Tactics for Tech Entrepreneurs to Consider When Preparing a Fundraising Strategy

First Republic Bank
August 21, 2020

Listen to this informative discussion on operational issues to consider when preparing a fundraising strategy. Topics include: setting business priorities, remote working impact on the fundraising process and evolving your tech stack for efficiency. Our panelists discuss both the CEO/founder and VC perspectives in today’s ever-changing environment.

Speakers:

•             Esther Kestenbaum – President and COO, Ruby Has Fulfillment

•             Darren Kimura – General Partner, Enerdigm Ventures

•             Blair Silverberg – Founder and CEO, Capital

Read below for a full transcript of the conversation. 

Chris Coleman - Good morning and good afternoon everyone. My name is Chris Coleman, Head of Business Banking for First Republic Bank. Thank you for joining us today for our webinar, which we've entitled Tactics for Tech Entrepreneurs when preparing a fundraising strategy. First Republic Bank has a long history of serving the tech community, not only with banking services, but with content and insights that we hope that are helpful to you and other entrepreneurs. We're pleased today to co-sponsor this event with Ruby Has Fulfillment. Especially during these unique COVID related circumstances, we're continuing to look for ways to provide extra value to you, practical information and guidance, such as our discussion today. So we hope you enjoy. We have a terrific panel of speakers today. First Esther Kestenbaum, president and CEO of Ruby Has Fulfillment, Darren Kimura, General Partner at Enerdigm Ventures, Blair Silverberg, the founder and CEO of Capital, and then our host and moderator, and my colleague Marina Bobrovich, she's a director focused on the technology sector. Just before we get started, a quick housekeeping note for all of you. You are able to submit questions, and at the end of this session we'll try to answer as many of those as time permits. To submit a question just look at the bottom of your screen, you'll see the Q&A icon right in the middle. Just click on that and ask your question. If we don't have time to answer all the questions, we'll follow up via an email to all of you. So I wanted to, again, welcome you on behalf of First Republic Bank and Ruby Has Fulfillment and allow me now to turn it over to our moderator for today, Marina. Marina, it's all yours.

Marina Bobrovich - Thanks so much Chris, and good morning, and good afternoon everybody. For those of you that haven't met me yet again, my name is Marina Bobrovich and I'm managing director at First Republic Bank focused on the tech banking practice. I've been focused on the innovation sector for a little bit over a decade. I spent some time in Silicon Valley and now in New York. And my role at First Republic is to really support entrepreneurs, their companies and the venture community by helping increase their probability of success through tailored banking services and tools to meet their ever-changing operation’s needs. But furthermore by helping create meaningful connections all across the innovation economy, through curated webinars events and content that's really related to real-time development in the startup community. And I think in today's world more than ever, it's important for all of us to stay connected, to support one another and to continue to be forward looking. So without further ado, I would love to provide a couple minutes for each panelists to quickly introduce themselves. And then I'll also ask a quick icebreaker question. I'd love for each panel is to share a hobby or a new routine or maybe an individual that helped you guys through this challenging time, I'm sure it was challenging for all of us on this call. So without further ado, I'll pass the mic to Esther Kestenbaum, our co-host.

Esther Kestenbaum - Thank you so much Marina, and thank you everybody for being here today. I'm president and COO at Ruby Has, we are a very fast growing eCommerce fulfillment company. We have fulfillment centers in New York, New Jersey, Nevada, California, Kentucky and Toronto Ontario. And we also serve a very entrepreneurial community. The retail and brand, and direct to consumer communities are highly entrepreneurial as many of you know, and we do support them from the fulfillment standpoint, but we're extremely interested in their development overall, and which is why we participate in these types of thought leadership programs, together with companies like First Republic Bank. So it's delightful to be here today, really looking forward to a rich conversation. And thank you very much Marina and everyone at first Republic.

Marina - Now we'll pass it on to Blair to provide a quick introduction.

Blair Silverberg - Hi there, it's great to be here today. I'm Blair Silverberg, I'm the founder and CEO of Capital. I grew up in Austin, Texas, studied at Stanford under a guy named David Kelly who founded a firm called IDEO, and really had a unique perspective after that when I entered the venture industry and I was a venture capitalist at Draper Fisher Jurvetson for five years. Having been a trained product designer and being a professional investor, I just thought that the way that private investments worked could change quite a bit and leverage technology more to understand businesses and simplify the process of raising capital, and also make it more predictable. And so after five years of DFJ, I left to start my own business Capital. And what we do is we systematically understand private businesses by plugging into the systems of record that businesses are using day in and day out, to run their business in the first place. And so that means that we're able to allocate five to $50 million, typically in the form of loans, directly to businesses, without asking for a pitch deck, a data room, no more than like 15 minutes talking to each other. And so just a totally different approach. And we found really great success with this approach, particularly during COVID when more and more transactions are transitioning to happening entirely online. And so I'll be talking a little bit about this today, but very happy to be here.

