Curious about revenue-based financing? In this episode, Marcia sits down with Denise Dunlap, co-founder of Sage Growth Capital, to discuss this unique model of funding, which combines elements of both loans and equity investments. Denise shares how her experience as an angel investor led her to start Sage Growth Capital, with a focus on supporting companies that may not qualify for traditional equity investment. With an emphasis on revenue-based financing, Denise explains how they offer funding to companies with recurring revenue streams, supporting businesses in various industries. Denise also sheds light on the lessons she and her partners have learned over the past couple of years. As they continue to invest in companies planning to raise equity funding, Denise discusses the unexpected recognition of their value proposition. She addresses the average check size they provide to companies and sheds light on the repayment timeline, dependent on the business's performance. Gain insight into the true cost of equity and the benefits of revenue-based financing in this captivating conversation.
Curious about revenue-based financing? In this episode, Marcia sits down with Denise Dunlap, co-founder of Sage Growth Capital, to discuss this unique model of funding, which combines elements of both loans and equity investments.
Denise shares how her experience as an angel investor led her to start Sage Growth Capital, with a focus on supporting companies that may not qualify for traditional equity investment. With an emphasis on revenue-based financing, Denise explains how they offer funding to companies with recurring revenue streams, supporting businesses in various industries.
Denise also sheds light on the lessons she and her partners have learned over the past couple of years. As they continue to invest in companies planning to raise equity funding, Denise discusses the unexpected recognition of their value proposition. She addresses the average check size they provide to companies and sheds light on the repayment timeline, dependent on the business's performance. Gain insight into the true cost of equity and the benefits of revenue-based financing in this captivating conversation.
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LinkedIn - https://www.linkedin.com/in/denisedunlap55/
Learn more about Sage Growth Capital - https://www.sagegrowthcapital.com
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Marcia Dawood:
Well. Hi, Denise. Welcome back to the show.
Denise Dunlap:
Thank you. I'm glad to be here.
Marcia Dawood:
Hard to believe that the first episode we recorded talking about revenue based financing was at the end of 2021, and here we are in 2023.
Denise Dunlap:
Yep.
Marcia Dawood:
Kind of crazy. If you could let our listeners know a little bit more about what revenue based financing is to start. Also about Sage growth capital.
Denise Dunlap:
Sure. So Sage Growth Capital is a firm started by myself and my two partners, Kevin Lernad and Molly Otter, and we are based out of Boise, Idaho. We started Sage Growth Capital based on Kevin's and my experience as angel investors. And we wanted to have a different model of funding available to companies that were traditionally underserved by other capital sources. So based in Boise, Idaho, it's a small city. We didn't have a lot of unicorns here. We saw a lot of good companies, and we wanted to have a model that maybe fit them a little bit better. And also, from our experience as fund administrators, we wanted to have a little bit different model for some of our investors who maybe had already allocated too much or, sorry, had allocated a lot to their equity investments, or they were aging out of the equity investments and wanted to have a little bit more cash flow. So that's where revenue based finance came in. So the model is a little bit like a loan and a little bit like an equity investment. So we make an investment in a company, and they agree to pay us back like a loan, but the amount that they pay us back is set. So it's a multiple of whatever the investment is. An example that we often give is we may invest $100,000, the company agrees to pay us back until we have received $200,000 back. And those payments are flexible, and they're based on a percentage of the company's monthly revenues. So that's why the term revenue based finance is often used, because that's what we're looking at, is the money that's coming into the company every month, and that's how the payments are determined. And they pay us back out of those revenues every month until we get our total pre agreed amount back. So that's the basics. I can get into more detail if you'd like.
Marcia Dawood:
So maybe just tell us who would be an ideal candidate to apply.
Denise Dunlap:
Sure. So an ideal candidate would be a company that has some sort of recurring, like revenue. So often you see people using revenue based finance for software as a service businesses. That's probably the most common because they have fairly predictable revenue streams. We don't limit ourselves to that. We are industry agnostic, and we would look at manufacturing companies, service businesses, anybody that has a recurring, like, revenue stream. And the funds need to be going towards something that will propel their sales forward pretty significantly. So those are the kinds of things we're looking for is what are they using the funds for and what are those revenue streams? So consumer products companies are good if they can prove that they have repeat customers. Food businesses are good, not necessarily restaurants, but producing a commercial product. And we've done, as I said, a couple of manufacturing companies. We have done some software. So those are all really good examples of the kinds of companies we'd look at. Typically they're coming to us in between equity rounds or maybe before they do an equity round. And so we are really seeing that our funds are being used for bridge funding rather than maybe doing a convertible note or something that you would normally do or a safe as a bridge round. And the reason for that is our funding is totally non dilutive. So once the company pays us off, we go away. We don't take equity in the company. And so that is one of the big benefits to companies is they can preserve their ownership and their early investors ownership much longer.
