How the Funding Landscape Has Changed Under Coronavirus - Rob Walling & Einar Vollset

0:00[Music] for joining it for day four of this tremendous adventure I'm pleased to see you back and I think we can have a really interesting conversation today as always special thanks to base camp and stripe as our our 20/20 headline partners and really appreciate working with them today our topic we're gonna run for about 25 or 30 minutes and our topic today was suggested in micro comp connect it was a question from a micro cough connect user and he asked about funding options to weather this downturn and he didn't just mean raising angel funding trying to raise VC their traditional paths but was as we got into

0:56the conversation actually talked about you know what would sting on some debt look like lines of credit that type of stuff so I brought an expert in sales and and fundraising onto the show the man to my right is in our full set many of you may have heard him on startups for the rest of us I spent on a few times and you may know him as the co-founder of tiny seed in our I'm gonna say hi to the micro come on air folks yeah I know I muted myself too so yeah in are joining us from shelter-in-place Santa Cruz and although I'm in Minneapolis we do not have a

1:35shelter-in-place order but we are kind of just living like we are anyways you know I I go to the post office once a week to drop a a package off I went to the grocery store yesterday but aside from that there was a lot of on the Shelf a Costco I was really surprised oh yeah I mean I don't think the supply chains are necessarily that you know yeah yeah so nr is um as I mentioned he's my co-founder with tiny seed he and I met years ago through micro comp he's been a bunch of my micro comps every time I asked him how many he says the maximum

2:10number that have been held even though I know that's not totally true but that's his joke he got a PhD from computer science out in the UK he taught at Cornell taught some computer science and then left that glory oh no I guess you did y combinator in 2009 so that was before the computer science the PhD is that right no no after no no I finished the Cornell in 2007 got it so you left the glorious world of academics to to join Y Combinator and start a start-up just yeah the rest of us yeah exactly so anyways today we're gonna dive into this question from Landon Bennett but

2:45first I have a joke it's it wouldn't be micro comp without some type of joke right so it's just Monday morning levity or Monday afternoon levity I promise I would do this every day but a scientist accidentally turned himself invisible he was worried so he went to his doctor unfortunately she couldn't see him that day it's crowd where there's no one on the other end or spottings it's over it really is so uh all right so yeah uphill from here so the question in micro comm connect if you're not in micro connect comm and your founder or aspiring you can head there to join it's our slack

3:27group we have hundreds and hundreds of folks that are in there we have 1200 who we've sent out invitations if you haven't gotten your invitation check your spam email support now micro calm calm and we have a channel in there called microcon for on-air where people can ask questions so Landon Bennett asked a question last week he said I'm super interested to hear about what other founders are thinking about in terms of funding to weather this down term downturn were entering into was thinking this might also be a great talk for micro conf on-air which is why we're doing it here as I'm sure a bunch of

3:56founders are thinking about this right now so I came back to him and I said look are you thinking of raising angel funding or venture because right now things are slowing down if not at a standstill so going out in trying to raise funding is not gonna be ideal so what were you thinking and and then he added some some flavor to it he said I figured it would be harder to raise but I bet there are a number of entrepreneurs that are wanting to add a little cushion as we go through this downturn especially those that have employees we're in a good we are Atlanta

4:23are in a good financial situation but we want to make sure we plan for a recession that may last a while for example twelve months to a bunch of founders that are looking at everything from VC to angel to loans and so today over the next 20 minutes Anna and I are gonna dig into the options that we're seeing and where many of them are so I believe I have seven or eight bullets here and I kind of want to you know it's it's things you've all heard of right like friends and family angels venture capital we also talked about we're gonna talk about pipe comm are gonna talk

4:52about SBA loans because there's there's a program that's either coming together or it has come together and are is a lot more up to speed on that than I am so that's sound good perfect all right so let's dig in so friends and family angels and VCs what's your take on trying to start if you're if you're not you know close to closing around today and trying to raise around from those three and to tease those kind of group them all together what's your take on that you broke up a bit there but uh my view on those kind of on friends and family and angels is I think that's pretty much

