On this week’s episode I do a deep dive into the world of venture debt with special guest Billy Libby, CEO and Co-founder of Upper90. Get ready to uncover a groundbreaking approach to financing early-stage startups that challenges the traditional equity-focused model. Upper90 is on a mission to make credit accessible to tech companies at an earlier stage, allowing founders to retain a greater ownership stake in their businesses. Billy shares valuable insights on how venture debt can provide a lifeline to entrepreneurs, highlighting real-world examples of asset-based lending and innovative solutions for capitalizing on growth opportunities. Whether you're an entrepreneur seeking financing options or simply curious about the evolving landscape of startup funding, this episode is a must-listen. Join the conversation and gain a fresh perspective on the intersection of technology, finance, and entrepreneurship.


Transcript (this is an automated transcript):

MPD: Welcome everybody. I'm Mark Peter Davis, managing partner of Interplay. I'm on a mission to help entrepreneurs advance society, and this podcast is definitively part of that effort. Today we've got an interesting conversation with Billy Libby, ceo, e o, and co-founder of Upper 90. They are a fund that is helping to capitalize early stage startups through a variant of a unique approach to venture debt.

So I think it'll be an enlightening way to hear how that type of investor is thinking about it. How you should think about venture debt as an entrepreneur and so on. So it's a great combo. Hopefully it is helpful to you and let's go. Enjoy.

Billy Libby: Billy, thanks for being here today, buddy. Yeah, thanks so much. I'm excited that we're doing more together. All right, let's kick 

MPD: this off at the top. Would you mind giving us an overview of Upper 90, just so everyone listening kinda has a sense of what you do. 

Billy Libby: Absolutely. So we started Upper 90 in 2018, and really the goal of Upper 90 is to make credit available to technology companies earlier that have some asset or some revenue that they can, basically collateralize.

So is there a typical stage. 

MPD: When you say earlier, typically people are doing venture debt around the A round, right? A or B 

Billy Libby: beyond? Yeah, it's a great question. A lot of people confuse us with venture debt and really venture debt underwrites the equity and they care who the equity investor is and they care how much equity you've raised.

And the challenge of that model is that the founders end up having to give away a lot of their company in order to get credit. And so what we did early was say every business has healthier parts and riskier parts, and so we should be able to provide credit to certain assets where we think those assets can pay back our debt independent of them raising equity.

So a founder who starts with upper 90, which usually happens around the Series A before they've raised that big growth round, ends up owning, up to twice as much of their business. Is there 

MPD: a, can you give an example? So when you talk about assets, Is there a generic example where you're not burning client confidentiality?


Billy Libby: What I always say is what's new is old, like 20 years ago we'd be talking about rolling up coffee shops and dry cleaners and gyms. That's become a big institutional trade owning subways and Dunking Donuts. We just talked to a founder yesterday who's buying software apps around NetSuite.

And around Salesforce ecosystems. And so they're buying ebitda. Those software companies have subscription revenue and have like real downside. And so he should be able to finance a portion, if not a high percentage of those acquisitions with debt. As one example, another example would be when you think of lending and factoring every small business.

Has short-term working capital problems, and you can now start a business online so much easier. We can build an app store on Apple, we can build an Amazon store, we can build a YouTube channel. We can build a, a NetSuite plugin. And so when you download an app on Apple, apple pays that app developer 60 days later.

They need money now for marketing and payroll. So one of our portfolio companies, Bravo, will factor that 60 day app receivable. There's another company that provides vertical software for the trucking industry. When a independent truck driver who owns one to 10 trucks delivers their truckload, they get paid 30 days later.

So it's smoothing out like all these new businesses where there's, it's in a lot of what we say, like the tech world has innovated a lot faster than the finance world. And so I see you don't really have a way to get access to capital for a le a lot of these new businesses online. Now, a lot of people aren't 

MPD: experiencing this.

How, what's your, can you do a quick bio of your background? Like how did you end up 

Billy Libby: getting here? Yeah, it's very random. I always had done different things, like I worked in the White House one summer. I did banking in Hong Kong one summer, and when I started in finance, I got thrown into quant trading, electronic trading.

Which is looking at all this data, right? You look at historical data, you build algorithms and you try to predict future prices. And I always love technology and I think it's hard from being in finance to get over to the tech world. It's tough. Like you really don't get valued for all of your experience.

You can go be like a VP of, Finance at Stripe or something. It's almost like where you have to start over being a, associated a VC firm. So I was sitting with my partner in Upper 90, Jason Finger, like in 2016, 2017, and he's Billy, there's this big problem happening in venture. Most venture firms have grown in size so substantially that they're misaligned with founders.

If a company's working, they wanna put as much money into the business as possible. And when he started Seamless, most funds were small and like more seed and very aligned with founders in terms of dilution. And I was like my world in quant is just all about using data and providing efficient prices.

