Fintech Reinvents Startup Funding

By  |  October 27, 2021, 4:12 PM


October 13 was the one-year anniversary of the first FIN post and, coincidentally, the day that FIN (in conjunction with CDX/Techonomy) held our first-ever in-person conference. The three and a half hours of programming yielded some fantastic sessions. One highlight was a fascinating, detailed conversation with Craig J. Lewis and Blair Silverberg about how fintech is changing the way that startups are funded. An edited transcript is below; you can watch an unabridged video of the interview here.

FIN: Both speakers are up from Texas, which is kind of cool. Craig is in Dallas and Blair is in Austin. We’re fortunate to have them here today in New York. Let’s start with 60 seconds from each of you about what your company is, what it does, why you founded it. Craig, why don’t you go first?

Craig J. Lewis: Craig J. Lewis, I’m the founder and CEO of Gig Wage. We’re a payroll company for the gig economy. So we help businesses and platforms pay independent contractors, gig workers, freelancers in a very modern way. You guys may be familiar with a little payroll company called ADP. So imagine the new ADP for the new way of work, right? Super excited about really helping drive economic empowerment and efficiency through the gig economy. There’s a couple of trillion dollars paid out to about 75 million people last year alone. And we want to make sure that money moves efficiently so people can get paid when they want to get paid, how they want to get paid and where they want to get paid. And like it’s 2022 and not 1982. That’s our mission.

Blair Silverberg: I’m Blair Silverberg, I’m the founder and CEO of Hum Capital. We help companies raise five to about a hundred million dollars via an experience that feels a lot more like Kayak than it does calling 50 investors and hustling to get introductions to this closed guarded club of capital. And the only reason that we’re able to do this is because these days, 75% of companies have all of their financial systems of record in the cloud. So there’s no reason to go knock on venture capital’s doors. I used to be a venture capitalist. It’s a fun job, but it’s a terribly inefficient process. Instead, you can just connect your accounting system and your payment processing system. We can objectively analyze how financeable your business is and we can connect you directly with capital that comes from places like insurance companies, where it’s extremely low cost. Oftentimes there’s no dilution. It’s just a totally different model for funding companies.

FIN: And we’ll get into that. Craig, tell us a little bit about your own funding journey. Where were you in the process of founding your company when you decided “I’ve got to go out and raise some money,” and where did you go and, and what made you take the deal or deals that you finally ended up taking?

Craig L.: I don’t take deals. I give them. (Laughs). That’s a different question. I knew I was going to raise venture capital the day I started the business, I’m a big fan of venture capital. So day zero, I knew I was going to raise money. I used to sell technology and I had made a good bit of money. I ended up self-funding the company, for like the first nine months. And then I went and raised money from local angels. Geography doesn’t get enough credit in fundraising. And so wherever you live, typically, within two hours of your front door is where your investors will come from in your angel rounds.

Now that’s changed over the last 18 to 24 months because everything’s so much more virtual, but back in 2014, 2015, it was going to be knocking on doors, having drinks, coffees, et cetera. And so you need to understand how the money moves in your geography. In Dallas, I knew there was a lot of real estate money. I knew there was a lot of oil money and I had to learn to kind of speak that language, right, to get them to write that $50,000 check, that hundred thousand dollar check, understand what their risk appetite was, how do we connect technology to a business or an industry that they know?

No one gave me a term sheet. I literally wrote my own term sheet said I was raising $250k, uh, just to kind of create some FOMO. It ended up turning into $600k. We did get a little bit of institutional capital from Stage One Ventures out of Boston, which had a connection to a family office in Dallas, but I pieced together $600,000 to kind of get us going. And that was the first part of our funding journey.

FIN: It sounds like a lot of work.

