How do you raise a $100M debt facility as a first-time founder?

Jason Kirby (00:04.522) Welcome to episode 29 of Fundraising Demystified. Today we have Kastav Das, founder and CEO of Efficient Capital Labs, a cross-border FinTech that provides working capital to SaaS startups around the world. He's raised a $10 million seed and $100 million debt facility as a first-time founder. Kastav shares his background as head of risk for American Express and several other unicorn startups and how it led to him identifying a gap in cross-border financing. We even dive into the weeds of what types of alternative financing are out there for startups at different stages. And this episode is a must listen for all founders to get a master class on accessing working capital. Now, as a reminder, be sure to get notified of our weekly podcast and newsletter by subscribing at join.thunder.vc again, that's join.thunder.vc. Now onto the show. Welcome to the show, Kaustav Kaustav Das (00:11.832) Thank you, Jason. Thank you for having me. Excited to be a part of this podcast. Jason Kirby (00:15.998) and I'm excited to have you on and share your story. And I'd love for you just to give a quick background to those that are watching today, a little bit about you and how your risk management background led to you building this company and kind of where you're at today. Kaustav Das (00:31.972) Amazing. Again, thank you. So my name is Kostov. I'm the CEO and one of the co-founders of Efficient Capital Labs. We are a revenue-based financing company, and we specialize in helping SaaS companies and their growth journey. And another specialty that we have is we focus on US and South Asian, Southeast Asia corridor. We're going to talk about a little more of it, what exactly is our USP, our Unique Selling Proposition. For me, as a founder, I have, as you rightly pointed out of an extensive risk background, been in risk management domain for 21 years of my career. Started my career with American Express, an entire American Express that did everything to do with commercial risk. I did small business, I did merchant, I did pure commercial risk. And after 2008 and nine crisis, I was one of the first few people to start the FinTech division of American Express. I was a chief credit officer for all non-card lending, started off with merchant financing and then eventually we did working capital and supply chain financing. And from then, I jumped on to become the Chief Risk Officer of Cabbage, which eventually, by the way, I'd left by then, but got acquired by American Express, but I had moved on beyond that. So was with Cabbage for three years, being a part of the amazing journey that Cabbage had seen. It was Softbank funded. It was one of the premier and primary FinTech lenders slash platform back in those days. Then I played multiple Chief Risk Officer roles 2021 I was the global CRO for a buy now pay later company. And after 2021 is when I jumped on this journey of building revenue-based financing through efficient capital. And I always give this example that my wife says that it was being bit with entrepreneurship bug. Kaustav Das (02:22.496) So I'd worked for many smart founders. I advise, I still advise many, many of the fintechs. What I wanted to build was something that not only plays to my strength and also solves a business problem. And that is how the efficient capital labs germinated in which we focus on cross-border SaaS companies. And our entire intent is to make capital border agnostic. Like whenever you think about South Asia, Southeast Asia, and whenever people think about raising capital, whether it's equity or debt, cost of that debt capital is a lot more expensive than any developed market like Europe or America and what we are trying to do is bridge that capital gap. Jason Kirby (03:03.555) And at this point, how long have you been running this business? How much capital have you raised to date? And in your case, you've raised equity and a debt facility. So if you could share a little bit more about that. Kaustav Das (03:16.372) Yeah, so we have raised around $10.5 million of equity, which is a seed round and a pre-Series A. We've got amazing VCs backing us. We've got QED and 645 Ventures to premiere VCs that are backing up. We've got quite a few of medium-sized VCs that have also backed us, like Everywhere Ventures, Riverside Ventures, Syncapital. So amazing set of VCs. It's great to get ratification. million dollars of equity. We have also raised 100 million dollars of debt facility through CIM. Right. And for people who may or may not be familiar, so I will explain the difference of what is an equity capital and what is a debt capital because sometimes 100 million dollars sounds overwhelming, but it's a very important nuance difference between what is an equity capital and debt capital. So simple way of thinking about it in equity capital is you can use it for whatever you want. You can use it to lend. You can use it to buy a laptop. You can use it to hire anything that you as a founder or as a founding team you want to use it for. That's where you can use equity capital. There is an unhinged way of using it. A debt facility on the other side can only be used for lending, right? If you are a lender, a lender means you can be of different types of lender. You