Darren Kimura - Marina, you might be on mute, but I think you might be handing over to me.

Marina - Yeah, apologies for that.

Darren - No problem. Hi everyone, my name is Darren Kimura. I'm happy to be here as well. I'm originally from Hawaii. I went to the University of Hawaii where I started my first company that led to an exit. And I started my second company, which led to an exit and my third company, which led to an exit, all of which along those companies I've raised capital from venture capitals investors. And in that process, I always thought being a venture capitalist would be the top of the heap. So I wanted to become one. That led me to start a firm Enerdigm Ventures, which is basically a seed and Series A investor. We invest typically in IT companies, primarily focusing around big data, AI and infrastructure. And most recently we invested in a technology company called spin.ai Spin.ai does, they add protection. They're like an add on for G Suite or office 365. We provide additional protection for risks. So we do things like ransomware detection and we can stop the ransomware. We look for applications and extensions that provide risk to your environment, and we can notify you of that risk. It's basically a must have for any G Suite or office environment. What I learned through my career and what I hope to share with you here today is that being an investor isn't always the top of the heap, but in fact in many cases, investors have themselves investors. So we're all just kind of part of the same ecosystem. So what I hope to share with you today is some of the learnings I've had as an operator and also as an investor.

Marina - I guess quickly, if you could each mention a quick I guess hobby or an individual or a new routine that you guys have discovered for yourself during the pandemic that would be great. Maybe take a couple of minutes to do that.

Esther - I'm happy to. So most of my life when a plant saw me coming, it's sort of hid, because I'm notoriously have a black thumb, but like many, many millions of people across the country and across the world, I have started a vegetable garden and so there were a lot of comical moments, but now it is actually coming up and we actually get to eat some of the vegetables that I grow and it's extremely gratifying. Also I will never take a vegetable for granted again. Now I realize what goes into an actual vegetable. It's kind of changed how I look at everything. And so, that that's kind of grown out of the stay at home, the shelter in place moment that we find ourselves in. So that's a little about mine.

Marina - That's wonderful, thank you for sharing.

Blair - I'm happy to give mine. So I'm typically an avid skier and just general kind of outdoors kind of guy, but that all came to a screeching halt when I had my first child three years ago. So I have a three year old son and then I have a five month old daughter. And my daughter was born literally a few days before COVID became a thing in the United States. And so it's a double edged sword, it's a fascinating time to have young kids, but also I travel quite a bit, as you can imagine, as a CEO that also came to a screeching halt. So my primary pastime when I'm not working has been taking care of my two young children and that's been an amazing change of pace and just ton of fun, frankly, to be able to work from home so frequently. And then I do have some intellectual treatises that helped me get through those too. So I read a great book called "The Great Influenza", which was about the 1918 flu, highly recommend it. Who's interested in seeing how the future might unfold from here. And I mean, it's just insane the number of parallels, like there's a difference between the coronavirus and the flu, but if you leave that out, like in 1918, politicians were saying, you should take an anti-malaria drug because there was very little evidence and people were scrambling to come up with some treatment, like down to the T there's like 20 or 30 things, that I've seen in the media, or seen just kind of observing society rack to this that I saw in this book. And fascinating enough, the book was written long before COVID. So it's like none of this stuff was preplanned. I'm a big believer that that history repeats itself and you can study history to learn how things are going to unfold. So I highly recommend the book.

Marina - I made a note of that, thanks for sharing. All right, Darren, you're up next.

Darren - So I used to be, in my twenties and thirties, I used to be like a triathlete and that kind of went away as I got older and had kids myself. But since I live in California, I live in Palo Alto where today we're number one on the Corona virus indicator, leading the country and the world. We have been pretty much locked down since March. But what I've more recently been doing is I've been trying to get out there again. So I picked up the bike, began running again. So I've kind of gotten back into that little bit more of a healthy lifestyle, trying to use that extra time we have in our hands to be healthy, that's me.

Marina - That's awesome, great. All right, guys. Well, thank you so much for sharing. So we'll dive into our interesting discussion now. So I'll kick off the first question to Darren, and kind of setting the stage, the fundraising environment has undoubtedly become more challenging. And in particular early stage investing has seen a significant slowdown in the first half of 2020, although on a brighter note there hasn't been a clear indication of softening valuations, despite the fact that we've been sort of coming off of a frothy environment. So, setting the stage in terms of talking about setting priorities. So as a founder, when you're contemplating fundraising, there's a lot to consider. So thinking about the recent shift that we've seen the last couple quarters, whereby companies are sort of shifting from growing their businesses at all costs and considering finding a path to profitability. And figuring out when is the right time to raise also figuring out what types of investments they need to make with the fresh capital. Is it marketing and sales? Is it R&D, is it tech stack, et cetera. So I guess Darren in your experience, and you can speak about this broadly, I think you don't have to mention specific company names, but within your portfolio, your sort of the experience you've had in the last couple of quarters, potentially being involved in a fundraising environment, how are you seeing companies sort of shake out priorities and figuring out when is the right time to start fundraising?