Craig L: It was a lot of in-person meetings. Hundreds of meetings. You got to remember, you know, I’m a former athlete, although I had lots of payroll experience, the payment experience, a black guy in Dallas, talking about payments and technology. I got a lot of crazy looks at first. So it took a lot of meetings to really understand how to make the story resonate. But once I kinda got it and you get your first person and your second person, and then you get some believers behind you. I remember the first check was an ex-entrepreneur in Dallas who had ran a company they sold to Xerox for about six and a half billion. The former CEO committed the first $50,000. And that’s when things got rolling. I’m a different founder in that I enjoyed the fundraising process I could spend the vast majority of my time talking to investors, I love it. It was hard, but fun.

FIN: Blair, let’s dive a little deeper into what Hum Capital provides, because if I understand it correctly, you’re trying to make that process incredibly streamlined.

Blair S.: I guess Craig’s version of raising capital on Hum would look something like: He comes to us online, he uploads or connects, maybe in his case, an early stage company, a deck articulating his vision—in 24 hours, he has three commitments. Some of that might be capital that comes from vehicles where we have a lot of discretion. So we can just say, “Hey, we really like this business. Let’s anchor a financing round.” Other capital can come directly from insurance companies or sovereign wealth funds or pension funds that invest directly into businesses. You guys probably know this, but the private markets have been exploding in size. There’s over $7 trillion of assets under management. The US stock market is like $43 trillion. It’s a subset of overall capital that’s growing incredibly quickly.

And the end owners of these balance sheets—like insurance companies and pension funds—they have relatively small direct investment staff. So we help them basically scale up how they invest. It allows us to give capital to companies with just a much lower fee cycle because alternatively, they would be investing through one or two layers of funds. The worst case for an entrepreneur is when your capital comes from an insurance company through a fund-to-fund, to a venture capitalist fund, both layers taking 60 to 70% of those dollars in fees. Sometimes it makes a ton of sense to work directly with a fund. Particularly if they add a lot of value, most of the time capital is a commodity. The cheaper, the better, we just facilitate that.

We use a lot of technology to do this. We try to understand guys like Craig: Does he have a relevant background for the space that he’s in? Is he thinking about the business in the right way? The technology that we’ve created is kind of dramatically applicable to companies that have revenue data. So once you have some revenue, your business immediately becomes quantitatively assessable.

Craig L.: That could be good and bad for the entrepreneur, right? Because I’ve seen people that have some revenue that becomes a point of, “Hey, I can now prove that people want to buy my service or my technology,” but then now the investors have something to measure it against. Right? And so if you’re not growing at this kind of hockey stick up and to the right, it can actually play against you in the funding cycle. And then somebody else will come in with a deck and a background and get a ton of money with zero revenue. That’s a really interesting dynamic that you have to think about.

FIN: I covered the Internet economy in the late ‘90s and for a company to show a profit was like the worst possible thing.

Blair S.: This is exactly right. When you’re just a sexy idea, perversely, it can be way easier to raise money. Then when you were both a sexy idea and $3 million of recurring revenue, if your growth rate, isn’t obviously off the charts…now that makes no financial sense. That’s just a vestige of investors knowing how to assess ideas, but not feeling comfortable with revenue metrics and the investors who are comfortable with revenue metrics being really conservative often. So that should just be a smooth kind of continuum you should, as you make progress, unlock better and better and better terms—by the way, those terms should be non-dilutive. This is how a functional market should work.

FIN: Let’s pause on “non-dilutive”—sometimes it’s easy to let these pieces of jargon wash over you—but can you discuss the importance of non-dilutive?

Blair S.: Non-dilutive capital is like, if you have a mortgage, you didn’t tell your bank, “Hey, thanks for helping me buy this house. I’ll give you 20% of my income forever.” You instead made a different deal. You said, “Hey, I’m going to borrow 80% of the value of my house. I’m going to pay an interest rate of 4%. I’ll pay it off in 30 years.” That’s non-dilutive capital. If you look back historically going back to the 1600s, 1700s non-dilutive capital lending has been around much, much longer than the joint stock company. If you don’t pay your lender back, there’s a vast category of options, but all of those options are, like your mortgage, non-dilutive. So if you’re an entrepreneur, you should start trying to figure out, “Hey, how do I finance this business without giving up a permanent share in some of it.”