can be working capital, you can be supply chain, you can be factoring company, you can be a credit card company. It really doesn't matter. If you're a lender, you use the debt facility. And again, not getting into there, there could be different types of debt. It could be a warehouse facility. Kaustav Das (04:56.902) and do a forward flow. There are different ways of raising capital when it comes to the debt part of it. So we raised a warehouse facility with CIM, which is a $100 million debt facility, which can be used for lending. And unlike equity, a debt facility comes with covenants. What that means is what you can or you cannot do. Just because you can lend doesn't mean that you can lend whatever, whoever you want to. There are certain covenants that you and your facility provider agree with. to stick to that during the course of that facility that you still own. Jason Kirby (05:32.846) No, I want to unpack that a little bit more. Um, so when it comes to getting a deficit, now your business in particular, actually let's take a step back for people that aren't familiar with revenue based financing, can you give a quick, uh, education to, to founders on what revenue based financing is and how those deals are underwritten? Kaustav Das (05:51.032) Sure, sure. So a revenue-based financing simply put, and it could be a retailer, e-commerce revenue-based financing, or it could be SaaS. We focus on SaaS is we upfront your capital. So let's think about, let's say that you are a platform company and you are an HR tech platform company, and let's say Citibank is using your platform for all HR related purposes, and Citibank for usage pays $20,000 every month for using the platform. So you make quarter of a million dollars or $240,000 from Citibank for the platform usage. What we will come and say that we'll upfront a portion of that capital. so that you can use it for whatever you deem fit, right? Especially for a growing company, especially for companies that are pre-seed, seed, series A, series B, getting that upfront capital, the ROI of getting that upfront capital is a lot more than getting it every particular month. So that is what we do. So in this particular example of that $240,000, let's say $120,000, we pay you upfront. Now you use that capital to build more features, you use that capital to go and pitch to another bank, capital to go to a GTM for another market. So it's a utilization that so we upfront your we front load the money that you would have got from a particular contract. We give that to your front. Jason Kirby (07:12.862) And how does that hit the balance sheet? You know, is that seen as like collateralized debt? Is it seen as, you know, accounts payable? How does it impact a founder's balance sheet? Kaustav Das (07:23.616) So, I mean, first you use the words collateralized, right? So most revenue-based financing companies would not, it would not be collateralized. And collateralized is a little bit of a nuanced term, right? And I'll explain to what that means. Sometimes when we think about collateralized, we think about you have to give something like a CD or a letter of credit, a certificate of deposit or a letter of credit. is the usual definition of collateralized, but in the legal definition of collateral, you can also file a lien, and if you file a lien, it is also deemed to be collateralized. But there are certain revenue-based financing companies that makes it uncollateralized. What that means is there is no lien filing, there's no upfront letter of credit or certificate of deposit that is there, but there are also certain other players within the revenue-based financing space, especially the ones that does much bigger amount, especially the ones that does longer tenure without getting into names, some of them do file for liens, right? And that is what makes it collateralized, right? Now in terms of balance sheet, right? So in terms of balance sheet, depending upon these are all current liability, right? Especially if you have to pay it off in less than 12 months, it is going to be a part of a current liability. Sometimes, as I mentioned, some of these revenue-based financing companies can actually give it to you for two, three, four years. Then it not only becomes your current liability, which is the 12-month portion of what you need to pay, but it is also a long-term liability for what needs to be paid back. Right. So that is how it will show up as your current liability on your balance sheet. Jason Kirby (09:09.246) No, I'm glad you shared that. I just feel like a lot of founders don't know how RBF works and from like a payback period. So yeah, usually less than 12 months, sometimes 18, sometimes longer, but it's not necessarily really an interest rate. It's usually a percentage of future revenue is how most of them are underwritten. How do you guys determine what percentage to take and how do you determine when it's Officially kind of paid off taking into consideration your percentage that you need to make in terms of interest Kaustav Das (09:40.772) So there are three types that are there and not to make it a lot more complicated. The first one, which some of the people would call it like a merchant cash advance, it is a percentage of your revenue. So what does that mean? And there are pros and cons to that. The