Have you ever wondered about the hidden complexities and risks involved in managing special purpose vehicles (SPVs) and funds in angel investing? In this episode Marcia and repeat guest Denise Dunlap, co-founder of Loon Creek Capital, do a deep dive into SPVs and fund administration. Denise, a seasoned angel investor, shares her invaluable insights and expertise, shedding light on the often overlooked long-term implications and administrative challenges of setting up and managing SPVs and funds. She unveils the critical considerations and risks associated with choosing service providers, drawing from real-life examples that underscore the necessity of assessing the sustainability and business models of such entities. Offering a glimpse into the intricate regulatory and legal landscape of managing SPVs and funds, Denise provides essential guidance for angel investors and entrepreneurs navigating the dynamic world of angel investing and fund administration.
Have you ever wondered about the hidden complexities and risks involved in managing special purpose vehicles (SPVs) and funds in angel investing? In this episode Marcia and repeat guest Denise Dunlap, co-founder of Loon Creek Capital, do a deep dive into SPVs and fund administration. Denise, a seasoned angel investor, shares her invaluable insights and expertise, shedding light on the often overlooked long-term implications and administrative challenges of setting up and managing SPVs and funds.
She unveils the critical considerations and risks associated with choosing service providers, drawing from real-life examples that underscore the necessity of assessing the sustainability and business models of such entities. Offering a glimpse into the intricate regulatory and legal landscape of managing SPVs and funds, Denise provides essential guidance for angel investors and entrepreneurs navigating the dynamic world of angel investing and fund administration.
To get the latest from Denise Dunlap, you can follow her below!
LinkedIn - https://www.linkedin.com/in/denisedunlap55/
Denise's 1st episode on The Angel Next Door - Denise Dunlap talks Revenue Based Financing
Denise's 2nd episode on The Angel Next Door - Surprising Lessons Learned About Revenue-Based Financing
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Marcia Dawood
Well, hi, Denise. Welcome to the show.
Denise Dunlap
Hello. Good to see you again.
Marcia Dawood
Yes, and you, too. You're on a three peat right now. We're going for the third time that you're going to be on the show, and we're talking about something completely different than the other two times that you were on. So we're going to talk today a little about spvs and Loon Creek Capital, which actually came along before Sage growth capital, which is what you've been talking about the other two times you were on the show. So why don't you just start off, tell us a little bit about how Loon Creek got started and a little bit about how then Sage growth happened. But let's focus mainly on Loon Creek and SPV.
Denise Dunlap
Sure. Yeah. Loon Creek Capital was formed in 2010, and my business partner and I started Loon Creek as a way to provide administrative and management support to our local angel group. So he was a founder of the Boise Angel alliance, and we had a fund that we all invested in, and I joined that as a fund member. And that fund was all volunteer driven, which a lot of angel groups start out that way. Right. And so as we got to the end of that first fund and realizing we finally felt like we knew what we were doing, we all started saying, well, we need to raise another fund. And everybody kind of looked around the room and said, okay, who's going to do it? And so Kevin and I had already been doing a lot of the work ourselves.
Denise Dunlap
And so he finally came to me and said, if we really want to have an angel group that's going to survive the founders, we need to have somebody paid to do the work and become the experts on this. Why don't we start a little company and provide this kind of support to our local angels? And I said, sure, why not? So that was how Lin Creek Capital was born. And we went from there to form the next three angel group, or funds, in the Boise Angel alliance and manage those. And in 2017, we started to pivot our business model a little bit and provide SPV services to angel investors all over the country. So we do work with angel groups all around the US, and we do provide fund administration and SPV formation administration to those groups. So how that led to sage growth capital, formation of Sage growth is as I was working with these angel groups all across the country, I was seeing that they were sort of struggling with some of the same issues that we had seen that happened in Boise, which is we had angels that had check fatigue. I guess they weren't writing checks over time because they were still waiting for their returns. And we saw a lot of companies that weren't getting funding because they weren't quite right for the venture model.
Denise Dunlap
And so I started looking at other options, and that was when I became aware of revenue based finance and became convinced that this would be a good tool to use in our local community and that it would have wide appeal to angels all over the country. And so that was when we decided to go forward with forming Sage growth capital. And you can listen to the other podcast to hear that story. But one of the great things that Sage had going for was Loon Creek. Because Loon Creek, we already had the infrastructure and the staff and the knowledge of setting up and providing support to angel groups. And so we didn't have to reinvent that wheel with Sage. We ended up just leveraging all of those resources from Loon Creek. And it helped us really propel sage forward faster than we would have if we had to stand everything up ourselves.
Marcia Dawood
That's amazing. So I didn't realize that Loon Creek started in 2010. Wow. That's a long time of all of that knowledge and learning about it, and that's incredible.