And he's so the, just like taking Jason's experience in tech and mine and quant, we said, how do we bring more efficient capital to the startup world? And that's how upper nineties started. It was. Just this merging of two different worlds that don't usually intersect 

MPD: now.

So you're in the credit markets and the private credit markets for startups, even a lot of founders aren't that close to it. And you're also, a lot of VCs they know of it. They make intros, but they're not intimately connected to the market dynamics. They're just, it's just a different conversation that's being had around the channel for sure.

So looking at the broader credit markets, all this stuff that's happening, we're in a weird moment in time. We're seeing defaults start to pick up in real estate and other places. What do you what is this macro, what's your macro perspective and how is that translating to what's happening in the startup world?

Billy Libby: It's a, I love to get your perspective on this. I, what I learned when I was in quant trading was, it's much better to have a macro tailwind. Then to try to be the smartest person in the room. And between 2003 and, 2018 when I was in finance, you saw this huge shift, of quant and ETFs take over long, short hedge funds.

It's very rare now that a long short hedge fund is getting paid two and 20 when it's tough to beat the market. And so what I think is that, The cost of equity is a question no one really asks. Like we think it's 30% cost of capital. And so you have a lot of these founders that are selling equity and then they get fixated on the cost of debt, like the cost of debt's temporary, and it's irrelevant.

But I think the biggest thing is we look for these industries where there's inefficiencies and we call it excess spread. So I'm sure you're familiar with, the clear banks and the pipes and all of those worlds. We were one of the first investors in that space in 2018. The spreads and what those companies could charge was pretty wide.

Because there now, if you fast forward to today, Stripe Square, everyone's offering the same product, so spreads have collapsed. And so I think it's the key is finding these inefficient industries where there's enough room for error, where if interest rates go up, you can't service the debt.

Like real estate, it's very efficient. Banks understand it, like everyone covers it. So you're seeing small increases in interest rates that are like gonna have. Massive destruction on returns. If you're financing an app receivable or a YouTube channel royalty, and those yields are like 20 to 30%, like interest rates going up doesn't impact their ability to service the debt.

So I think it's the riches are in the niches. You just gotta find these industries where there's enough room to like healthy, like service the debt. 

MPD: And when I look at this space, look, you've got the overall market has evolved, right on the equity side of the deal, valuations are down and we're starting to see a little bit of structure in some deals, particularly at the growth stage, right?

And structure is, equity language for covenants, in, in your side of the game. There was a period during the heyday where a lot of the venture debt deals, the lending programs were really covenant light. Meaning, yes, there was an interest rate, but there was a lot, not as many restrictions and trip wires that a company could trip over.

Is the era of covenant light debt over, how is, how are the terms evolving now that the market's tightening?

Billy Libby: It's a very good question. So for everyone listening, like where we wanna sit is we want to be your first credit partner. And I think having, most of the companies we work with and that, you might be investing in, they don't have a CFO yet and they don't have a super experienced.

Person who understands Mez debt, senior debt covenants, trip wires amortization, like these are all very complicated things and I promise you like the sophisticated lenders take advantage of that. So we want to come in and be that early partner. Jason says like this capital markets conciliary to help.

How do you wanna structure your first debt and get everything in place so you can actually get to the next phase? Like on better terms. I think it's really important, probably like 10 or 15 years ago in your industry, everyone was like, we're gonna help you with hiring and we're gonna help you with marketing and we're gonna help you with go to market.

I'm, you've evolved your business too. And I think those things are no longer I think the next set of services that founders are gonna need is a lot of what I'm, tax and credit and, all of these things. So I think that you are, The days of Cov light isn't going away.

I still think there's a tremendous amount of money just needs to be deployed. And so I think that these big institutions need capacity. Yeah. And they're willing to trade capacity for covenants. So I, yes, it's gonna get a little bit worse, there's not that many deals. You can put like a hundred, $200 million to work into.

And so I still think you're seeing. Less, there's still a lot of competition, which means that it's still gonna balance out the, supply demand here. I think one of the 

MPD: other big questions that I had for you, which I think it plagues a lot of founders, is founders wake up when they start a company and they think they should be raising venture capital.

Sure. They're gonna fund the whole business of venture capital, even if they shouldn't. Maybe they should be raising, they should be bootstrapping it. There's all these different elements of how you finance a company. And everyone just dumbs it down to raise vc. Sure. You and I both know there's a lot more nuance to it, and getting a good financing strategy could make a big difference in the outcome for the founder.

What's the framework that a founder should think about of when to take debt versus go for equity? Is there a simple way to for folks listening to hear okay, if this, and that, you should really be giving us a call? 