percentage of revenue that means is if you are volatile, if your revenue is not as predictable. it can potentially help you because in certain months, let's say you do 50% of it, you don't want to pay a fixed amount because the revenue that you have made is not as much as you made in the previous month. So the amount that you're paying back falls or goes up depending upon the revenue that you're making for the month, so which is a percentage of your revenue. But that's the advantage. What I give you is the advantage, right? So it means that if there are certain months in which you're not doing that great, the amount that you need to pay back goes down. The disadvantage is if you're a growing company, where most of the companies that we go after are growing companies, right, which means that your revenue per quarter is growing up. At a certain point in time when you're estimating, when a usual RBF players are going to estimate, they're going to estimate looking at your growth till that point in time. And they are going to calculate if it's a 12 month, they'll calculate what needs to be done for you to be paid back in 12 months. But if you're a growing company, what happens is that you end up paying it depending upon a growth rate, six, seven, eight, nine months. So what you are doing, your effective APR or your effective rate that you are paying becomes much higher than what you anticipated it to be at the point when you got it. So that's a disadvantage of it, right? So when you are a growing company, you may not want to take it as a fixed percentage of your revenue because you'll end up paying a lot more as a result of which the companies are higher, Kaustav Das (11:39.771) MCAs are happy because they are getting a lot higher yield on that particular thing. So that's one type of MCAs that are there. The second type of MCAs that are there is, which is what we do, we do it as a fixed fee. So what that means is we go after predictable revenue, so you exactly know every month what needs to be paid in terms of principle and what needs to be paid in terms of interest, right? So there is no surprises. So you can plan accordingly, doesn't matter whether you're growing, whether you're growing with 30, 40, 50%, you pay exactly what you need. Again, the reverse of it is true. If there are certain months in which you dramatically are lower, it might pose a little bit of an issue of repayment, but especially for a growing company, we always advise, doesn't matter whether it's a friend or existing customers, we always advise to take a fixed payment. It helps you in terms of your yield. The third type of revenue-based financing companies that are there is, it's not technically a revenue-based financing company, but it's more like a... loan in which there's a balloon payment. What that means is it's interest only for a certain period of time. It could be a year, it could be 18 months, and then you repay that entire amount at the end of that period. And there are advantages and disadvantages. The advantage is for that period of time you're paying interest only and you're not paying principal. The disadvantage is especially in certain markets, especially where we are right now. that balloon payment puts a lot of pressure on everything that you have. Then you're looking at refinancing. Then you put yourself in a little bit of a pickle depending upon how big, because those are the three typical types of RBFs that you would see. Kaustav Das (13:27.256) Jason, I think you're on mute. Jason Kirby (13:30.818) I think that I really appreciate you sharing that and breaking down the different layers of opportunities that founders can at least start to think about how this might play into their business, especially for revenue generating businesses that want to look at this. So appreciate the education. Let's kind of take a step back. You raised from some pretty prominent investors, pre-seed seed and of course, the debt facility. What was your strategy? You know, how did you go about getting in front of the right people? At what point were you at with the product to go out and do that? And, um, yeah, we'll start there. Kaustav Das (14:06.708) Yeah, so and it's a good learning exercise. Like the way I said, it's learning by doing, I faltered, I stumbled, and then I learned. And if anyone ever comes to me for advice, I can say what to do and what not to do. So I started fundraising back in November of 2021. And we all know. in 2021 was during the heydays of people being able to raise funds. So the entire thing, and it's a very personal story. So the entire thing, the way it started was I started talking to a few of my VC friends, people who were entrenched in the market. And the feedback that I got was, Kostav, the idea is great. With your risk background, with AmEx and Cabbage and so on and so forth, we were looking to raise around $5 million at that point in time. It's going to be a breeze. It's just going to be a walk in the park. Don't worry about it. And so November and December, I spoke to only five VCs, right? top five VCs, again, without getting into the names, like big names, we spoke to only, I spoke with only top five, right? Some of them showed, QED was one of them. So some of them showed interest, some of them showed a lot of interest. The other three