Denise Dunlap
Yeah. And we didn't really set out to really build a business to provide services to other people. What had happened was, as in a lot of angel groups that were formed back in the day, there was a handful of us that sort of took it on ourselves to become the experts in angel investing. And the rest of the group just said, ok, you got this right. And we ended up becoming the de facto experts on angel investing. And so Kevin and I happened to be those, you know, we did that because we were traveling to all the ACA meetings and we were forming those relationships and know along with everybody else. And that was sort of what happened is we ended up being those experts. And that translated over to, so, you know, you learn things at a very different level when you're an administrator of an angel group than you do as just being an angel and looking at all the cool companies and writing checks.
Denise Dunlap
It's a much deeper knowledge of the industry because you have to understand the legal and accounting and the regulatory and what's happening trend wise. And there's just a lot more that goes into it when you are an administrator of a group or a fund or spvs. So it's been really fun. But I do like to tell people that Loon Creek, our roots are as angel investors, active angel investors, and we know this stuff because we've lived it. And that is one of the things that we really bring to the table is that really deep understanding of the industry and not just the administrative side of it.
Marcia Dawood
So I'm interested because I have personally used Loon Creek services for some of the groups that I've worked with. And what you have going on in Boise and the fact that you're in the state of Idaho, tell us a little bit about how that works in relationship to some other.
Denise Dunlap
So, you know, one of the things that you have to decide when you're standing up a fund is where do you incorporate it? Or an SPV. Right. So most people will choose to incorporate their entity in whatever state that they're headquartered in. A lot of the platform providers and people that are providing services of this nature have standardized on a set of documents in Delaware because that's kind of what everybody does, right. As you go through Delaware, we chose to standardize on Idaho because, well, we're located here, and Idaho is a very business friendly state, and it's also a very venture friendly state in terms of regulation. And so when we looked at the advantages of standardizing on our documents and our processes in Idaho, where we were located, there was a significant cost benefit to doing that than standardizing on Delaware. And Delaware has made a business out of forming entities and renewing them every year. And so it is pricey to do that.
Denise Dunlap
So that was the big reason why we decided to go with Idaho. Plus, we serve as a registered agent, so we don't need to pay those additional fees.
Marcia Dawood
That's really, you know, having the ability to have a group like Loon Creek to put these spvs together and funds especially, I think, are so beneficial, especially for angel group leaders or people who are thinking that they'd like to have an angel fund even, or a small fund. And the backend administration of that can just be so incredibly onerous. And I think it's a lot of times just extremely daunting for people who are thinking about doing it and they think, well, I don't know enough about this. I wouldn't even know where to start. And then even if they do try to get started, they find that the expense is just so immense. So I'd love to hear your thoughts on how you're able to kind of consolidate all that and make it simple for everyone.
Denise Dunlap
Sure. Yeah. So our priority has been, I mean, our company has been consulting and expertise mentioned. You know, we're active angel investors. We've immersed ourselves in this world, as have you, Marcia. You know how much work it takes, and lots and lots of years of becoming familiar with that. And we really feel like that is one of the biggest things that we bring to the table that you may not get, know, the administrative support and the technology, those support what we do, but we really feel like that consulting and expertise is the important thing. So you ask about group standing things up.
Denise Dunlap
So when I think about the options out there, when we first started this, what we saw the options were is you could go on the one end of the spectrum, the absolute full customization, go out and do it yourself. Well, what that means is you go find your own attorney, you find your own accountant, you find somebody to do the administrative work, and then you figure all this out on your own. You put it together. So that's a full customization, high service, but extremely high cost model. And anybody that's come to me that said, wow, I did an STV and I brought my attorney, and it was way more expensive than I thought. That's why they're looking for other solutions, because it just doesn't make sense to do a lot of these or even multiple of these if you're paying those kinds of prices every time. So I think that that is where a lot of the platforms have evolved to provide that service as well, where they're going with more of the automated services, low customization, maybe some do it yourself tools, but they're taking a lot of the cost out of that. And we ended up sort of right in the middle of that.
Denise Dunlap
Right. So our focus is on the service and on the expertise, and we have a high level of flexibility and customization, but we've also taken a lot of the cost out of it. So that was one of the things that we focused on doing is trying to make it easier for those managers or those fund administrators to do what they do and not have to worry about the administration. So we have standardized documents, especially for spvs. You don't need to spend a lot of money developing those documents. There's a lot of people that have done that. They've essentially been crowdsourced. We have our own documents that cover what you need, and that takes a lot of the cost out of it because we can do things.
Denise Dunlap
We replicate the process right. We do it all the time. We can be much more efficient about that than it would if you're trying to do it on your own. And that's true of a fund or an SPV. And so what happens is a lot of times people come to me and they're like, we want to start a fund. And the cost is super expensive and we don't know what to do. Well, we can take a lot of those pieces of the process out of it for them so that they can focus on what makes our fund different. How are we going to find deal flow? How do we differentiate ourselves and not have to worry about those other pieces of the back office administration and what are best practices and stuff like that.