Darren - I think the biggest part of that question is really what stage are you at? And generally we kind of D note them by things like seed stage A, B, C, D, et cetera. And it's going to depend on all stages because at different stages, you have different revenue patterns, you have different costs, et cetera. I generally think as a founder CEO, you always have to be thinking about fundraising. So everything that you do, your public image, what you do on social, needs to be designed to be investible. I like to have some kind of general rules of thumb. I think especially now during the times of COVID, what I think you should be doing is really investing in cleaning up some of the debt that you might have in your company. And I don't mean debt in the economic terms. I mean, things like technical debt, marketing debt, sales debt, this is as unfortunate as it may be with the unemployment rates and what not being high, and it’s also a really good time to find really highly motivated talent out there. People are hungry, people are passionate. If you have maybe an entitlement situation now is probably the time to deal with that. So I see COVID and the situation we have now as being a little bit of an opportunity, to really kind of clean up the shop, to make yourself more fundable, more attractive to investors. Now with respect to what do you invest in, growth versus cash, et cetera. I think that's probably going to matter... each company has to kind of take a call on your own. You consult with your board of directors. I as an investor, generally almost always look for growth. If you can demonstrate growth in tough times, you're probably going to be pretty good at growing really fast and good times. Now that being said, obviously don't grow at all costs. I mean, running out of cash is probably not a good idea because while we haven't seen fundraising necessarily drop off, I mean, I do think it's inevitable. So I think the better companies will be more investible, especially as this runs on a little further.

Marina - Now that's helpful feedback. And I guess, Blair, do you have anything to add to that? I know you've been both in kind of investor's shoes, as well as the founder and Capital not too long ago raised a sizeable round of equity as well. So anything you have to add to Darren's comment would be great to hear as well.

Blair - I mean, I think that in the modern era, like definitely the last 12 years, founders basically forgot that the economy can come to screeching halt. And we're very fortunate that because of federal stimulus, this is a slower burn than it might've been naturally, but as a founder, I think what you have to do, like I've had this fascinating comparison between being a very growth oriented, the firm that I was at, worked closely with a guy named Steve Jurvetson, he's like on the board of SpaceX and Tesla. And so it's just extremely growth oriented risk oriented firm versus now running a company myself where I have to guarantee to my investors that it's going to be successful, no matter the environment. And I think you can basically distill out of that, a very simple lesson. You should always have your upside case and your downside case, and know what your reality is. And your upside case should bake in things like I'm going to raise a bunch of equity, I'll be able to invest as aggressively as possible and growing my business, and your downside case should say something like not further dollars coming into this company, unless I get it from revenue itself. And the only way that I can control my destiny is to control my burn and the efficiency of creating revenue. And I think all good operators should have both of those cases in their heads all the time. And you're basically by-running your business, you're just oscillating between the two of them, depending on the facts on the ground. And I think that if you think that way, particularly going into the election toward the end of this year, at Capital we also have an investment team because we of course make investments. We've got great people on that team, veterans from places like Oak Tree and some of the premier Wall Street law firms, and hedge funds and so on and so forth. We have this view that like if you study cycles and you acknowledge that the government can stimulate the economy for a period of time, it's very unlikely that anything bad is going to happen economically between now and November. Just like the game theory, it makes absolutely no sense, but post-November, it's highly likely, in fact, there's a great book called "This time is different", which talks about debt ratios and countries developed and developing, and it's like The Canonical work, Carmen Reinhart, who wrote that just became The Chief Economist of the world bank. And basically when you get countries to have more than 150% of their GDP in the form of debt, crazy things start to happen. And so this is like a study of hundreds and hundreds of countries going through this at different points in history. And so bottom line is no one knows what the downside case ultimately should be, but you should have one and you should just monitor the way that the economy is developing and be prepared in case things trend down, really rescue yourselves.

Marina - No, absolutely, you should always have a plan B and think through all the scenarios that could be coming your way absolutely. And Esther, I know that you currently work with hundreds of direct to consumer brands of all stages. You probably have some insight into how they're thinking about the fundraising world as well.

Esther - So yeah, what's happened for us is, our world and our client's worlds have grown enormously during this period. We're seeing a moment that our clients are seizing for growth and for funding. We're seeing a lot of companies being funded, not only the DTC brands themselves, but the types of technologies that support them and the types of companies that support them. So there's a plethora of new technologies that are kind of built around the new behaviors that we're seeing that COVID has accelerated. These are things that were going to happen anyway over the coming decade. And what's happened is that this COVID moment has actually accelerated all kinds of e-commerce behaviors, probably compressed about a decade’s worth into six months of adoption. And we're seeing not only this growth moment for the DTC companies, but companies that support them, including FinTech based functionalities that they can integrate, that really help them drive more behaviors and more sales. Companies like Returnly that allow people to buy their new item, their new correct item even before they've returned their actual wrong item. Companies like TryNow that have democratized the try at home and pay only for what you keep. Stuff that we used to see only in very large, well-funded and third party reseller companies, and companies that really have empowered consumers to shop more with confidence, like FinTech companies that allow you to break up your payments for an item over time. That used to be something that you could only do if you went on QVC, you have to be a multi-billion dollar organization to be able to do that. The companies like Affirm and Afterpay, allow you to do that. So it actually is a very interesting time from our perspective for our business as well, we're growing very fast, but we are seeing that companies can thrive, be funded, not merely survive and tread water during this period of time.