Billy Libby: A hundred percent. If you are a business that does, that, has receivables, that does lending.

If you're a business that has equipment, if you're a business that has inventory, if you're a business that is doing acquisitions, those are all like capital intensive activities. And if that's going to be part of your roadmap, I think getting a partner in early. That is an expert in those areas and also can provide, credit for those activities is really important.

There's a company that we're talking to right now and he said, Billy, I have a lot of demand on the equity side. All these top VCs want to invest. And what he's doing is he's rolling up software businesses around, I'm using the Salesforce Shopify world. And his thought was, I'm gonna go raise equity and then I'm gonna think about debt and it's, call it 50% of his business is gonna be debt, 50% of it's gonna be equity.

And I said, why do you need six VCs all offering the same capital, offering the same services? Get two VCs and get one of us. And like diversification's your friend, and I think that a lot of founders, they raise equity, then they think about debt, and then what happens is like that becomes this snowball effect.

And anytime they want to grow, it's like they have to raise more equity, then they get debt. And that's where these founders own, I think they sell 60% of their company by the series B. And and that's, you break that chain. I think it's really. Working, with groups like yourself, like you're not putting in a dollar a day to put in $5 in the future, right?

You may do that, but it's not like you're just taking a in Andreessen where I have to put hundreds and hundreds of, or billions of dollars to work. So I think it's working with early stage funds that are also dilution sensitive, and then I think it's really helping founders become more aware of.

Like when they should be thinking about credit. And if I started my own company, I would demand that the debt investor also invest equity in the business. So Upper 90 does 90% debt and, but we also put 10% equity. We don't ask for warrants, we don't ask for freebies. Like we wanna put our money where our mouth is and when things go wrong, which they inevitably do You think differently when you have some skin in the game?

And I think that you're seeing now when no one has skin in the game and everyone has a free option, it creates a lot of reverse incentives. And my last question 

MPD: for you may have already answered it, cause you've dropped some wisdom here. I'm just trying to make sure founders kinda get a playbook out of this.

Billy Libby: Sure. 

MPD: Founders should be talking to debt providers earlier. Got it. What should everyone know before they pick up the phone and reach out to a firm? Is there a watch out or a gotcha, a lot of people are coming at this and there's not a ton of experience around the table. What should they be looking out for?

Billy Libby: It's a gr it's a great question. You know what I believe that you wanna find a partner who's the best partner for this stage of your business. When they go to interplay, you guys are exceptional. C to a investors, right? I think Upper 90 really wants to be that first partner. And what I would say is, If you're just beginning to think about credit, a bank or a large institution is not the right person to speak with, that would be the equivalent of somebody who's starting a business talking to private equity.

So I just, really think and have discussions before you close your equity round. Think of, one statistic that I heard is the average s and p 500 company is about 50% debt, 50% equity. Bessemer had an index, that kinda looked at the venture world. It's 99% equity, 1% debt, right?

So I just think if you're a business in FinTech or eCommerce, or one of my favorite companies built a tech enabled driver education school. And their biggest cost was a Prius. And so one of our company's Cruso Energy, which is this amazing business that's capturing stranded energy, their biggest cost was a Caterpillar generator.

And I think that most businesses have some part that can be financed with credit. So I just encourage people to reach out to Upper 90 just like you would talk, or there's other firms that do what we do and really just try to understand here's how much money I wanna raise and here's my uses of capital.

And I think that we can help you tailor your balance sheet. It's like I think there's gonna be a lot more personalization of finance. Equity's very blunt. If you and I tonight look at Netflix, we'll see different Netflix home screen, we'll see different ads on Instagram. Everything's becoming personalized through data.

So I think you're gonna see this huge macro trend of just a lot more tailoring of the balance sheet. And we wanna help founders think about that before you can't undo equity. So I'd say before you close your round, one of our slogans was like, delay your a like, You raise your seed round, you're you're in two cities and you're live and it's working, and now you want to go into city three.

Usually people then go and raise a big growth round. It's I think that there's a lot of ways to use credit, and I would encourage people to try to have those discussions. Most of our founders are second and third time founders. And I think cuz a lot of them just say I don't care who my investor is.

Capital, we have to be honest, has become a bit of a commodity. We say our capital is greener because you'll own more of your business. But I would just encourage everyone to really, if you don't understand credit, it's okay. Just are there assets that I have that I think could be financed without equity and, shoot us an email and I think it, you'd be surprised.

Thank you Billy. Appreciate you being on. Thank you so much. Great to have 

MPD: Billy on. This is a topic that a lot of entrepreneurs face. At some point, they're not really sure what to make of how to factor kind of debt into the capital stack. Hopefully some insights were gleaned some wisdom was developed and it helps you all out.

And otherwise we will catch you next week. Thank you for listening.