said no at the very beginning. And come, I would say January 1st or 2nd week, which is two months, two and a half months, things were starting to get a little bit difficult. The answer was no from all five, right? Including QED at that point in time. So I was in square one, right? What I realized was I did not, and that was the learning. I did not spread the net, could not cast the net wide. I spoke to only five of what I considered to be top VCs and I had wasted two and two and a half months of time just doing that, right? Kaustav Das (15:55.776) because another disadvantage that I had at that point in time was I did not have a product. So it was me and my co-founder, I had a great pitch deck and I had my resume and I was selling those two things at that point in time. So after January, I started casting a much wider net, speaking to different types of VCs, people who specialize in fintech, people who are in New York that can go and have a conversation, people who specialize in pre-seed and seed as opposed to going to multi-stage funds. And I got introduced to amazing funds at that point in time. And one of them was 645 Ventures. And we immediately hit it off and... we raised the first seed round with 645 Ventures. So that was one of the biggest learnings that I had is, don't put all your eggs in one basket and try to diversify. So 645 was the first investor. We used that funding to build a really, really good team. We started building our first product and... Sometimes it becomes the chicken and egg situation when you are doing a lending. It's a very important thing. When you are doing lending, it's always the chicken and the egg. When you speak to an equity, and when you speak with a VC who knows FinTech, the first question they'll ask you is, do you have a debt facility lined up, right? And when you speak to a debt facility player, the first thing they'll ask you is, hey, do you have equity lined up? Because there's always an advanced rate concept. So what is it? So here is where my experience of knowing a lot of debt facility providers helped, right? Given my background with Cabbage and with Petal and so on, I knew quite a bit of a debt facility provider and was lucky enough that I had three people, three debt facility providers who were willing to give us a directional term sheet, right? Even without equity. Kaustav Das (17:56.956) right, for me to show it to the equity players, right? That is one advantage that I had. So I always say that I was very well covered on the debt side. I was absolutely not covered on the equity side. So, and during the due diligence, 645 spoke to one of these players that was there, and that gave them a lot of confidence because they knew that we already had a term sheet from a debt facility provider. So that is one thing founders need to keep in mind that when you are doing... anything to do with lending, that how do you solve for the chicken and the egg? And by the way, we did not do it, but another way of solving for it is you raise a certain amount of equity and you use the equity to lend. So you build a little bit of the book with that equity for lending, then you go to a debt facility provider, by then you'll have a product, by then you'll have a platform, by then you'll have customers, you have something to show. So anyway, so that is how our journey went. Then with the equity, we were able to close our first debt facility back in November with CIM. It was a smaller facility, which we call a promissory note. It was a $15 million promissory note. But that particular term sheet that we got had economics which would unlock if we raised another round of capital and the economics would become a lot better. The interesting thing. Again, another learning and this is another learning that I heard from my VC friend is raising capital is almost like joining the dots. Right? So what I did this entire one year of 2022 was I picked certain VCs and when I was not raising capital, I kept on presenting to them. best time to present and this is when you're not raising capital. So I kept them engaged and one of them was QED. So even though QED did not come in during the first round, I kept them engaged and we showed them the growth. We showed them that we closed a debt facility in the 1500 promise we note and they came in for a pre-series in December. Kaustav Das (20:05.448) Right. And that is when we closed with QED and 645. 645 continued to believe and invest in us. And QED and 645 closed the... pre-Series A, which was a $7 million pre-Series A that we raised in December. And it's always self-fulfilling. And because we were able to close the pre-Series A of $7 million, we then went ahead and was able to close the $100 million debt facility in July with CIM back again. Now that we have closed the $100 million debt facility with CIM, our conversations as we are going for a Series A becomes easier, because now we are completely covered from the debt facility side, at least for the next two years, maybe even for the next two and a half years. for a financing company, you always are in a capital raise mode, but it is like the debt has the equity, which again helps the debt, which again helps your equity raise. Jason Kirby (20:58.35) I think that's something that the chicken and egg problem is something founders