5:32frozen solid as a market unless unless you already have sort of handshakes and self commits and that sort of a thing in in the bag already you know there are still I still still think there's some option but certainly it is a completely different you know narrative then then you know even just three months ago I think the sort of one exception to it is if you happen to be in an industry where you're seeing a huge amount of growth because of this I can see some angels being interested in supporting things so if you're if you are a zoom competitor or you know so anything to do with

6:08remote work or you know hand sanitizer some hand sanitizer manufacturing or something like that then friends and families you know might still work but I think right now the sense that I get from most investors and certainly sort of non professional investors is that everyone is sort of in a wait-and-see you know wait-and-see mode I mean the the the Federal Reserve just today announced that they basically have unlimited money to print and and you know you would think that after the markets closed down four or five percent on Friday when the Fed says we'll give you unlimited liquidity and we'll start buying you know corporate bonds that the

6:44market would hold up but but at least as of an hour ago I was still down four or five percent and I correctly the know that that people like Angels have to invest so unlike say a traditional venture capital fund which has you know they'll feel some strain to put in a short term I think angels are seeing all available cap vest in startups shrink thirty percent in a month they're definitely gonna pull back right and cuz that's when the stock market drops like this if you're talking to a person that doesn't have a fund they've raised prior like venture capitalists go out to limited partners they raise the money

7:21and then they deploy that over many years they through first they're able to invest right in help but as you've said if it's your uncle or if it's just an angel who's lost 30 percent of you know of their net worth in the recent market crash that's gonna be a much much tougher sell so I I'm with you in that boat I think that those buckets are gonna be tough tough to raise from yeah yeah and I think I think even even sort of traditional venture capital like I don't I think you know publicly everyone will be saying like you know we're still open for business never done so many deals blah

7:56blah blah and certainly that was the the sort of tone about a week ago I still think you'll end up in a scenario in sort of the even for the committed funds that they'll sort of look at their portfolio look at the amount of you know dry powder they have and they they particularly because people are talking that it could be a twelve eighteen month recession a lot of them will want to reserve potentially more capital for their sort of existing investments then then you know necessarily wanting to get you know get into more companies I think I think the way you'll see that is people will never admit to that of

8:33course because steel flow is Alpha and Omega in the venture capital world but what will happen is all of a sudden everything takes a lot longer all of a sudden you know the doc the guy could turn around the terms eaten in the day all of a sudden takes a month and now he has the due diligence to do and he wants a couple more reference calls and so I think I think even that is is right now at least and for at least the next month nor two I would say it's extremely challenging even against existing venture capitalists unless you're in this like I guess I'd zoom bucket right

9:04right kind of an exception yeah and that's that's the thing is like venture capitalists don't have I'm not sure what the motivation would be at this point to rush deals through because I think a lot of us are in a wait-and-see position right it's like I think just in general in life it's yeah it's like we don't know what like are my kids gonna go back to school in two weeks or not I don't know yet I'm kind of waiting in seeing on that so I'm not making any big even personal or business commitments right now for the next two three months because I don't know if my

9:29kids are gonna be home until this summer you know so you can imagine someone with millions of dollars to invest it's like why would you risk that and and push that out you know quickly I think but there are other options right I mean we've kind of said those are gonna be tough but there's funding there's this revenue based financing right it's stuff like a lighter capital sass capital big foot capital there's I don't know 20 30 others what's your take on on how well at least yeah what's your take on on that space if you have any any info or on you know on how it would

10:01be to try to raise revenue based financing right now so I worry about that as well simply because these are credit markets and so so I think like a lot of the revenue based financing guys they're looking you know they're they're you have to have a certain amount of money so I think for most of the revenue based financing ship shops you're not gonna be able to tap into that even in good times unless you're doing a half a million a year so so that is pretty much closed to most sort of bootstrap II independent sass companies anyway I think there are I think big is a big

10:33foot that goes down to 15k a month so would that be just under 200 K err are but I think there are I think 250 is like is like the very lower limit I think and I think they're likely to up that just because a lot of time what these guys do is that they they basically have giant spreadsheets with their preferred risk model and they predict a certain amount of growth right and it's like okay I take the growth this is how I make my money back now if you're if you're in a very uncertain scenario they're likely to want to put in bigger buffers on that and so the

