as a fixed percentage of your revenues until you pay it all back. So then that means that let's say you're paying 10% of your top line revenue per month back when you get revenue based financing, it means that the faster that you grow, the more money you pay per month, which means that the shorter time that it takes for you to pay all that money the higher the APR. If you stay flat, then you're repaying, the same amount every month. So maybe it's not that expensive, but if you're growing, and like startups grow very fast, then you're really paying it back really, really quickly.

Then term loans with like bullets that is really dangerous in my opinion, for a startup, because what that means is that you're getting money today, and then you're just going to start either like paying interest only for a while and then pay the full principle in one single point in time at the end, or you start accruing interest, you don't pay anything, and then at some point in the future, you pay the full principle, plus all that great interest. In any case what it means is that you get a ton of money today, you give a ton of money back at some point. The tricky thing there is that if you are not building the cash research to pay back, which honestly like a startup, you probably shouldn't because it probably means that you're not investing money in the right place, then at some point you're gonna have to go and raise a round. Either like save, you know, and massively just stop to get all those cash flows that allow you to build, the amount of money that you need to return as bullet payment or raise a round, and then either refinance the loan, you know, which then you're gonna pay additional fees, whatever, or use part of the round to pay the loan.

I tell you that option. Nobody's gonna take it. No VC investors gonna say, "Oh yeah, I'm gonna put in a few million dollars in this company, so you can pay back... No way!" Because then like, sure you're taking liabilities out of the startup, but then you don't have money to grow.

Jared Klee: This is, I think what, in 2008, 2009, like the quote unquote "balloon payment against the house..." the house is free and then you wake up one day. It's like, gimme all the money at once. Like, I don't have it.

Miguel Fernández: Literally the same thing.

And then third, the last option is ours - is Capchase. Which is, let's say, could be in between, venture debts and revenue based financing, but the founders know exactly the amount they're going to repay every month. And then there are some configurations where like there's interest only for a little bit and then organization or direct amortization in line with customer payments. But what it is is that the funder knows exactly how much money they gotta be paying back every single month with absolute certainty. Given that is a gradual, draws and deployments, it ends up being way cheaper than anything else, by like 3 X.

Jared Klee: We talked right at the beginning, this like monthly versus annual challenge, like with the annual contract, I'm gonna give a massive discount to my customers. Cause I really want that money now. And with the monthly, I'm gonna charge quote unquote, "full price," but now I've gotta fund all my expenses today and I don't get paid for a while.

And as a recovering quota-carrying sales person, I know you used to be sales. Sales in particular... salespeople are stupidly expensive. They get paid generally up front for revenue that shows up over 12 months. I mean, that's painful for, for a startup. Talk to me a little deeper on that monthly verse annual... how does Capchase create that middle option for startups? How is that a win for both the customer who's buying the product and the startup who's offering those now, let's be honest. A third plan in the middle?

Miguel Fernández: What a startup wants, at the beginning it's as a much catch fund as possible, the highest price possible, you know, because you wanna show growth in ARR. They want long-term commitments from customers, and they want the short sales cycle.

Customers want pretty much the opposite. They want the lowest price possible. The most flexibility. So monthly payment terms or quarterly or bi-yearly, or whatever, but like not upfront. They want a good deal. Right. And they want flexibility to change. If the SaaS company offers flexible payment terms, the SaaS company is incurring all these upfront costs and it's getting paid month over month. So it's almost as if the SaaS company finance their customers. So you're getting your VC dollars or your own funds and you're financing your customers to buy your product, right?

Jared Klee: And I think an important point there, that's not the business you're in. Financing your customers is a perfectly fine business, but that's not what most software companies are set up to do. They're set up to sell software.

Miguel Fernández: Exactly. And I mean, they're unprofitable, they're burning money. They're growing. Like you can do that when you're like printing money, like Walmart, but knowing you're a startup that you need, like every single dollar to create more value.

Jared Klee: But even when we go to the big boys, like your IBMs, your CAT in the construction space, your GMs, they all set up separate financing companies. Like they split it out from their core business. Like, "Yeah. Great. Awesome. You need that? We're not gonna take on that risk. Go deal with it over here. This is our partner."

Miguel Fernández: So then if customers pay monthly, the SaaS company is financing the customers. If the SaaS companies says like, "Look, I can't do that. I need the money up front. I'm gonna incentivize you with a discount." Then the customers are paying upfront for something they're gonna use during the year.

So then they get a discount for it, which means that the customers are financing the SaaS company.