FIN: In the traditional VC model, it’s diluted because you’re giving up control of a certain portion of the company in order to get the capital.

Blair S.: Yeah, exactly. Our largest investor, Steve Jurvetson, is an amazing thought partner of mine. I am totally happy as our business succeeds with him getting an obscene return on capital. But that’s not how commoditized capital typically is. You wouldn’t be thrilled that your bank got 70% of the appreciation of your house in a good market like we’ve had. So it really depends on the kind of capital you take on. Nothing wrong at all with taking on equity capital. It’s just, you want that equity capital to be value-added. If you’re just using it for dollars, those dollars could come at 4% from an insurance company. And you should check that first before you permanently sell a share of your wealth.

FIN: So interesting. You’re the first person I’ve ever heard talk about this. I do not think of most insurance companies as wanting to invest in tech startups.

Blair S.: Well, where does venture capital come from? Insurance companies, pension funds, sovereign wealth funds. So they are LPs in venture capital funds. We work with some insurance companies that are literally direct investors in over 200 venture capital funds, all the ones that you’ve heard of. So why don’t they invest directly in those companies? It’s not that they don’t have the interest or capital. They just don’t have the manpower. As it’s become easier to quantify what’s happening in businesses, by connecting into the SaaS systems they use, you don’t need as much manpower. You can rely on a lot of benchmarking and algorithms to say, “This business is objectively financially more efficient than this business.” They both may be financeable, but there’s a difference.

And so exactly to Craig’s point, there are businesses where the data alone doesn’t tell the story. Those are the businesses that should be raising venture capital. For early stage venture, the next Elon Musk, where you’re having to look in someone’s eyes and figure out is this person going to build this crazy robot and send it to Mars? Like Steve Jurvetson is really good at that. And there’s a community of people who are awesome investors, but we just shouldn’t conflate the two types of risks.

FIN: So Craig, if Hum Capital had been operating when you were raising money, would you have used it? What do you think you would have gotten out of it?

Craig L.: No. And to this point, you have to know what type of business you’re building as well. Right? And so depending on the stage and type of business can also determine the types of financing that you should take on. So as an early stage entrepreneur, I had an idea, I had a pitch deck, I had a vision, I had a background and we actually didn’t start off as Gig Wage. We had this other idea, really grandiose, we believe that payroll should be free. And so what I wanted to build was the free version of ADP at first. I was like, we’re going to take a Credit Karma model. We’re not going to make any money. That was not even the point. The point was to build technology, collect data, and then start to monetize that data at scale.

Blair S.: I would have funded that. ‘Cause that sounds awesome.

Craig L.: Exactly, exactly. That business requires capital, it’s super high risk business, right? No revenue, no product, no nothing. So that requires equity. But then the bet is that that entrepreneur or that business model then leads to a certain level of scale at a certain speed that may be traditional capital or non-dilutive capital will not finance and fund. And so it really depends on the type of business you want to build. I was looking for people that believed in a big idea that were in it for, you know, they didn’t need a return. They didn’t want distributions every quarter. This was going to be a seven to 10 year run.

FIN: They call this “patient capital.”

Craig L.: It ain’t that patient. They say that, but it you got about 18 months to get to the next level. It all comes with something, but you’ve got to know what type of business you’re building before you know what type of capital you’re raising. You’ve gotta have deep conviction about that. Then I’m also a guy that just kind of likes the deal, right? I like to sit at the table. I like to look you in your eyes too, and see if I can get you to believe what I’m doing. And so there is that component because along the way, we’ve raised about, about $16 million and a lot more coming.

We’ve raised some venture debt, from Silicon Valley Bank, we’ve raised mostly equity capital from institutions. A lot of the insurance companies are trying to figure out how to get to these 75 million gig workers. They have spun up venture arms so that they can now invest equity type capital into startups. You’re starting to see these corporations—financial services, insurance, etc—create their version of venture capital, but it’s usually tied to strategy of their business development teams, their strategic alliance teams, and how can they further their innovation or their growth through a capital investment.

FIN: So interesting to think about gig workers as a target audience for a corporation. I think that’s not commonly understood.