11:04available credit limit is gonna be it's just I think it's just gonna be lower I could I could be wrong I'm by no means an expert on revenue based financing but that's my that's my hunch I also I mean revenue based financing at least a big shops are tied much more into the the secured is Asian markets and sort of the their actual credit markets backing this stuff and that one is like the credit markets are this is essentially why the US Fed is just saying they have unlimited money to buy things like high-yield high-yield bonds which effectively is corporate debt right and and that's because the the credit

11:43markets and the public markets have been seizing up almost completely and you can tell I'm without getting too much too nerdy you can tell that by looking at what's called the spread between what's considered which would be Treasuries the the yield you get on Treasuries versus the yield you get on on corporate bonds and that's been spiking unlike anything we've seen since 2008 right so until that settles down even again these revenue based financing folks have raised a big fund so they should theoretically have dry powder to spend so it's not like they need to go out and get it but the prudent approach right now right instead

12:16well there's that there's that too and like most of the time in within credit markets you don't it's not like equity markets necessarily or you know it's more like they might have raised say they if they say they have a five hundred million dollar fund they may actually only have a hundred million and the other four hundred million are are securitized and bring in from other credit lines so so that that might be under strain as we speak but I haven't heard anything specific right okay so verdicts out on that one I'm guessing it's gonna be player to player you know again if they're twenty thirty

12:50fifty of these it's gonna be well there's two things right one you can contact a lot of them but but two there's there's gonna be a supply and demand thing coming up which is what you're saying we're like everyone's gonna be coming looking for cash a lot of founders are gonna suddenly realize have the same realization that Landon did and suddenly they're gonna get flooded you know with requests and so as you said they can raise their the minimums they can raise the bar of what they will loan out they can they can do a lot of things right and just a typical supply-demand business there's another

13:20option that's just coming online I don't know if they've if they've actually lent money to this point but it's pipe comm and you may have heard Jordan Dahl mention and he's the first one that I heard about it from but it's basically if you have a monthly customers your SAS with recurring they will pay you out the the full year as if the customer paid you annually and you literally it links into your stripe dashboard and you literally can like check them off check off customers and and they'll get sent to pipe comm and they write you a check for the full annual that they would pay

13:54you minus 15% expecting them to make it to not churn right and so if they turn then you have to like replace them with another customer in US and so all it is is it's it's taking your full annual payment even though the steamer is not paying that did I describe that was a little bit confusing but basically you can't earn monthly customers its annual yeah and pipe comm will pay you - that fifty again I don't even know if these guys are online yet and without knowing if they raised a fund or if they're going to credit markets it's kind of hard to know right

14:23and I I have to imagine they're getting inundated coming on the market right now of course yeah and I haven't actually III I spoke to Jordan briefly about it but I mean that's like there's nothing new Under the Sun as it were I think that's similar to invoice financing in the more traditional markets and it yes and again I think those things you know Factory I think all those things are gonna be under strain but I again I could be wrong it could literally be that what the Fed is doing is pumping in so much money into the into the credit markets that this is readily available

14:52which we would hope yeah which also carries with it a danger because remember when the Fed pumped a bunch of money into the credit markets after 9/11 and then we arrived at 2008 you know 2009 I mean that was one of the big causes of the Great Recession right his cast so cheap and people were using it to buy so many houses well I mean you look at look at that I just watched the big shot the other day actually and one of my favorite movies um and actually you you should you should also keep a look on the fan to the government's currently buying mortgage-backed

15:23securities it's the only ones wanting to buy mortgage-backed securities so they're providing super low interest rates and actually backing the mortgage backstitch back securities of the brokers so it's not long hair if it keeps going too long pretty much the government will own all the mortgages in the u.s. that's interesting well so let's I actually want to come back to that we have time but um okay how about someone else throughout like what about traditional debt what about if they have a credit card with a thirty five thousand dollar limit or two or three credit cards like that what if they have a line of Craig's isten line of credit

15:58from a bank whatever that's secured you know by whether it's their house or whatever do I think the big question is do you think I mean there was threat of in the 2009 the Great Recession I don't know if it happened but I remember there being like lines of credit where you had a hunter granting in available credit and then they froze it so you couldn't take any more money out so I've heard some people saying well think about drawing some of that cred now some of that you know the cash out to hold on the sidelines what's your what's your take on that if you