Jared Klee: Those customers as well, in theory, often it's startups buying from startups. If you're trying to grow revenue a hundred percent year over year, the cost of now financing your vendor is extraordinarily high. Nevermind the fact that it's upfront, you have much better uses for that cash than financing your vendor.

Miguel Fernández: Getting upfront payment delays a ton: the conversations, the negotiations. No CFO, no VP of Finance is happy with paying upfront for anything. You just can extend the sales cycle. So then usually the leverage a SaaS company has to close the deal or to negotiate our price, terms, product composition, and duration of contract.

Capchase comes in between. Suddenly the SaaS company doesn't care, if the customer pays monthly or not because they're always gonna get the cash up front through Capchase. So then in the negotiation, instead of giving up on price, instead of giving up on duration of contract, or instead of giving up on product composition or giving stuff for free, they can say, "look, you can pay monthly, but we need to close today or tomorrow, whatever. So then the CFO from the buyer is very happy: "Great. We're paying monthly amazing. This is a big win for us." And then this SaaS company's not losing anything because they can literally go to Capchase immediately and get all the cash up front from the whole cohort of customers that closed that month. What it creates is that it aligns incentives suddenly and takes out all the friction from the closing of the deal.

Jared Klee: I love that. I mean, because what we're talking about here is specialization. The customer specializes in using that software to do whatever their business is, the software company that's selling it specializes in building and selling that software. Neither of those parties specialize in extending balance sheets.

You're saying like right now we've got this situation where one or the other has to take that on, even though you're not good at it. And it's not good to use your capital. What if Capchase inserted itself and like, "we'll solve the balance sheet problem for both of you."

Miguel Fernández: SaaS companies lose sales when they can't offer flexible payment terms, because some customers just walk away. Like, "I'm not gonna pay up front I'm out. Whatever price I'm out." It creates a lot of value in terms of that. It creates a lot of value in terms of annual contract value that doesn't get discounted, so that for SaaS companies.

Jared Klee: Let's talk about the raise. So you're a startup. You've raised this massive round from venture capital company. As you said, like, "I'm raising money today. I might not need for another 24 months." For a company that's raised that big pile of money that's now just sitting around, how can Capchase help them?

Miguel Fernández: What we can do is we can turn that runway, let's call it 24 months into 48 months. And the reason why is because instead of using the equity for everything and it's tempting, right? You have just a pile of cash, saving your bank account. Why not use it? Instead of doing that for everything, what we help SaaS companies do is kinda like disassociate or like disaggregate the sources of funds and match them to the users of funds.

To explain a little bit what that means is that VC money is long term money. You never have to give it back. That's awesome. It allows you to risks. On the one hand, debt, you take it and you have to give it back, but it's way cheaper. So there's a trade off.

What the best companies do is that they use long-term capital for long-term initiatives and for uncertain initiatives. And they use shorter term capital for predictable initiatives that have higher return than that cause of capital. Which means that using VC money for investment in engineering, in new geographies, in new products... so basically, if they work out, you're gonna create a massive return, and if it doesn't work out, it hurts, but you don't have to get back.

On the other hand use, for things that are predictable, which in a SaaS company, predictability is user acquisition, your CAC and then your pay back because you know how much you are paying. Things that are predictable, use something like Capchase. Because then you're using something that costs you like a third or a 10th of the equity that can scale with you, which equity can't, unless you dilute yourselves again. And then also the return that you're getting from the activities is way higher than the return of Capchase. So it's almost like an infinite motion machine, you know, like a financial machine for infinite growth.

Most SaaS companies spend let's say between 35 to 55% of the top line in growth activities. So marketing, sales, partnership, implementations, whatever. And then they spend up to 60%, in everything else. When suddenly use your VC money for only 60% of your expenses, then your runway becomes much, much larger.

Jared Klee: It's dollars specialization here. The low risk, high return, predictable... I can use cheap cost of capital money to fund that. The high risk, high return typically longer timeframe... I can't get cheap cost of capital. I have to get other dollars. Let me invest those dollars there to drive that type of growth.

Miguel Fernández: Exactly. What would be disastrous is mixing them. Either using VC money to acquire customers... you can sink all your money, all the money in the world into ads to get customers. But then the faster you grow, the more money you're burning. So the more money you need to raise, which is like what people were doing until 2020.