Craig L.: Every major stodgy, serious conservative company you can think of calls us on a weekly basis, every insurance company, the market caps of the companies that call us, blow my mind all the time. They all want it. Because again, you’re talking about a lot of horsepower here, $2 trillion of earnings, 75 million people and growing at a faster rate than W-2 employees. And none of the financial services are designed for these workers. We do this thing called a proof of income report. What we found was if you’re a gig worker, how do you get approved for any type of financing when it’s based on employment and earnings, right? And so you’re working for three or four different platforms. You’re getting money from here. You’re getting money from there. How do you get a mortgage? It’s a difficult process. How do you get a credit card? That traditional financial services model that is being uprooted and kind of turned on his head. The gig economy is a big part of that.

FIN: So Blair, Hum has been out of stealth for a few months. I’m curious, who are you funding? Who’s coming to you, where’s the money coming from? What, what kind of patterns are you seeing in terms of, who’s getting paid in 2021?

Blair S.: About 50% of our customers are not located on the coastal United States, about 15% of our customers are international, but so just focus on the US it’s a pretty big audience of noncoastal entrepreneurs. 80% of venture capital is allocated in side the San Francisco Bay Area. So it’s a pretty big delta between where the entrepreneurs actually live versus who’s a two hour drive from your front door. If you happen to not live around San Francisco, you’re kind of screwed historically. That’s changed I think, with us. In terms of sectors, it’s pretty broad. So 30% are like tech, anything from e-commerce to SaaS, 20% are financial services company. I think it’s like 15% industrial companies. So factories manufacturers, we have a bunch of services, businesses like insurance agencies. I think the point is that the reason that we’re able to offer the cheapest capital, the fastest to companies is because we have a broad, diverse network of companies and that’s very attractive for capital sources. It creates this flywheel. It attracts diverse capital sources. The more suppliers of capital you have, the more options entrepreneurs have, the more entrepreneurs we have more options the investors have. That’s created this interesting virtuous cycle, pretty rapidly after coming out of stealth.

FIN: And how does Hum make money?

Blair S.: Like most marketplaces, we charge a percentage of the transaction. That’s the dominant way that we make capital. We basically charge two to 6%.

FIN: And you don’t take equity in the companies.

Blair S.: Not systematically. If you see something you like, you might invest, but it’s not part of the model. Sometimes we can really help businesses because we’ve just seen a lot. I mean, you know, if you think about like your typical investment firm, you might have four to six partners who specialize in an area and they hear a bunch of knowledge and rumors and ideas from the conversations they have.

If you think about how our system works, we’ve got thousands of companies that are streaming and data every day. So we have quantified, verified a super-granular picture the economy. We can draw conclusions like, “Oh, this region is really experiencing a lot of growth after COVID businesses starting up or moving to this region are going to have a bunch of tailwinds from subsidies.” That can help us make good investment decisions and it can help us point entrepreneurs in directions that are fruitful for their companies.

Audience question: I have one quick question for Blair. To me, Hum sounds like it should be a phenomenal tool to remove bias from capital. Do you have data on that? Is that a part of your mission?

Blair S.: Yeah, that’s a huge part of the mission. You’re exactly right. When a business has data and can stand on its own, it doesn’t matter what the gender, or color of the entrepreneur’s skin, is. I remember being a man and an old school venture capitalist, you’re kind of sitting there and you’re like, “Does this product for women resonate with me? I don’t know. Maybe I’ll ask my wife.” It’s really hard to assess that stuff. Now we can just look at the data and say, in fact, the data shows this product is resonating and it’s completely irrelevant what we think about it. ’Cause we’re not the target customer. Sometimes it’s gender, sometimes it’s race, sometimes it’s just industry and sector—like you have very few VCs who were working at NASA. And so why do we only have one Space X instead of 10? There’s a lot of sources of bias in investing.

This piece originally appeared in FIN, James Ledbetter’s fintech newsletter. Ledbetter is Chief Content Officer of Clarim Media, which owns Techonomy.

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