Marina - Absolutely, now, that's helpful. And I guess building on that topic, thinking about sustaining and building your brand, especially nowadays. I think for direct to consumer brands and digitally native brands, it's a little bit easier because that's how they've been acquiring customers, pre-pandemic. But I think probably for some of the businesses that have omni-channel approach, it's a little bit more challenging now to stay in front of their clients, but I guess not really specific to a particular sector, because I think every company needs to build a brand, whether you're an enterprise software company, whether you're a FinTech or direct to consumer brand, what have you guys seen? And I guess maybe I'll direct this question first to Esther and then Darren and Blair, please feel free to chime in. What types of channels have you seen companies, and maybe you can speak to the company where you currently hold that your role, but maybe broadly speaking, what channels have you seen be effective for branding your product or service and how do you guys have, or I guess, how have you seen companies that you interact with measure their return on investment? That would be helpful to hear I think for the audience as well.

Esther – Sure, so I'm going to first of all speak about ourselves. So one of the largest things that's happened for us is, our industry has very traditionally participated in onsite events, large conferences, large onsite in-person events. That had already started to go away, well before COVID that had weakened for us as a channel. But now really having that, been moved to the sidelines has allowed us to focus on digital strategy. And that has been very powerful, I have to say. And for a lot of these newly adopted behaviors, whether they're B2C or B2B, we don't really think that the genie is going to go back into the bottle after this period is over. Anybody's ever tried to kind of suppress progress has failed over time. So we think that this is going to persist. We participate in events like this one. So the human connection isn't gone, but we're able to really not only get better results than we had been, but they're highly measurable. They're data driven in a different way. And so that's been very strong for us. The largest thing that we've seen in our industry with regard to our market and our customer base is this enormous shift that's happening toward direct to consumer. So, we had classically worked with companies that were natively direct to consumer brands. And those companies came into this environment with an advantage. It was an inherited advantage. They were already ready, they were there. Many brands, many of the most beloved brands in our country and across the world are actually not natively direct to consumer. They had a very strong channel strategy, whether it was in brick and mortar or online, it was through third party channel partnerships with retailers and resellers. And what we're seeing is an enormous shift toward direct to consumer by legacy, non-natively direct to consumer brands. That's huge and they've recognized that there was an enormous opportunity that they can develop direct relationships with their customers that they couldn't before. They could better manage and control their brand identity and that's very powerful. So for us as a company, our TAM, our total addressable market has really, it's well... I would say 10 to 20 fold is really I think conservative. And what we're seeing is a real blossom, but it has to be a really quick pivot, because the consumer is fickle and they have a moment that they need to see is right now where you're still beloved, they're still remembered by their customer base and they have the opportunity to get through this and survive. So I think the quick to pivot will survive here.

Marina - Now that's helpful. I'm glad that you guys are keeping a beat at Ruby Has and doing so well, so congrats on that. Blair, maybe shifting to you. I know that since the launch of capital, you have hit the ground running and are kind of in the midst of figuring out the best customer acquisition channel, et cetera. I'm curious to hear your thoughts on what has been sort of your strategy, whatever you feel comfortable sharing, of course, or what do you think some of your peers doing in the FinTech space to stay in front of your customer and then to get in front of new customers, because in the virtual world, it's very challenging to actually meet face to face, so you have to do everything virtually. So we'd love to hear your thoughts on that.