And the opposite is probably worse, getting debt to fund crazy bets. Imagine that you go to a bank and say, I'm gonna take a million dollars. I'm gonna go to Vegas and let's see what happens. Right? Like that would be crazy. Like what if you have to give it back and you've lost it all taking bets, you know? So that's why you need to align sources with uses of funds.

Jared Klee: So we've gone revenue side, cash side. What about the expense side? So startups have, from time to time, massive expenses. That could be legal bills, that could be office. How are you helping startups on that front?

Miguel Fernández: Instead of them parting with all this money upfront, we can help to split that big upfront cost into multiple installments. So then imagine that you raise a round, you have to pay $150k to lawyers. Instead of paying $150k today, you can pay, let's say, $10k for the next 15 months so that you are again getting working capital and you're aligning your cash outflows with cash inflows from your customers. You just have a much smoother and predictable cash burn profile.

Jared Klee: And you've got the analytics on top that keeps the CFO happy, as opposed to the bouncing around here. We, we, we get nice steady lines for once.

Miguel Fernández: Exactly. Exactly.

Jared Klee: I want to turn attention to the macro because we're in a particularly interesting environment as we're recording this. Unclear if we're in a recession, but financing's more difficult. Certain sectors we've seen slow downs in customer purchases. Obviously for Capchase and for others, we've seen massive upticks. So this kind of bifurcation of the environment.

You've got a really interesting kind of view from the bridge here, given the data that Capchase analyzes to help your clients. What are you seeing in the environment? And perhaps in terms of that bifurcation, what do winners look like? What do losers look like?

Miguel Fernández: So in the industry side, I think that everything was doom and gloom for the last few months. And then with the last earnings from the big SaaS companies like user Zoom, Atlassian, Microsoft, Azure, AWS, and so on, what we've seen is that the revenues are crushing. They're doing really, really well. And why this is important for the SaaS industry is because all those companies that I mentioned sell to everybody. From big enterprise companies to SMBs, which means that if the revenues are growing, that is the best proxy for IT spent across the industry. When IT spending increases, SaaS revenue increases, the health of the SaaS industry is better.

That's continuing to grow. There are some sectors of the economy, which, discretionary spend is decreasing. It is definitely not IT spend. And as a consequence, the SaaS industry is looking really, really good.

You know, we made some choices early on that really positioned us for now. So we made a choice to just focus on SaaS and build multiple products for SaaS to build like a brand awareness and to have like products that support each other and create more value to founders.

We are in situation where the market is recovering. SaaS companies are humming along. We have a ton of liquidity. We just raised $400 million two months ago. Right. And then a bunch of our competition is really struggling because they made purchases in the past. They decided to go horizontal and finance SaaS e-commerce, crypto mining, a bunch of, you know, different verticals that don't have that much in common. When you go like horizontal, I'm trying to finance everybody, then your models don't understand anybody. Which means that when the market's going well, everybody's happy. But when the market is turning, like it turned the last six months, then everything is worse. You're losing money left and right. And you don't even understand why or what you need to do to change.

And you made choices six months ago. That then are biting you right now. It's a very interesting point because the industry recovering, SaaS companies are doing well, it seems like valuations are stabilizing a little bit, you know? And then on the other hand, it feels like suddenly we look left and right. And other competition is licking their wounds in the corner. We have a ton of cash and we can go and help funders in the best way.

Jared Klee: That maniacal focus on SaaS companies as opposed to going horizontal. Was that a strategic decision at the beginning? Where like, we want to make sure that we get this one good. Or was it a data driven decision that kind of emerged out where you started seeing that some things behave differently and we wanna make sure that we start with the first one?

Miguel Fernández: Well, I think it was a little bit of luck. And then a little bit of thought afterwards. But I think luck came first. And the reason why I say luck is like, we just didn't understand anything else. We understood SaaS and that's what we knew. And that was the problem. And yeah, at the beginning, a lot of people were asking us like, "Hey, when are you going to do this for e-commerce? When are you gonna do this for other verticals? Like lawyers, lawn mowers and, we're like, "we don't understand that."

Like, why I do that? Then what you're doing is you're trying to become a bank, like just a lender for everybody. And when you look at every single company that did like horizonal lending, none of them did anything huge. Because then when everything goes, well, everything goes well, when everything goes bad, then you don't understand anything. You can't look at a lawn mowing company in the same way as a SaaS company, right? It's just not the same. You can look at top brand, you can look at bottom line. It may look the same. If you open the hood and look inside, it looks totally different.

When investors ask you, "Why don't you go and do different verticals?" And you say, "No," you have to have a reason. So then that's when you start like thinking into it.