16:26definitely absolutely need the money I would do it just because yeah like a draw hold which is what it's called I don't I suspect if things get real bad that that might happen it's still expensive because you're not essentially a your because you're not going to be making any money holding the card you're gonna be paying whatever the interest rate is on just to hold it that's a cash cushion um but I but I think you know I think that's prudent if you're if you know you're definitely gonna need it in the short term and I think in terms of credit cards it's a similar thing I had

16:57I had something that something similar happened to me that might have been there in 2008 when I was you know I had some cash flow issues at a time and then I was just working my way up on my Amex and I knew I was gonna get paid in like a month and a half so I wasn't worried about it but then all of a sudden Amex says oh yeah we've changed your credit limit to one dollar more than your current limit so they've affected you credit from without I mean then they do that without notice right what you spend on it but one thing I did hear

17:27specifically as it relates to Amex is that if you call them up they will defer payments for up to two months currently got it and there's there's a lot of folks yeah it is there's a lot of there's airlines letting you change tickets but no change fees there's hotels letting you know there's a lot of that going on now I know we'll see how long how long that lasts and all that stuff but last bullet I had here is these SBA loans and this is not your the traditional SBA loan stuff that we have seen over the years which I think most of us would consider they're trying to a

18:01bunch of money businesses because they don't want there to be this you know I mean I've seen estimates of 40% of Rick and mortar mom-and-pop owned brick and mortars going out of business in the next two months or something I don't know if that's right but they want to keep happening so can you can you talk us through what you've learned about the SBA options sure so there's there's basically as the way I understand this is that there's basically been so far been to relief bills passed by Congress and in one of the first two with two of them already passed well two already passed and the third

18:33one they're working on in the in one of the first two they passed this called FF CRA and I have no idea what it stands for but it's basically an SBA loan it does have a personal guarantee and you can borrow a tenner pretty cheap right I think it's three percent or three point two five percent or something like that and it's basically by SBA banks but it's guaranteed by the government and and you know at first blush I think it's it's quite an appeal accepting the personal guarantee I think it's quite an appealing one thing I would caution is that in the politician hangover pad the

19:13past the third relief bill sort of got clogged up in the Senate yes Sunday and in there this I don't know he's called but there is during more beneficial relief from some from some of these companies and I think the store you can borrow up to two and a half times trailing 12 months payroll and as a loan guaranteed by the government and it's a reasonably long payback time and I think there's there's and talked about and I haven't actually read the bill talked about if you don't let people go during this period the government effectively forgives your loan after a certain amount of time that's much but that's coming they're

20:02pumping money cuz I mean looking on Thursday the new the unemployment numbers come out and usually that's about 200,000 and they're expecting it to be anywhere from 700,000 the two million that's pretty bleak and then a gamble at this point is how long does that how long does that last you know what is next month's it said multiple months of a million or is it one month and it just winds up being a v-shape versus a crater in essence right is what yeah I think I mean I think like yeah I mean the banks that's the analysts they seem to fall over themselves to try to

20:38figure out come up with the most bearish GDP estimate I mean the first one that Goldman came out about a week ago and said ah we think I'll be roughly 0 Q 1 and then maybe down 8% and then roaring back in q2 and q3 I heard Goldman was saying it was gonna be minus 9 this quarter minus 24 in q2 which is the biggest drop in GDP in the history of the United States I think so ya know I guess we'll see this is the thing like there's so much uncertainty and like the most concerning thing I've seen is the fact that the Fed seems almost impotent

21:11in terms of turning the markets around yeah you know all this stimulus stuff should be putting a floor on things and it just doesn't seem to be at least not yet I just think there's so much fear you know it's they can stimulate all they want but until people know if their kids are gonna go back to school if the business down the street is gonna open like that uncertainty I think is just in everyone's everyday life I went to like I said at the top of the show I want yesterday I have not been inside a Costco in well over a year but I was

21:41driving back from somewhere and you know we needed some some staples and I figured out get some because I'm canned food and and you know whatever else fresh food and it was it it was fine it was the the shelves were all stocked there was nothing nothing missing but it was this this there was a feeling of stress everyone around was just in a hurry people are staying away from each other you know is this odd air around us that we all know we're in a place where stuff could be transmitted I don't know it just our day-to-day lives are just that we're all at just a higher level of