Blair - Yeah, it's a good question. I think our space is quite unique, so I don't know how many lessons there are to draw from how we market for other businesses generally. So I'll talk about how we market for a second, then I can talk about just what we've observed in our network of businesses that we work with. But, in our space, we just send emails to people. I mean, like literally like, hi Bob, I see you're running a company that we've heard great things about, we'd love to talk to you for 15 minutes. And like 50% of people basically respond. And that's just kind of how, it's an indication of how broken private finance is at this state in the world. And if you can offer a transparent and straightforward process, that's somewhat predictable in terms of like, am I going to get a quick, no, if I do, is that going to be actionable? Like, hey, look, you're really still investing in research and development. You just can't finance that with debt traditionally, but here's some great VC to talk to. So a lot of those lessons, like most businesses can't send cold emails to people and get a 50% response rate. And so I would categorize those things as just specific to us. But yeah, the vast majority of the ways in which we market are just email based. In terms of businesses that we've seen in our network of businesses, we work with several thousand businesses that are connected to the system that I mentioned before, which is called the Capital Machine. And there's some fascinating learnings about that network of businesses and what they're experiencing right now. So really, as Esther said, there are a whole set of industries that are seeing these secular trends accelerate at the same time that online marketing for example, has gotten about half as expensive. So if you're in the food delivery space, for example, where we have some portfolio companies and you're paying for Google and Facebook ads, literally your costs have been cut in half. And this is at a time when consumers are dramatically more likely to try a food delivery option in the first place. And so perversely for businesses, and we track about 14 industries that have these trends, where there's some secular trend that's accelerating right now. Perversely this is actually the time to put your foot on the gas and invest as aggressively as possible, because you're seeing returns on things like sales and marketing stand go from... maybe you were getting like a 50 or 60% return on investment. So in two years to your dollar spent on sales and marketing gets paid back. And then from there net return, you get a nice let's say maybe a two and a half or three X return on that set of customers you acquire. These returns are oftentimes accelerating to like 10 X that. So like we see companies at a fairly regular cadence that are getting like a 1000% return on investment within two to three months, they've taken the basis, basically off of the table of paying for ads to get new customers. And so anytime you see something like that in your business, it's just like a once in a lifetime, like seize it right now because it will eventually go away. And if you can seize it, you'll level your business up to having a much larger base of customers. And so anyway, we track this efficiency. We call it basically cohort return on investment. It's like a unit economic metric that measures sales and marketing efficiency, a much more attributable way than things like ROA as some metrics that are kind of more commonly track. We track all that stuff through have the capital machine, but the bottom line is if you're seeing those metrics, call it ROA, just to simplify for a second, dramatically change, you were a substantial candidate for additional investment during this time and failing to take advantage of that, oftentimes your competitors are taking advantage of that. And so you sort of have to adapt to the times. When I was saying the upside and downside case, like there are some businesses where the upside case is much more applicable now than before. But anyway, long story short, I think generally online marketing has gotten a lot less expensive. There's like I said, we have on our website 14 industries that we track that have customer behavior changing at an accelerated rate. So that's sort of further amortizes the cost of customer acquisition down. And generally I just think you want to be experimenting with new techniques, to see if there are other pockets of inefficiency. Like it was shocking to me that search advertising has gotten less expensive to the class, but it totally makes sense when you think of many of your competitors in your space pulling out of that market. But you generally just want to experiment with new techniques, track efficiency and then double down on the ones that are working, that were specific to your business.

Marina - That's helpful and I think you're catching on sort of our next discussion point in terms of like talking about digital transformation, making sure you have the right tech stack for your business model, because I think especially some of the larger institutions, including banks, et cetera, probably accelerated their digital transformation exponentially, whatever they were planning to do in the next four to five years, they probably have to adapt and build something internally or acquire another company in order to really become more efficient in a matter of months. And I guess I'd love to hear your thoughts. And again, maybe I'll shift the mic to Darren as you're seeing lots of companies and you've been both a board member and an investor. What are you seeing companies doing in terms of maybe just like kind of the early stage and growth stage sector, in terms of making sure that they have the right tech stack and not only to be efficient internally, but also to combat competition? Because competition, there's a lot of disruptors, especially in the FinTech space that I'm seeing every day. So we'd love to hear your thoughts on that topic.

Darren - So I think about that as being two sides of the coin. So maybe I'll touch on both. The first one is what's happening to customers you might sell to. And what's been generally happening in the market is historically, what would happen is especially in the world of IT is you would look for something big, what we call the monolithic. Something big and brand name, otherwise no one has best of breed to invest in and build your strategies around. So for example if it's cloud or whatever, email or whatever it might be, you'll go in buy the brand name in that area. You'll have that and then you'll kind of augment that with other services, maybe build some of that stuff coded in-house or whatever the case may be. So if you're selling to that, especially as a startup or maybe even a growth stage company, it might be hard to get into that. And what I'm referring to here is the past. What happened since COVID was the shift happened so quickly, from what we would call an on premise environment to like a cloud environment, that a lot of the rules were just broken. A lot of the customers that we talked to had these two year plans to shift from on premise to the cloud and COVID happened in February, March, and it was like shift tomorrow. So now they're figuring out, okay, well, what do I need to have? And what we're seeing now is the shift from a monolithic kind of an approach to what I would call like a circuit breaker approach, where you have a myriad of different SAS solutions, each of which do something very specific. But the nice thing about that is if that particular product should trip, break, you don't take all your entire company, you don't stop revenue, you don't stop selling, and just that one service stops. And you can oftentimes find a backup service for that in the means of competition or because it's SAS very easily, will that company be able to come back very quickly online? So it's changed a lot. So what we've been seeing much, much more recently over the last few months even, is that that circuit breaker mentality, everything needs be SAS, everything needs to be in the cloud. Everything needs to be shared with rules and access controls. So that way I can work from my home and delegate access to Blair, who's working from his home and we can work together as if he was sitting right next to me. So along those lines, its things like, what are the fundamentals? Its things like document sharing, products like box and Dropbox. It's the collaborations suites like G Suite and office 365, which in and out of themselves, they come with things like document sharing, sheets, calendar sharing, email sharing, all that kind of stuff, as well as things like meet and teams, that allow for collaboration. And finally the continuous communication in kind of platforms like teams or like Slack. What we've seen more recently is companies now, they're kind of standardizing on having Slack as a requirement. You must have Slack on, you must show your online profile on, that's how I know you're at your desk and working because otherwise you're at home, I can't tell, it's kind of changed from that perspective. So I think understanding what kind of company you are and what you need, but really kind of thinking about it in terms of a variety of all the different products that exist out there that may not be the same products that you would have bought five years ago.