Denise Dunlap
So that's one of the things that we really feel like is important to that process, is working with somebody that can help. You just know, what are the best practices and what are other funds doing and how do I avoid those pitfalls? Because I will tell you, having stood up several funds myself and several spvs, we've paid the dumb tax. I mean, we've already made all the mistakes. Well, maybe not all of them, but we've made a lot of them. And we've learned from other people's mistakes, too.
Marcia Dawood
We've been talking a lot about fund formation and spvs on the podcast recently because we're trying to make sure that people understand or realize what all their options are. And you were with us when we were in Boston at the women's investor forum, and we heard from several fund managers who actually are not going on to raise subsequent funds. And a big part of the reason why they're not doing that is because of the immense amount of back end administration that is necessary and the actual doing of the investing and helping the companies grow and getting returns becomes almost secondary because there is just so much administrative work that has to be done. So I think it's important that we keep talking about the options that are out there. And that's why I really wanted to highlight what Loon Creek is doing so that we can show more of the types of places that people can go. I mean, in a lot of cases, people do think exactly what you just used in your example. They'll just say, oh, well, if I'm going to do this, I have to get an attorney and I have to get this and that. And then the attorney alone can cost tens of thousands of dollars if you let it, if not more, especially if you're working on a fund.
Marcia Dawood
So I just think it's important that we keep talking through kind of what all the different options are and why people would do this. There's a huge need, obviously, for funds, especially out there right now. I talk about funds all the time and how it can help to diversify portfolios. And I think if we want to get more angels in the game, get more people to become angel investors and back some of these amazing companies. We have to give them the opportunity to be able to diversify, and that's going to really be through a fund. And the easier that we can make it on the fund manager, the better everything else is going to be.
Denise Dunlap
Yeah, I totally agree. And I think it's been interesting to see over the past 13 years that I've been doing this, how that industry has evolved in terms of, well, everything. Frankly, when I first started this, the Sirius seed standard, docs, term sheets were not out there. That evolved later. Just the fact that everybody has, we as an industry have arrived at a lot of standards, kind of in how deals are done and diligence and all those things are huge improvements. We still have a ways to go, I think, in the administration of funds, but there's a lot more tools out there. I mean, there are a lot more people working on trying to solve this problem. You've talked to a number of them on your show, and there's a lot of interesting things happening there and it's great.
Denise Dunlap
I always say we tell the companies that we invest in that they need to be innovative and come up with new things, new solutions. And we as an industry aren't always the greatest at that ourselves. But there are a lot of people working on software and different ways to approach this. So I do think that that's a great thing. And yeah, it's concerning that people are dropping out because of the lack of affordable tools. And I get that. It's like anything, though, you've got to be careful about where you're putting your money and make sure that you're picking the right provider and people that can really help you avoid the mistakes because it's not insignificant. We're operating in a really heavily regulated and legally complicated industry, and we want to make sure that we're not just cutting costs and opening ourselves up to a lot of liability, too.
Marcia Dawood
So just a few weeks ago, we had Nick from sidecar IO on the show, and we were talking about what had happened with ashore back in 2022 when they went out of business. So you bring up a good point about knowing who your provider is. So tell us a little bit more about.
Denise Dunlap
So, you know, the ashore situation was really unfortunate, and we ended up helping a number of people that were impacted by that. And I know you and Nick really covered that pretty well, but I would echo what you guys talked about, that when you are searching out a provider, you really, unfortunately, in this day and age, need to do more diligence on them. Than just what do they charge? Right. We used to go to a provider, vendor, anybody, and assume that they've got a good website, they've got a software, they've got a service, they're going to be in business. They don't have to worry about that. The things I need to worry about is, do they meet my needs? Is the service appropriate? How is the pricing? But these days, you really want to be careful. I mean, we've seen this with the collapse of Silicon Valley bank. We've seen it with the collapse of that.
Denise Dunlap
That is a big deal when one of those businesses goes under. And the takeaway that I had from that whole process is that people really need to understand the business model or at least think about the pricing that their provider is utilizing, because you need to think about a couple of things there. One, what is that provider incentivized to do? And b, are they sustainable? Is their business model sustainable to keep them going long term? And so I've had a lot of people come to me in the last year and say, okay, how are you funded? Have you taken funding? And I was like, no, we're trapped. We've grown through profits. And they're like, thank God. Okay, how long have you been around? And I never got those questions before. So people are thinking about it, but what I try to tell them is, it's hard to say, okay, provider, tell me what your business model is. But you can get clues from that by looking at the pricing.