22:14stress and I think the traders and banks and and you know the everyday Americans with money invested in the stock market are or fuel in that same way and so I don't think when I hear that the Fed is pumping money in I know that long-term that will help but I'm personally not thinking that that's gonna turn the stock market around this week you know it's just I mean the Fed can really only do something on the on the supply side right they can supply cash print money essentially versus this is also a combined you know potentially supply shock which is what they're trying to take care of but also a demand shock

22:45because you know I don't care what the what the you know price of jet fuel is I'm not about to go jetting around the world currently so yeah so yeah and and to your point like on the sense of feeling I feel like you know since this really took off two three weeks ago I feel my brains been complete mush and my probably using about 20% of normal brain capacity on on you know non coronavirus related stuff so and I think everyone is sort of feeling that way it's yeah a lot of us feel that way how about you know someone else through a question in that

23:17thread and they said what does it look like this is less related to founders raising but they say what does it look like for fun to try to raise right now like how how you know what should should we be yeah should tiny seed raise are fun - right now it's kind of know I think is the answer I mean the Desai's fund we're going for a 35 to 50 million is typically filled in by family offices family offices are like you know big angel investors mostly and and you know I think the main the main a they're a little bit more sophisticated usually and actually one of the main problems

23:52other than the fact that you know a lot of these family offices are worried about things like should I be escaping to New Zealand you know or what what about what about do with my kids around the house all the time versus trying to have new conversations with with with emerging venture capitalists so so I'm pretty much putting that on ice until you know at least towards the end of April because I think that's challenging too and actually one of the things that is sort of unique as it comes to two funds is that all these family offices they have a allocation right so they have

24:24some bonds they have some stocks there's some emerging markets they have some missteps and that and all the stuff that's priced in real time goes down in value versus venture capital holdings if they already have some that stays that doesn't get repriced as quickly so all of a sudden were before you said okay 110 percent venture capital if the market goes down 50 percent all of a sudden you have 20% venture capital which is way way more than you wanted so so if anything like it's it's it's even more challenging because of the the sort of a liquidity of the or the the lack of real time private venture yep cool there

25:00was one comment from Ken Wallace in my car cough connect chatroom he says also please let folks know that US federally funded student loans have waived interest accrual for the next 60 days plus they are giving folks the option to defer for at least two months at 0% interest technically a forbearance I just got an email about it this morning so thanks for that cancel the inter apparently they moved the tax filing date to the 15th of July without panel I saw that yes I can take the my tax bill in and earn that sweet sweet 0% interest rate right which is something I I always

25:37violate anyways with an extension but yeah so that that that helps this year I don't file that question from YouTube channel by cubit they're from the YouTube chat Xander posted it he says what mics stand is that so a little bit of a meta meta question essentially I went to Amazon / a / Craig Hewitt from Cass knows his recommendation I got the IO technica atr2100 ed I believe that's what my mic is called and there was a package on Amazon that was like 90 bucks and it was the stand and the holder and all the stuff so I don't particularly know what the stand is if it was put

26:13together by you know a third party or if audio technica actually supported it but that's where we are with that we have no other questions in the chat and we're wrapping up sir thank you so much for taking 30 minutes out of your day to come hang with us on microcon Bonaire sure this will be my this will be my productive part of my day yeah exactly actually got something done here so if folks like you folks want to keep up with you on Twitter your @nr voll set and Xander maybe producer Xander maybe if we have that bottom what's called lower third so folks can see how his

26:45name is spelled it's just his first and last name crunch together interesting tweets coming from him now and again and I mean of course the markets totally so tomorrow Craig Hewitt of Gaston speaking of Craig he's gonna be joining me on the show he's gonna be answering questions about his microphone for Europe talk titled that talk was staying on top of your sass metrics knowing what to measure and what not to to help maintain sustainable form and if you go to our micro conf YouTube channel you just go to youtube search for Michael it is now live and watch that talk tonight or in the morning and I will see you here same

27:25time same place for a conversation with Craig about everything you talked about in that talk as well as I [Music]