Marcia Dawood:
That's great. So you have two funds now and how many investments total have you made?
Denise Dunlap:
We have made nine investments out of the first fund and eleven so far out of the second fund. So we've done 20 investments total in, let's see, we started in 2019, so not quite three years yet.
Marcia Dawood:
Got it. And what are some of the lessons that you've learned from in the last couple of years?
Denise Dunlap:
Lots. So probably the biggest lesson that we learned sort of right out of the gate was that we had expected that we would be investing in Main Street businesses or companies that didn't want to or didn't qualify for equity investment. And what we found was that that was not the case. Our value proposition really held up for the companies that were planning to raise equity funding at some point. And so we ended up not, we haven't invested in any of the Main Street businesses, but every one of the companies we've invested in has either raised capital or is getting ready to raise capital. So that was probably one of the biggest things that we learned that we didn't expect.
Marcia Dawood:
And what is the average check size that you write to these companies?
Denise Dunlap:
Well, we've done them as small as 100,000. We've done them as large as 600,000 in one investment tranche typically. Our average investment size I would say is probably right around 350,000. And we like to do a smaller check early on and then do additional tranches later if the company is performing and they're good to work with and all of the good things. So we have done as much as a little over a million in any one company, but typically our check sizes are probably between that three and 500,000 range.
Marcia Dawood:
And then how long does it take a company to pay off that type of it's not necessarily a loan, but I guess it shows up as debt on the balance sheet.
Denise Dunlap:
It does show up as debt on the balance sheet. And the time frame really depends on how well the company is doing. When we're modeling out what the return or what the payment schedule will look like, we're typically looking at between 36 and 60 months. Well, we expect them to pay us off between probably 36 and 48 months, but we always write our terms for 60 months, so everybody has plenty of time to pay us back because the payments are flexible and they're based on the sales performance. We really don't know. We're kind of guessing and so are they. And of course, what we project their growth rates to be are usually somewhat less than what they project their growth rates to be. As we know, entrepreneurs are very optimistic, so the time frame is not fixed and we haven't had anybody pay us any of our original terms. We haven't been in business long enough yet for any of the original deals to mature. We've had several companies pay us off early for various reasons, but nobody's gone that full 60 months yet because we haven't been around that long. So we're thinking it'll be somewhere in that 48 month range. This is my guess.
Marcia Dawood:
That makes sense. So talk a little bit about the true cost of equity and then the cost of debt and how founders can kind of look at that.
Denise Dunlap:
Sure. So you can see a lot of the articles and the recordings and things that the subject matter that we've done on our website has really focused on that cost of equity. And the reason that we do that is we find that a lot of times founders aren't thinking about that or as well educated as they might be about what that cost of equity is going to be to them personally and to their early shareholders. So the reason that non dilutive funding is so important is it helps preserve that longer and what we would expect. For instance, in our average deal terms, we're looking to get between two and three times our money back on each deal that we invest in. Now that sounds really expensive, but if you think about what your average angel or VC is looking for, they're looking for ten to 50 to 100 X their money back. And so that's one of the things that we like to remind people is, yes, our money is expensive, but it's not nearly as expensive as an equity investor would expect. So when you compare us to bank debt, obviously if you can qualify for bank debt or other forms of debt with a stated interest rate and whatever, I mean, these days interest rates aren't that cheap, but they're still cheaper than what you would expect for an equity investor. Most of the companies that come to us are not yet bankable because they will have had to had two years of profitability, they will have to have personal collateral or their balance sheet may not support that. Or their personal balance sheet may not support that. And so that's where our funding often comes in is we are unsecured and there's no collateral or personal guarantees required. Now not all revenue based funders offer those kinds of terms. Some of them do require collateral, I should just point that out. But for us we do not. As I said earlier, it's a little bit like debt and a little bit like an equity investment. So we get a higher return based on the level of risk that we as investors are taking on. Since this is totally unsecured debt, we're not requiring personal guarantees.