Marina - That's true, I mean, I can speak to First Republic. We have a number of tools, that we've on boarded in the last four or five months that have made all of our lives much easier and easier way for us to interact with our clients as well, which is crucial, absolutely. And I guess Blair we'd love to hear your thoughts. I know you've build a capital machine, which I'd love for you to just share a little bit more about what that is with the audience, in terms of how it's actually operating, how it works and we'd love to hear, I guess, what it took to actually put it together. Because I think the launch of the company took place in October, from what I recall. But the road to that was... I'm sure it took a couple of years to sort of build the product and invest in R&D, and then COVID happens after the launch, like six, seven months later. And I'm sure there's been a pivot or two that you probably had to consider and work through. So we'd love to hear how you sort of dealt in a time of crisis, and how you're viewing the world sort of post-COVID

Blair - Sure I'm happy to talk about those things. So first we can talk about the capital machine for a second. So in 2018, this fascinating thing happened. And so basically 50% of businesses in 2018 were running natively in the cloud. And what that meant, Mike Darren was talking about, all of the core systems they were using to run their business, whether that was their accounting system or their payment process orders, or the ways they can log into Bank accounts, their sales, their CRM system, web analytics, all of these systems used to actually just run the business were cloud native. And that meant that they had APIs, so you could connect into the data that lived in those systems and analyze it. And before 2018 it was actually a pretty rapid growth leading up to that point. So I think in like 2016, it was like 30% of businesses were running in this way. And this trend has accelerated quite a bit. And so what that allowed us to do is build a system that connects entities underlying systems of record. And when we have a conversation with a company about financing them, and like I said, we provide five to $50 million typically in the form of debt, although not always, when we have a conversation about financing and business, we do a few things that are very different because of this capital machine. The first thing is we ask businesses to connect, read only and totally kind of PII scrubs, we never see like customer names or any of this kind of stuff in the capital machine, their accounting system, their payment processor, as we get later in a financing process, the bank and a few other systems. And what this allows us to do is we pull down on average about 40 gigabytes of data per company that we look at and we're able to analyze that and dig in, and really understand detailed attribution of how money is being spent and where that's generating return. And so what typically has happened if you think about like the history of like commercial finance, you have these very high level rules. So like if a business is not generating EBITDA, it's not financeable with debt. And in fact, what happens within businesses and companies like Amazon have made this clear over the last 25 years, their internal sources of return that can be quite efficient and a business if they're kind of optimizing how they run the business, will choose to invest capital into these internal sources of return and might actually be running a very bad kind of bottom line loss, even though the business itself is efficient and tomorrow could turn off that spin and immediately be positive. And we've just found that the class of businesses that are officially investing in growth are incredibly poorly understood by traditional commercial lenders and even kind of commercial equity financiers. And so the capital machine makes all of this super clear by connecting to the raw data itself and the additional benefits, in addition to us being able to extend credit to companies that typically cannot get credit in any shape or form, there are some additional benefits. And so one benefit is like I mentioned before, no pitch deck, no partner meetings, no recurring diligence calls. We can provide capital in large amounts, sometimes in as little as seven days. It really just depends on the pace at which companies kind of get their data into the system. We don't use auditors. So for those of you who have done larger commercial transactions, you'll often pay an auditor like $250,000, and spend three to six weeks waiting for them to come back with results. And if they come back with something that's a deal breaker, you find that out after having spent on both sides, well over a million dollars in legal fees documenting these transactions. We do the audit for free and upfront, because of the capital machines access to these underlying data sources. And then the final piece is from a monitoring and relationship perspective. We don't sit on boards. So typically what most lenders will do is they'll require some sort of credit disclosures on a fairly frequent basis, like, hey, give me audited financials on some cadence, help me by furnishing some certificate that says all of the covenants and loan, help me by understanding which ones you've tripped and which ones you haven't. You end up having these reporting requirements that by our math costs on average a hundred thousand dollars a year just to comply with, because you typically have to hire one to two people to run when they're reporting. And so we have none of that because we do a hundred percent of our reporting via the capital machine. And so these are all facets that were made possible by really the adoption of cloud systems of record that really just happened in 2018. And so we've worked them into the capital machine and totally changed the process that we use to turn our businesses, and it just so happens that as more and more transactions are happening because of COVID online, this is a great way to raise capital. And so that was not part of the plan obviously, but we've just found ourselves in this position where our business has also accelerated, just because of the kind of latent demand basically for closing financing online.

