May 23, 2020
Photo: Christopher Michel/Flickr
Hello and welcome to Pipeline. I hope you don't spend all of your three-day weekend on Clubhouse, but please post your screen time notification and tag me on Twitter (@bizcarson) if you do. This week: Why you should probably mention COVID-19 in your pitch deck, blaming cows for outages, and the blunt hammer of equity.
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For years, the trend has been to bundle venture debt rounds with traditional equity rounds in one big headline-grabbing number — a move that made sense, considering venture debt rounds are often made around the time of an equity fundraise. But that's changing: We're seeing companies such as Airbnb, Digital Ocean and Envoy openly talking about just raising venture debt.
Most companies seeking venture debt during COVID fall into one of two buckets, says Runway Growth Capital's David Spreng, a former VC and Midas List-er who has switched to the venture debt side.
This was the first time Gadea ever raised debt, but after talking with founders and other investors, he realized there was too much uncertainty — and too many down rounds — to go for a traditional venture round.
Sadly, "founder financial literacy is probably at an all-time low," says Indie.vc founder Bryce Roberts. "We spend all of our energy educating them on equity and how to sell equity, and we don't spend any time educating them on all the other form factors of capital that are out there, despite that pool growing leaps and bounds."
"Where you spend the money is how you should think about how you raise that capital," says Clearbanc's co-founder Michele Romanow.
The key to nearly all of these alternative funding paths is to have a revenue-generating business that works. Clearbanc doesn't fund companies that can't show that their ad spend is returning money. Venture debt lenders like Spreng want to see revenue and growth, and not much risk.
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What's one of your new quarantine habits?
Homeschooling! I am experiencing eighth grade, fourth grade and kindergarten all over again! I ended up really getting into it and wrote up a blog post called "Corona Curriculum." There are so many wonderful online resources, and they can learn anything — our kids are so lucky with everything at their fingertips for learning. We are doing painting, Python, pastries …
What's a pitching pet-peeve?
I like founders that are honest and direct — that is my style. My biggest pitching pet-peeve is distortion or "over spinning" of data. I put a big premium on honest, direct communication. If a founder is playing "hide the ball" during the pitch, or has to be asked three different ways for a simple metric, then this doesn't bode well for a long-term working relationship.
What was your first check?
Lending Club. I wrote a check for $7 million in Q1 of 2009, the depth of the last economic downturn. We came in on the series B at about $24 million pre, on a down round. Those really used to happen. At IPO, the company was valued at $8.5 billion. That was a pretty good first deal; it set the bar high.
What's one of the worst predictions you've ever made?
The worst prediction was telling Travis Kalanick, when he told me he was considering becoming the CEO of Uber, that he'd never win the battle against the taxi unions. That was a mistake.
What's one problem you wish an entrepreneur would solve?
Food logistics. Solve the issue of food rotting or having to be thrown away in one place while 1 in 10 kids in the U.S. are food insecure. Solve this. Please. Farmers don't want the food they worked so hard to grow to be thrown away, and childhood hunger is a problem we can solve in this country. It is more pressing than ever given the pandemic.
Thanks for reading this week's Protocol Pipeline. And happy birthday to my sister Meredith. If you like what you're reading, sign up here to get it in your inbox. Send story tips and Pipeline feedback to firstname.lastname@example.org. Otherwise, stay safe, stay healthy and stay home. See you next week.