complain about all the time. And I think it's that straddling where you kind of get a little bit of a commitment on the other side, you kind of like play both sides. And I think that's a crucial tip to share. And being that this is a competitive space, like you're not the only player in this type of financing solution, albeit I think the market's in growing and I think more and more founders are looking towards this option. So I think it's bigger. pie that's accumulating. How did you differentiate yourself? I think you have the Southeast Asia element to it, but beyond that, is there a proprietary underwriting that you have? Is there tech? How did you kind of go out and differentiate in this space? Kaustav Das (21:38.36) The biggest differentiator, Jason, is we are the only revenue-based financing company. We are not only cross-border, but we do our risk cross-border too. Right, so we have got like entire infrastructure built in different markets to do risk assessment, not just in one market, because we solely focus on cross border. And that is the biggest differentiator. We just don't focus on one market. We have not built an infrastructure just for one market. We've built an entire platform to look at multi-market when we are doing risk underwriting. Jason Kirby (22:09.422) And okay, I can see that because that opens you up to a whole larger amount of opportunities than just businesses that are just doing business in the US. Now, I appreciate you kind of adding some insights there. And when it comes to what you look for in terms of underwriting deals, and like just for the audience here that might actually want to use you guys, what are you looking for in a company? What's the typical criteria that you guys look for? Kaustav Das (22:15.044) exactly. Kaustav Das (22:18.465) That's exactly correct. Kaustav Das (22:37.668) So we are fairly flexible, right? Like, again, I cannot speak for the other. There is no one condition that eliminates you, and there's no one condition that approves you, right? So just because your net margins or a beta margin is negative, severely negative, negative doesn't eliminate you, or just because your margins are positive doesn't mean that... you're going to be approved. We look at a bunch of things, right? We look at your banking data that gives us view in terms of your revenue, in terms of predictability. We look at your other accounting data that gives us view in terms of your... debt capacity, like how much you already have, how much you think you need to pay. We look at your contracts, like we look at stuff like, is there any, you could be a $2 million company, ARR, but what if the $2 million 1.5 is coming from one particular company, there's too much of concentration risk. Like what exactly if you lose it? So we look at contracts, we look at whether you're VC funded or not, whether, for how long you've been in business. And again, I don't want people to leave with the impression that if you're not VC funded, it is bad, it's actually not. You could be, we've got 20% of a company that are bootstrapped, right? And it helps in a way if you're bootstrapped also. So there's no one condition that eliminates and there's no one condition that makes you better off. That are there. Jason Kirby (24:04.278) So the best thing to do is kind of see if one, you need this type of, you know, need additional funding and apply and see where it goes to kind of see what options might open up. That's something that we help founders with all the time is like, okay, like how much capital do you really need to kind of hit the next milestone and you really need to go out and run in a fundraising process for, for venture capital, or can you follow going after, you know, working capital, RVF, term loans, these types of things to kind of see if you can, in most cases, get capital quicker. in a lot of ways. You won't get maybe as much because there's certain caps based on revenue and whatnot, but maybe you don't really need that much and you can kind of do what you gotta do. Kaustav Das (24:35.355) Exactly. Kaustav Das (24:41.888) Right, right, right. So one thing that I'll add is that what we try to do is we avoid being the lender of last resort, right? That is one thing that we do not want to be the lender of last resort. What that means is you've tried raising VC, it has not worked. You've tried raising debt, it has not worked. You've tried going to other places and now you've got one month of runway. your revenue might be exploding, but you just have one month of runway. So that is something we tend to stay away from that we never want to be the lender of last resort. And another important distinction, like there are three types of capital that you can raise. And Jason, probably you know this, but for other, there's VC, there's a venture capital, then there's a venture debt, and then there's alternative capital, right? Alternative capital, it could be revenue-based financing, it could be working capital financing, it could be... Supply chain financing fashion, whatever. And there's a subtle way of differentiating, right? A venture capital, the way I explain to people is always a multiple of your revenue, right? When you are looking to explore, when you're looking to grow, when you're looking to make it a hockey stick growth, you're