Denise Dunlap
So one of the things that I know you guys touched on, you touched on with Nick, is that what ashore was doing was charging upfront for services for many, many years, and then they ended up being a victim of their own success in some ways. They had all of these entities that they needed to take care of, but they didn't have the revenue streams to do it, and their overhead grew because it turns out that it's a lot of work to manage these things over. So I think about this, like, okay, let's think about that model for a second. Marcia, would you go out and hire an employee and pay them upfront for seven years and nothing for the next seven years and expect them to stick around?
Marcia Dawood
Right.
Denise Dunlap
Yeah, it may be an extreme example, but that's exactly what was happening. At the very least, you're not going to expect that employee to provide you with a great and energized service once they've spent the money. Right.
Marcia Dawood
Right.
Denise Dunlap
I think that this is the exact kind of thing that was going on with ashore, is that they charged upfront and then what were they incentivized to do? Were they incentivized to stick around and take care of your SPV or your fund for the next seven years when they had no revenue coming off of that? No, they weren't. They were incentivized to go out and get the next deal and next deal and next deal because that was where their money was coming from. So that's an example of, you really need to understand the pricing model and think about what is that provider incentivized to do? And if it's not to stick around and manage your entity until it exits, then you maybe want to think about that. And ashore is a good example. They didn't have a sustainable business model and ultimately they had to go out of business because they just couldn't keep it going. And it's a tough situation because how do you have those conversations? But I think the takeaway is, again, just look at the pricing and see how you're being charged and make sure that that makes sense to you and what's going to happen if that business does go out of business. So many people that I talked to from that ashore collapse had just PTSD. I mean, they just never even thought that something like that could happen.
Denise Dunlap
And they had no idea where their records were or even what they should be asking. And so I had to coach a lot of people through the process of what those records should look like. I think people are more savvy now, but you have to think about that. I don't know if that's helpful or not, but that's one of the things that I think is really important.
Marcia Dawood
Oh, that makes total sense. And yeah, I agree. We have to keep talking about it. That's why we've talked about it a couple of times now on this podcast, just trying to make sure that people know angels who are out there who are thinking about putting a fund together, or fund managers who are looking for a place to actually get help on the back know Loon Creek is a place that they could go. Angel groups or angels in general who are thinking about putting spvs together can also reach out to Loon Creek. I'll make sure that, Denise, all your contact information is in the show notes. Yeah, I think we need to keep talking about it because it seems like it's one of those things that people kind of don't want to talk about. It's a little bit like the back end plumbing, but if it doesn't work, it can really hurt these entrepreneurial companies.
Marcia Dawood
And I think entrepreneurs as well as angels and investors need to really understand kind of what's going on here.
Denise Dunlap
Yeah. And one thing I would caution people, and I say this all the time, I joke about stepping on my soapbox, but one thing that we all are guilty of as investors is we are all so focused on getting the deal done up front, we're not necessarily thinking about what happens after that. And so that is one of the places I think that people get in trouble, is you set up these spvs or funds, and that entity has a life. It has a lifespan of probably ten to maybe 20 years. And people don't think about that. They think, well, the hard part is finding the deal and doing that deal. But I will tell you that managing an entity over ten years, a lot of stuff happens and somebody's got to deal with that. And for me, doing the deal and closing that initial investment, that's the easy part.
Denise Dunlap
It's really the easy part, dealing with all of the things that can come up. I mean, we've seen stuff over the last 13 years that I never would have expected. Legal and regulatory changes that require all of every single operating agreement that we've got for every single entity to be modified. Now, that's a big deal, especially when we've got to go back and talk to all those members and have them opt in or opt out or vote or whatever. And people don't think about that when they're out there setting up all of these entities and managing them. I will tell you personally, I could tell you horror stories, right? But people get married, they get divorced, they die, they move their assets to a trust, they move them out of a trust, they give their interest to their kids. There's just a crazy amount of things that happen once you've set up an entity that have to be dealt with and have to be managed, and they have to be done legally and responsibly and ethically, we're looking at stuff regulatory right now, like with the Corporate Transparency Act. I know we've all heard a ton about that.
Denise Dunlap
That's going to have a huge impact on all of these funds and spvs that are out there, and somebody's got to know what's going on and know how to handle it. So those are some of the things that I caution people to think about, is don't just think about getting the deal done. Think about your business model of your group and how are you going to maintain, and who is going to maintain these entities once they've been set up. Because I've been doing this for a long time. And I still have deals that I'm in funds and spvs that I'm in 15 years later that still have not exited. So people always say, oh, they exited in three years. Yeah. That's not realistic.
Marcia Dawood
Right.
Denise Dunlap
The ones that exit in three years are the ones that go bankrupt. Right. So the better ones take longer. And you do need to think about that long term, that tail.
Marcia Dawood
Well, that's great advice, Denise. Thanks so much for coming on and talking to us about Loon Creek spvs fund administration and all the great things that angels and entrepreneurs need to know about.
Denise Dunlap
Yep. You're welcome.