Why Alignment Matters in Credit
Delving into Upper90's core beliefs and how we align with the founders we back
Upper90 was built around the belief that data creates new asset classes, but less-dilutive credit to finance those asset classes has been largely absent in the startup world. To change that, we launched the firm in 2018 to offer founder-friendly credit earlier, helping businesses solve their most pressing capital needs while maximizing ownership and control.
Let’s dive into what exactly “founder friendly credit” means
Most startups don't think enough about debt as a source of capital to fund growth. In other posts, we highlight the role that debt can play in financing early stage companies more efficiently and with less dilution.
We believe the optimal outcome of any partnership between a portfolio company and Upper90 centers around three things:
Optionality: Providing founders with more ways to “win” from capital diversification. Meaning, operating a profitable business, selling for $100M, or going public at $1B can all be good outcomes. It shouldn’t have to be growth at all costs.
Ownership: Providing credit to stable parts of a company where that debt can more efficiently finance an asset or stream of contractual cash flows, rather than the default solve being equity and resultant dilution. When true, business execution and asset performance alone can determine the right time to raise future capital.
Flexibility: Giving founders the ability to operate (and sometimes, fail) in reality. Uncertainty in company building is one of the only certainties - things can and will break. Collaboratively working with companies to help solve growth challenges is paramount in any true partnership.
We aim to achieve all of this through alignment with the companies we back. We are primarily an asset-based lender, supporting early stage startups that have a capital intensive element of their business. We are best suited to be the first institutional credit partner. In this environment, we’re also seeing later stage tech businesses with shorter term and complex capital needs.
Irrespective of stage and size, we want to be on the same side of the table as the companies we back. To do that, we make smaller equity investments alongside our credit facilities to strike that alignment with our founders.
Show me the incentive, I’ll tell you the outcome
For traditional lenders, the incentives are ultimately around putting large amounts of money to work at a high cost of capital for as long a time as possible. When companies are early in their journey, they often have fewer credit options available to them. So they can, and often do, get locked into long-term lender arrangements. In many cases, we believe the goals of the lender are inversely correlated with the goals of the founders and their business.
Longer-term, these arrangements ultimately work against founders and the underlying business. For example, in fintech and supply chain finance, cost of funds is one of the most important variables in the unit economics equation. So the goal should be to build the capital markets muscle internally, refine an underwriting process, and hone in on product market fit. Subsequently, the next step should be accelerating the path to cheaper bank financing to unlock unit economics and de-risk the business.
Early in a company’s journey when cost of capital is typically higher, we believe founders should think about raising what they need for the current phase of growth, rather than trying to raise the maximum amount of capital they can find. Said another way, don’t look for $50M in credit when the business only needs $10M for the next 18 months.
What alignment looks like
We built Upper90 around the belief that debt and equity should be aligned. Simply put, a lender acts differently when they have skin in the game. As a result, we only support companies only where we have deep, long-term conviction in the team, business, and ability to execute. To reflect that conviction, we typically invest a smaller amount of equity alongside our credit facilities in the companies we back.
While long-term alignment means customer introductions, hiring support, capital markets advisory, and high fives when things are going well, it also changes the way decisions are made when things don’t go as planned. We spend a lot of time post-investment providing value beyond capital across go-to-market, talent, customers, and future debt and equity raises. Additionally, and sometimes more importantly, we help solve problems related to people, product, distribution, and economics when things aren’t going as well.
Returning to the things we look for in a successful partnership, optionality is critical.
We often spend time with founders digging into the use of proceeds for an upcoming fundraise - a slide in most fundraising decks. What we find in many cases is a bucket within that use of proceeds that has entails stable, predictable revenues and/or explicit collateral that can be underwritten and thus, financed with credit.
A common takeaway from these exercises is that founders are often raising more equity than they need, as there are facets of the business that are better suited for debt. Examples include hard assets like inventory, equipment, or vehicles with tangible collateral value. Others include financial assets like receivables, loans, leases, royalties, contracts, and other IP.
Our operating thesis at Upper90 is that it’s not how much you raise, it’s how much you own. We exist to help founders grow more efficiently with less dilution. That’s where ownership comes in. Those taking the greatest risks - the founders and team - should own more of their business. Raising the right mix of equity and debt help to optimize for efficient growth without sacrificing exorbitant dilution.
Sources: (1) Based on median valuation, round size, and dilution data across Series A to Series D rounds from Carta 2021 US VC report
Raising equity is an important input to financing early stage companies. We also accept that not all great companies are destined for hypergrowth. Founders and investors alike can achieve great outcomes without requiring unicorn valuations. While it may have been forgotten over the past few years, companies should ultimately be able to self-finance their own growth and control their destiny.
Our credit commitment is for the current phase of growth, rather than locking up capacity long term. We end up building deep long-term relationships with our portfolio companies through flexibility. Your next lender may be taking longer than expected to close. Customer demand may have grown faster than expected and you don’t want to risk turning away customers. You may have a new product launch or market expansion that requires a new credit facility. Having an aligned partner helps solve complex capital challenges.
If you’re a founder working on a business with a capital intensive element in fintech, supply chain, commerce, or marketplaces, reach out to conor@upper90.io. We’d love to learn more about what you’re building.
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