looking for multiples of your revenue, you can never substitute it with the third part of it, right? You can substitute a part of it. A revenue-based financing or alternative capital is always a fraction of your ARR, right? It's never a multiple. So that's one good way of doing it. And there are pros and cons in each one of them. As I mentioned, like right now, the VC market, if you might be raising multiples, but you're giving away an arm and leg in terms of your company, if you don't need to do it, you shouldn't do it. You would rather get to a valuation, you would rather get to that one particular customer, you would rather... I always consider us not the lender of last resort, but your last mile. So that last mile to help you get to that valuation, your last mile to help you get to that ARR, your last mile to help you get to that enterprise contract before you explode. So we are an enabler of that last mile. Jason Kirby (26:52.042) That's a really good way to look at it. And that's how I see it. It's just like, you know, hitting that milestone, you just need a little bit more to hit that certain, you know, MAU count, user count, or, you know, revenue metric, I think is a really good way to look at it. And it's how founders should be looking at their business anyways. You know, they should be looking at, you know, the milestones that they need to hit to achieve, you know, a capital raise or be, you know, attractive to a more formal capital raise. Kaustav Das (27:03.16) Correct. Jason Kirby (27:19.65) When it came to your experience fundraising the debt facility, you mentioned the firm. You have a background. You've been in this space. You probably already had a couple lined up. How are these debt facilities structured, if you can kind of enlighten the audience here? Because there's a couple of startups I've worked with in the past that have sought this out. Kaustav Das (27:38.124) Sure, sure. But again, another big learning is even though. I thought I knew a debt facility, right, which I would say that from a regular person, I probably might be a little bit better off, but there was a lot of things to be learned, which I learned during the course of it. I understand the basic thing, what is an advanced rate, which people may or may not know, right? Like what is a sofa plus this and what is it that you need to negotiate? But there's so many other small, subtle things that we learned and we learned that needs to be kept in mind. I would very strongly say that if somebody is going for anything to do with debt or going to a debt facility, try to think of getting a fractional CFO or a fractional capital markets guy. no matter how smart you are there are many things, there are many nuances and these debt facility term sheets that you sign are long-term term sheets these are not six 12 months they're two three year four year term sheet what you're signing right now you have to live with it for the next two three four years so it is imperative for you to know some of the nuances imperative for you to understand this and it is okay for you not to know everything so that's why i would always advise for somebody who is into lending to invest certain amount of money maybe not to hire a CFO I understand or maybe even not to hire a CRO but to invest in fractional CFOs or to invest in fractional capital markets people Kaustav Das (29:13.608) the value add for that, the ROI for that is a lot more, which we'll only realize after we have gone to the term sheet negotiation. So that's another very strong advice that I would give anyone who is thinking about doing a FinTech which includes or which involves lending. Jason Kirby (29:31.506) And in this lending world, there's got to be essentially a spread. You have a cost to capital on that, to where I imagine there's maybe some fixed cost. And when you deploy that capital, because essentially, it's not like you get $100 million in your bank account. You're drawing upon that when you're doing deals. And I imagine there's probably some kind of fixed cost. You don't have to share obviously the exact numbers, but there's some kind of fixed and then maybe some performance upside to back to the lender to kind of juice their returns. Like, is that kind of what you experience? Are there other types of ways that these deficit facilities ultimately end up making money? Kaustav Das (30:04.772) No, so I mean, this is a very typical debt facility in which there is a fixed cost that is there. It could be a fixed cost. And now given the markets have become a lot more volatile, so most of the debt facility providers would do a percentage plus SOFR. Right, SOFR is the Fed rates, which it's not prime, it's a little bit different, but it keeps on changing every month. There's a one month SOFR, there's a three month SOFR and so on. And depending upon it could take a one month or a three month SOFR. So most of the debt facility providers have moved away from the fixed cost. Now it's a variable cost in which there's a fixed component and there is a variable component, which is the SOFR that is there. Right, and the other thing to keep in mind would be, you have to get confidence. from the debt facility providers through multiple things that are there. First is product, right? What type of product that you have, whether they deem