Marina - Absolutely, and I think companies, especially at that growth stage, find it very helpful to start thinking sort of outside the box in terms of do I go the route of traditional decorum or do I consider maybe a mix of the two were the way to cost that sort of combination is probably going to be much, much less dilutive, cause as we all know debt tends to be less expensive than equity. So it's great that you're able to provide sort of the founders or some guidance in terms of their cost of capital and what they should be considering, rather than just going to traditional route. That's great, thank you for sharing that.

Blair - No problem, and I think it's super, but back when I was talking about the upside and the downside case in your business, like you should never take on debt that you can't pay off in the downside case of your business, is basically the simplistic way that that I think about it. But if you can, the benefits can be substantial. So like if you're running for example, a ride sharing business and had taken on debt two rounds earlier than you did, you're nine times wealthier now than you would have been if you didn't, we've done a bunch of math on this for all sorts of different sectors, but basically how capital intensive your businesses accessing non-dilutive funding early can make a huge difference. And in our network of companies, I mentioned there's a few thousand in here, we've also quantified the cost of equity. And so the average cost of equity in companies connected to the capital machine is 54%, and 54% is high, like your personal banker would be in jail if they charge you 54% on your credit card. It's illegal to charge that high rate. Of course sometimes it makes a ton of sense, like when DFJ financed SpaceX before a successful rocket launch, like very tough to do that with debt. But today in the venture industry, the industry is about 20 times larger than it was in the mid-nineties. And the vast majority of capital is being invested in companies, going to fairly low risk things, like low risk feature development, sales and marketing, things that normal companies use, debt to finance and the rest of the economy. And so I just think it's very important if you're trying to position yourself in this environment to figure out how to come out of it ahead. There's the upside and the downside plan, like I mentioned, and then there's how do you finance each of those plans. And I think that's the conversation you want to be having with your investors and your board, to really optimize and tailor what you should be doing for you.

Marina - I guess, taking a quick step back, I know Esther had a few comments regarding building a tech stack. So Esther, I'll open it up to you to share your experience and how you've managed through a post COVID world as well.

Esther - Yeah, absolutely. One of the things that we do at Ruby Has, is we are kind of squarely in that world of the tech enabled services company. So we are a fulfillment company, but it's all technology right now. And one of the things that we've done is we've really built out a real, kind of an ecosystem of partnerships. Many of whom we actually integrate to, not all of whom we integrate to, but almost all of them, if not actually all of them, are technology companies. And they are, if you look at them across the board, they formed the technology stack that a direct to consumer brand would want, in the aggregate. And what we love to do is we love to be that kind of intellectual hub that is able to help our customers and our clients build the right stack for themselves. So that includes things like actually order management systems that we integrate to. So companies like Skubana or ERP companies, we're very, very proud of our partnership with NetSuite because what we do is we sometimes we'll start off with a direct to consumer client and then they'll grow and their needs grow, and they need something to work off of. So that's been a beautiful partnership. We work with companies that are focused on international shipping, companies like Flavorcloud and Passport. So over time, what that really does is it creates an entire infrastructure, technology infrastructure and the companies that really do pay close attention to that technology stack, and not only kind of go that out quickly, but also adapted over time are the ones that we really see thrive into the future. So if you look at our partner ecosystem, it really covers almost everything that a direct to consumer brand would need to thrive.

Marina - Thank you for sharing that. I know that we have a number of direct to consumer companies on the line, so I'm sure they appreciate your comments as well. I know we have about nine minutes left and I'm going to ask one last question before I sort of open it up to Q&A. And maybe I'll direct that question to Darren. In terms of building your fundraising strategy and especially in the post COVID world, it's become much more difficult to, not only is it difficult to connect to your board on a regular basis and make sure they're sort of up to speed on what you're building, and kind of any pivots that you're foreseeing in your business, but as you're looking to potentially fundraise from a new lead, it's much more difficult to build a connection in a virtual world versus in the physical world. It's much easier to read the body language, et cetera. What have you seen worked well, once founders are actually ready to do the road show? What are some of the maybe do and don'ts that you can share or maybe your own pet peeve? I think the audience would love to hear that as well.