Marcia Dawood:
And how have the investors liked being a part of a model like this?
Denise Dunlap:
Well, I think they like it based on. So with our first fund we had, I think everybody except for, I think there was three investors that did not reinvest in our second fund and most of those investors increased their investment in the second fund. That's a good metric, right? So in our first fund we had, I can't remember the exact number, but it was around 33 investors. Our second fund, we have 92.
Marcia Dawood:
Oh my gosh.
Denise Dunlap:
Yeah. And that was deliberate. We wanted to raise our fund from mostly angel and existing angel investors and we raised that from our network of investors across the country. And the idea behind that was our angel colleagues were out there looking at deals and they would see companies that maybe weren't the right fit for their fund or their personal investment portfolio, but they would send them to us and then we could look at those deals and invest in them and they still get to participate. So that has worked out really well. Our angel investors are pretty hot on this idea and like I said, every single deal that we've invested in has ended up being from somebody in our network that referred it to us. There was one that found us on the internet by themselves and didn't come from a referral, but every other deal was from somebody that we know. So the feedback has been positive. I've had several people tell me that I'm funding their angel habit, which I take a lot of pride in because we have paid back a lot of money to our you know, you may have seen our blog post. That we released through the Angel Capital Association recently. And it was a recap of the sessions that we did in Las Vegas in May. And our session was standing room only and we literally got mobbed. After the event or after the session was over, people just coming up and asking us, are you joining a fund? Three, are you going to open it up? Can we join it? Can we participate? And we were super excited about the enthusiasm but a little overwhelmed too. And as I told everybody, hey, I have to invest this fund before I think about another one. But I would say that all of those data points would lead to a conclusion that angel investors and our investors in particular are pretty happy with this model, I think.
Marcia Dawood:
Yeah, I was looking through your portfolio the other day and saw some really interesting companies that you have invested in, like Melt, which I mean, I see Melt at the grocery store all the time. That's pretty cool. And then everybody water. Tell me about that company.
Denise Dunlap:
Yeah, we're pretty excited about this one for lots of reasons. They have a really interesting mission to support women and girls in other countries that do not have access to clean water. It's an all female team led team. Not that those are our specific criteria that we look for. We just get excited when we see them since we're, as Kevin likes to say, two thirds female. They're they're a great group and I can't remember exactly who referred them to us offhand, but it was one of our colleagues and we're super excited about them and they've been really great to work with and they're doing super cool things. We've got some fun stuff in our portfolio, right? Different.
Marcia Dawood:
Very different. Pop art, gourmet snacks and lots of based what's naked about?
Denise Dunlap:
Well, we just love their name. So this is a company based out of Seattle area in Washington. And what they build is high end gear and equipment for long distance runners. And so they started with the Naked running band. Now, I'm not a I don't this is not my thing, I'll just tell you that right now. But apparently a running band is something that you wear around your waist and you can clip your water bottle, your keys or snack bars or whatever. And the idea is to keep as much weight off of you as possible. And so that was their first product and they have expanded into a variety of other products for long distance runners. In fact, they just released their part of our funding went towards their release of their very own shoe. So that was built by runners, for runners and specifically long distance runners, which all those I respect runners. I think they're crazy personally, but they have a very loyal fan base and they love their products and so, yeah, it's kind of a fun company. A fun name.
Marcia Dawood:
It is. So any other lessons that you would like to share?