it to be risky or not. If you're doing a product that's four years, it's a lot more risky than it's a three-month product, right? The product itself. Second thing is background of the people, right? Whether, if it's not you, whether it's a risk officer, it could be you, the background of people who is eventually going to be responsible for managing risk, right? It's extremely important to showcase that when you're speaking to a debt facility provider. They are evaluating you. No matter how smart you are, you could have raised $50, $70 million fund. You have to understand that there's appreciation for risk, right? And you have somebody to back it up, right? Kaustav Das (31:42.604) The third thing is you have to walk the talk. What that means is you have to showcase your policy is reflective of what you understand, what you know, and you are not skimming it. What I mean is that you're not skimming it. You may know it, but when you're starting off. You're not doing the entire nine yards. You are just getting the financial. So you're just getting, you have to walk the talk of your knowledge and reflect it on it. These are the three very important things that you need to keep in mind when you are raising. What is the product that you're thinking of? Right? The second thing is you need to have a team to back it up. to showcase that they understand, they appreciate, and they're going to be the flag holders that the debt facility people can go up to. And the third thing is you need to showcase that what you are building is reflective of what you claim you're gonna do. Jason Kirby (32:35.766) And for funders to know and also just for my own curiosity like what kind of downside protections do you put in place to You know mitigate any kind of loss or full loss of capital deployed into your clients Kaustav Das (32:51.352) So it is not, so for us as an example, it is not a collateralized loan, right? So the downside protection, technically speaking, is going to be your underwriting, right? So the downside protection is going to be where you are in terms of the money flow, right? The downside protection would be you do a pull from their bank account and not wait for them to push. for their bank account. The downside protection would be how an early warning you get when the customer is probably deteriorating and not wait for it to become worse and not repay you. So those are some of the downside. You do not have, as it's not a collateralized loan. you do not technically have that downside protection in which you are covered completely. There are certain aspects of it. There are very few players that do it, but there are certain players that do it. For example, you do a lockbox. A lockbox would be when your end customer is it goes into this mutually owned bank account where instructions are given that what money can move in and what money can move out. So what that means is when the money comes into the log box, you tell them that, hey, I'm gonna be paid my percentage first, but it's a fixed fee or percentage, and the remainder of it goes to the customer, the SaaS customer. That's another downside protection. Again, as you can imagine, the SaaS customers, they don't like it at all. A lot of friction. Jason Kirby (34:20.782) Thanks for watching! Kaustav Das (34:21.868) But sometimes you need to leverage it to protect it. But not a whole lot of companies are doing that today. Jason Kirby (34:30.382) I think this is such valuable insight for a lot of founders because there's so many tools out there. There's Stripe and Shopify for those types of companies that are using it where they just, here, you get half a million dollars or whatever instantly, but they don't really realize how it works, what kind of protections are there, and how the payback periods work and interest rates and those types of things all work. So I really appreciate you sharing your insights. Kaustav Das (34:56.492) Jason, that is a very important point and I try to educate people, right? Stripe, Stripe Capital, Square Capital, Merchant Financing and American Express. It's a very, very interesting product. but you need to understand the nuances of what is the effective API. So I always encourage people that whenever they say, it's a six months payout and I take only 25% or 30% of your revenue, but you paid off in six months. What you are thinking is cheap for you is actually a 24, 25% of the API that is there, maybe even higher. I'm not even talking about the MCAs, I'm talking about some of these merchant financing companies through Square and Stripe American Express that are there, you need to understand, I always encourage people to understand that what is the effective VPR? Ask that question and more often than not they will answer you and you'll be surprised that it's a lot higher than what you think it is. Jason Kirby (35:55.402) Yeah, it can be very misleading, especially because it's not like a term loan where it's explicitly clear that you're paying like 10% or 20%, whatever. And also people haven't realized is how much interest rates have gone up. We were so used to hearing these 3% or 5% type terms. But even- Kaustav Das (36:01.476) Exactly, exactly. Kaustav Das (36:09.284) Exactly. Jason Kirby (36:13.782) They're thinking like mortgage loans, which are very, very different than