Darren - Yeah, happy to share those. So I think the first thing I would direct at all founders is that be prepared to do your own ABM. You're going to have to find... you probably have a network of investors. The first thing you should do is make sure that they're warm, keep in contact with them, set up regular calls to the extent you can, whether they be phone calls or zoom calls or whatever the case may be, just continue to have that relationship and build upon that relationship, so when you get out there and the road show, that will be a warm meeting for you. But the reality is probably not going to have enough of those. So you're going to have to do your own cold outreach and there's nothing wrong with that. I think the biggest thing I've seen from founders a lot of times, and maybe even some CEOs is that they're afraid to actually do that cold outreach. They feel like maybe it's designed or reserved for someone in sales development or maybe an investment manager. But the reality is in COVID times, you've got to think about things in terms of being much more tactical, much more I call it kind of guerrilla warfare, more hands on to hand. So you've got to get on things like sales navigator and use your Twitter, and do DMS and find investors who are out there posting or hosting podcasts or writing books. I mean, the nice thing is that everyone's got a little bit more free time now. All of us are doing some of those things and investors in particular are doing more blogs now. They're spending a lot more time on social. Some things you can do is like their posts, comment on their posts, engage that way, strike a DM, try to establish a relationship and build enough of those up so that when you're ready to actually get on the road, you actually have a pretty, relatively warm list. And the thing is you can't expect to do that and get a response immediately. That's just not the way it works. You're probably going to have to try five, seven, 10 times possibly even before you even get a connect or a response or whatever the case may be. So expect the rejection, but that's part of the life that you sign up for. And I think the ones that are the most tenacious at it are the ones that are going to succeed.

Marina - That's great feedback. Blair or Esther, do you have any commentary to add to that before I open it up to questions?

Blair - I mean, I think that being tenacious is more important now than it was before, but it's always extremely important and being creative. I totally agree and I've been shocked at how no task should be below you as a CEO in general, I'll attest to that. The other thing is I think frankly, we can help out quite a bit. I mean, the way that we work with partners, and we basically have a beta program that we're running right now, which the First Republic folks know about. We work with companies directly and basically take a business, quantify it, benchmark it, explain, if it is objectively from the metrics alone financeable relative to peers who have gotten finance. And then we work with companies to either finance it ourselves or to make introductions. And so we have this burgeoning syndication program where we basically handhold companies and hand them directly to VCs that should be funding those, based off of the quantifiable metrics. And so one great way to get introduced to investors is to just work with our team and participate in our syndication program. And that I would say that is certainly an option that's available to people. And our team now is taking on customers. We're pretty selective in the customers we take on because it's an early beta, but part of our participation here I think is to make clear that, that's something we're doing and we can definitely help.

Marina - Absolutely, well thank you for that Blair and Darren, and I guess we have four or five minutes for one or two questions. If there are any questions in the audience, please feel free to type them into the chat and I'll be able to read them to the panelists. So we have our first question. How do you get investors that are motivated by the existing customer acquisition costs comfortable given that the trend could change at any point?

Blair - I'm happy to take a quick stab at this one. So this has to do with your payback period. So if you have a short payback period, then like short can be like two months, there's very little risk. It's like if I could buy a stock and in two months, get my full basis off the table, and by month three, I'm in a profit. Like I would do that all day long. And so you just have to be able to articulate what actually is your payback period and tell investors, hey, I'm going to pay back the sales and marketing spin very quickly, and you also then need to explain to investors why you're a reasonable prudent person. And so if you take on more money than you can spend efficiently and say that trend reverses, you should be able to explain to investors that you're tracking this granular and you're not going to spend money on 12 month payback, assuming that it was two month payback. So long as you can do that, it's actually a pretty easy conversation to have with investors.

Darren - I would just add on to that. I think the fundamentals that you're going to be doing now to acquire customers will still work post COVID. Things like the tools that you're using to do your own ABM, the engagement methods, perhaps AdWords buys or whatever the case may be. You should still do that. So in the post COVID world you're just going to layer on top of that with more trade shows like Esther mentioned earlier, and maybe more site visits, et cetera. So I still think this is the steak and potatoes, these are the fundamentals that you're doing now.

Marina - Thank you, Darren, thank you Blair. Anybody else have a question? I can wait for a few, a minute or so before we wrap up the conversation, but I really enjoyed the conversation. So thank you to all the panelists for finding the time. I know August tends to be a challenging time to connect, so I appreciate you sharing your thoughts and this has been a great discussion, so I'll give it maybe like 30 more seconds before we wrap up the discussion. Well, it looks like there's no more questions. But if any of you have any last minute thoughts that you wanted to share, happy to open it up to either of the three of you or we can sort of wrap up the discussion.

Esther - Well, I just wanted to thank First Republic Bank for your partnership and all the panelists, and it was a really rich discussion. Thank you very much.

Darren - I just wanted to add, so if you're in the audience and you're running a company and you're looking to raise capital. I know it's easy to be dissuaded by the situation, but the reality is deals are still being done. And the thing is I see that deals are going to become more competitive in the future. So now is a time to work on your business, improve your business, clean up the shop, clean up your KPIs as Blair was mentioning, be more prepared because everyone else is doing that too. So this is your chance, use the time wisely. When you do hit the road be ready to go because it's going to be competitive, I think in the next six to 12 months out there. But good luck and thank you for having me today.

Marina - I'd like to thank you all for attending this online event and thank you to the speakers for the insights that you guys have shared. At First Republic we are proud to serve you as part of the innovation community across the US, so please feel free to reach out to us for any of your financial needs. This concludes the event. Thank you all so much for joining us.

Blair - Thanks for having us.

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