Denise Dunlap:
Yeah, as you know, I come from an angel investing background and there's been some sort of eye opening things. For me personally, the diligence process around doing these deals has been very different than how we as angels would think about diligence. We spend a lot more time digging into the revenue streams and the sources of revenue. As I mentioned, that's one of the most important things that can make a company suitable for our funding. And that has been an interesting experience, really spending a lot of time on financials and gross margins and really focusing on where not only the company has been, but where they're going. So we spend a lot more time in financial analysis than I think I ever did as an angel investor. With the angel investing side, you're often looking at the size of the market and the ability to attack that market. We look at those things as well, but they're not as important to us because we're not necessarily worried about an exit with this company. That's not how we get paid back. So the diligence has been very different. The other thing that's been interesting, as we've been doing this a little bit longer, is that the returns are sort of the exact opposite of what you would expect in angel investing. So we often say in angel investing that lemons ripen faster than peaches, right? For those of you that like lemons, that means that the lemons are typically the bad ones, right? And the peaches are the good ones. So in angel investing, we realize that it takes a lot longer to build the good companies and get to an exit, and the ones that aren't going to make it usually fail faster. This is sort of the inverse in revenue finance is the really strong performers actually pay us off earlier because they're growing faster and because our payments are based on a percentage of sales, they're paying us off faster. The good ones go away quicker than the ones that aren't doing as well. And so that's been kind of a different mindset for me. We've also seen several of our higher performers get acquired or have a change of control transaction of some sort and pay us off early, which has been great. It's a little different thinking about the way those returns happen in this. So other things that have been lessons learned for us, we knew this going in, but I'm the partner that's in charge of all of the ongoing operations and the mechanics and everything that happens behind the scenes. So one of the things that has been a big eye opener is just how much work this is. Unlike in angel investing, where most of your work is done up front to find the deal and do the diligence and negotiate the terms. But once a check is written, you sort of in a wait and see mode for the most part. For us, the work happens up front and then it really starts to happen once the deal has been done. And we have a reconciliation process that happens every month with every one of our companies and we're collecting payments every month from every one of our companies and we're distributing those back out to the investors on a quarterly basis. And so the administrative workload for us has been pretty significant and was just a lot more complicated than I thought it would be, especially when we start getting creative with some of our deal terms and then not everything's standard and we've definitely had to learn to keep that to a minimum too. And as I mentioned earlier, we have had to do a lot of education with the companies. A lot of companies still don't really understand this model and so we've had to spend a lot of time sort of educating them on the pros and cons of the model and then how it works going on an ongoing basis. So those have all been pretty big learnings for us. But it's all been fun, it's all been good.
Marcia Dawood:
That's great. Well, I really appreciate you coming and giving us this update. I'm going to ask you one last question before I let you go and that is you were talking about how it is a little bit different, how you think about it, how you due diligence, things like that. What about after the transaction has happened and you've given this money and now they're going to start paying it back off of their revenues? As far as just angels tend to get very involved with companies. They tend to be on boards, they tend to help out with introductions and all those types of things. Do you get involved in that level or is it more you're just trying to help them grow the revenue so that they can pay back their loan?
Denise Dunlap:
Yes and no. So we don't get involved at the level that angels would from the standpoint of we don't take a board seat, we don't take any sort of formal advisory role or board seat or any of those kinds of things. So what we tell the companies is we're not going to get involved with how you run your business. If we're not comfortable with that, we're not going to invest in you. Right. But what we do offer is if they need help with anything and they reach out to us, we will do whatever we can to help them. We decided early on, because we're a small team, that we really didn't have the capability of doing more of an organized coaching or mentoring or accelerator kind of thing alongside of our funding because we just didn't have the bandwidth right. But we do want to be helpful and we do have very extensive networks of people that can help them. So there's a couple of things that we have done there. One, we just keep that open. They are welcome to ask us for help at any time. We have certainly opened up our networks of angel investors and we've made introductions for them when one of the companies has been raising equity. We've also helped them find people when they're recruiting employees or a bookkeeper or something like that. We've definitely helped with a lot of that. I think the biggest ask that we get from our companies is hey, I'm getting ready to raise money and I know that you guys are angel investors. Would you look at my deck? And who do you know that I should talk to? So we have spent a lot of time with our companies on that and we have started compiling a database of all of our angel investors in our group that we call Sage Advisors. And the idea behind that is that is a resource for our companies. We have, as I said, 92 investors in our fund. They all have very diverse backgrounds and experience and most of them are more than happy to help out with companies. And so that has been something that we've been working on for our companies, is to give them access to that rolodex, if you will, of our investors and their contacts, because we all want to see these companies be successful. That is one of the things that we have offered, but we haven't required it. We haven't done a formal mentoring kind of program. And again, we don't take any kind of legal oversight of the company. And, yeah, so far it's worked out pretty well. I think we just have to remind the companies that we're here. They just need to ask.
Marcia Dawood:
Yeah, I think the whole concept of revenue based financing is really cool and I'm really excited to see where it's going to go in the future because we are obviously at the very early stages of it and you're kind of leading the charge. So I love it. Thank you so much for coming on today and giving us this update. We will link everything in the show, notes from the previous episode, and if any companies out there listening wanted to apply to Sage Growth Capital to be considered, we will make sure that information is there as well. So thank you so much, Denise.
Denise Dunlap:
Yep, thank you.