Let's go through an example. Let's say that you have an eCommerce company and a SaaS company. Both are making $10 million top line and both are burning, let's say $500k per year. Let's say that both of them get to a point where they have $0 in the bank. The SaaS company can go and fire three engineers, the equivalent of $500k per year, and then they're cash positive because they have retention. People continue to pay, they have high gross margins, right? So then once you have a customer signed up, they can stay forever. They're gonna cost you a lot of money. So then that means that the SaaS company at zero cash day, they fire a few people, and then they just keep going.

eCommerce company, they get to zero cash day. If they want to sell one more dollar, they need to invest in inventory, in warehouses, in paying people to move the stuff around, in delivery services, in marketing to our core customers. So to get $1 incremental sales, they need to spend a ton of money before or otherwise they won't get a dollar in.

That's the very big difference and the big insight that we had when we went to every investor and said, we're not doing anything but SaaS, and instead of just doing lending, we're gonna do lending and they're gonna do payments and they're gonna do workflow automation, and they're gonna do negotiation tools and software and so on.

Building a stack for SaaS to building a horizontal play for everybody.

Jared Klee: So within that, what are you seeing among the SaaS companies today of your 3000+ clients in 11 countries? What are you seeing in terms of revenues, expenses, and if the average isn't representative, what's the dispersion looking like?

Miguel Fernández: Our customers are around 50% VC backed, 50% bootstrap. There's a really big difference between them. VC backed companies I work with are really good capital allocators. They have a ton of money and they know how to put it to work. And they're usually very data driven, operationally good.

On the other hand, bootstrap companies, a lot of them are also like that, like VC back companies, they just have like less funds or have a slower growth curve. But what they do is they're extremely diligent with money. When you have your own money and that's it, like you need to make it to the end of the month... I guarantee you just learn how to do it.

What we're seeing is that the best companies are, continuing to spend on growth and marketing. There's temptation to stop investing in marketing when you have a poor economy, because you don't wanna spend too much. What we're seeing that the best companies are continuing to spend, and they're actually accelerating growth ahead of competition that decreases spent. We're seeing that the best companies are guiding themselves by the rule of 80 instead rule of 40. Rule of 40 is that if you add your ARR growth and you subtract your net income, the sum of both should add 40 or above, right? So if you're growing at a hundred percent, then you can only be burning 60% of the top line. If you're growing at 0%, then you better have 40% EBITDA margins.

Instead of guiding themselves by rule of 40, they're actually achieving rule of 80, which is an interesting insight, like, "Hey, you can actually get high growth in a cash efficient way. A lot of it is using different sources of funds.

Another insight that we've seen is that companies with female leadership and female ownership grow faster. It flies under radar because you need to have your fingers in a lot of companies to be able to see that. But that's another really, really interesting insight.

Jared Klee: Miguel, I know we could keep going and we'll have to have you back on for another episode. Turn to wrapping up here because Miguel, it's an extraordinary story. And really just two years in the company that you and your co-founders have built, the capital you've put to work to help founders. It's really powerful. I'm curious for you personally, and it's the same final question for everyone. What's been the biggest win for you? And that could be professionally. That could be personally anywhere you want to take it.

Miguel Fernández: I'm extremely proud of Capchase, but I don't think that we've won yet. This is just day one, you know, as a founder should say always. I think that my biggest win looking back I would say is getting accepted into HBS. And it's kind of weird, you know, as I founder to say that our first investors said, "You guys gotta drop out. It's much better to be an HBS dropout than HBS grad to do a startup."

Just the fact of getting accepted, changed my life forever. You know, for a few things on the one hand, it was a dream I never thought would be possible. And then two, it kind of like puts you in a self fulfilling prophecy, right? You look at alumni, you look at people that have gone to HBS, or any MBA really? And then you start seeing that they've achieve the pinnacle of the careers of their industries. And they are role models. And then you're like, "Hey, I need to be there. Right. I just like, need to do it. I cannot let this institution's name down." So then that on the one hand puts you on a path.

And then also it gives you so much confidence that anything is possible and that whatever you set to yourself to, as long as you work hard enough, try enough times, you can achieve it. I think that change of mindset really, changed my life forever. Like my biggest win for sure. Coming from Spain, you know where it's is a very different economy. That's my biggest win for sure.

Jared Klee: Miguel. I love it. And thank you again for coming on. This was an awesome conversation.

Miguel Fernández: Of course, man. Yeah. So good. It was great. It was good to chat.

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