what business loans come out when you're raising... If you got a mortgage when it was like 3.3%, businesses were still paying like 8% to 10%. And I think that education wasn't really there for a lot of founders that never went out and pursued debt. And now I see interest rates, I'm seeing venture debt loans between like 18% to 30%. Kaustav Das (36:39.948) Venture debt loan starts off from mid teens and higher. Mid teens and higher, starts off. Jason Kirby (36:43.434) Yeah, minimum. And I was just looking at a deal. We're helping a client right now, uh, find a new lender because, you know, they didn't read the fine print. They're like, Oh, we've got an 18% interest rate. It's not too bad. I was like, well, you got to read the covenants and what triggers the failure of the covenants and what happens when you default. And basically the covenants were written to default. Like there was no way it was absolutely impossible for them not to default. And then effective interest rate post default would be closer to 27% plus like a penalty on tap. And so it's just like, well, your actual interest rates, 27% because the moment this, they give you the money within the first month, you're going to default with how this is written. And, and so being able to read that, you know, fine print, being able to understand what the effective. Kaustav Das (37:13.656) There you go. Kaustav Das (37:28.936) Exactly. Jason Kirby (37:31.686) real rate will end up being, you know, is something that I think a lot of founders really need to spend time, you know, when they consider debt options. Kaustav Das (37:40.18) very interesting point that similarly with venture debt like even for the best of best like people who would not like an SVB is great in terms of venture debt that is there they wouldn't have clauses like governance that are there however there are other fees that people don't add up like for example there is a closing fee right your headline could be ABC it could be 15 there's a closing fee there are warrants that are given right warrants have fees, right? It could be 25 basis points to 100 basis points. Then there are concepts like minimum draw. So what that means is even if you don't need it, you need to take the money and then there's a minimum draw. There is a concept of unused fees. What that means is if you're not doing it, you have to pay fees. So there's a lot of nuances, as we rightly pointed out, in venture debt that you need to be aware of and not be enamored by the headline, oh, I'm getting it at 16% or 17%. The lot are the fees that stack up very quickly. Jason Kirby (38:38.858) Yeah, that's a hundred percent true. And that's something that I, you know, spend a lot of time educating founders because a lot of founders come to me because they want venture. They are, they have raised venture and they're familiar with this, like. BC that is, you know, they know that eight out of 10 of their bets are probably going to zero. You know, it's just like, that's the name of the game. Whereas debt, they don't lose money. Debt, like lender, debt lenders don't lose money. And that's like the op, you know, it's the opposite of venture. They have very predictable returns, and they have lots of downside protections to prevent losses or mitigate losses or underwrite a portfolio of investments to ensure that principal is never sacrificed. And so with that comes these additional fees that founders need to be aware of and do their homework on. So, you know. We talked a lot. I know it kind of picked your brain on, you know, kind of all these different topics. I find it to be very interesting. More founders need to know about these options and know what could be out there for them. But what's the best way for founders to learn more about you and what you're doing at Efficient Capital? Kaustav Das (39:42.624) I mean, like the easiest way would be, we take pride in the fact that our website, which is ecapplabs.com is fairly self-explanatory. Like people can reach out to me. I love talking to founders because I learn from them. I learn a lot. Happy, as I said, I still advise for six different fintechs around the globe. Would love to see if people want to learn anything beyond this 45 minutes in our conversation, see if I can be of any help, non-fintech but if people are very keen on learning very specifically about revenue-based financing, if people are very keen on learning specific about E-cap efficient capital labs, they can go to ecaplabs.com and they can always reach out to me at costa.ecablabs.com fairly open to any sort of conversation where it can be of help. Jason Kirby (40:33.622) No, I really appreciate that. And from what I hear, our guests often get hit up for various different things once the episode goes live. So, you know, hopefully founders take this as an opportunity to reach out and learn from you and build a relationship with you with that in mind. So I really appreciate you being on the show, sharing your insights, sharing your knowledge. I found this to be a very informative and educational episode. So hopefully our listeners do as well. Kaustav Das (40:58.312) really appreciate the fact for giving me an opportunity and a platform to talk about it. Jason Kirby (41:03.389) Thank you for joining us. Appreciate it. Kaustav Das (41:05.316) Thank you.