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The Role Forward

Jeremy Tsui on Raising Debt as a Startup

In this episode of The Role Forward, Jeremy Tsui, the Co-Founder and CEO of Finley, gets into the importance of capital strategy and managing capital. Jeremy and our host Joe Michalowski discuss raising debt versus equity, the process of raising debt, and how you can find a lender.

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Episode Summary

Many of today’s most innovative companies rely on debt capital to reach their full potential, and debt capital can be the difference between hypergrowth and stagnation.

But capital providers and borrowers are stuck with legacy systems, which means slow transactions, disjointed processes, and limited visibility.

In this episode of The Role Forward, Jeremy Tsui, the Co-Founder and CEO of Finley, a company that offers software to accelerate the pace of capital, gets into the importance of capital strategy and managing capital. Jeremy and our host Joe Michalowski discuss raising debt versus equity, the process of raising debt, and how you can find a lender.

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Featured Guest

Jeremy Tsui

Co-Founder and CEO, Finley

Jeremy is a Co-Founder and CEO at Finley. He was previously in the Merchant Banking Division at Goldman Sachs, where he made investments in software, real estate, and other companies. Prior to Goldman Sachs, Jeremy was at Oliver Wyman, where he specialized in financial analysis, scenario modeling, and stress testing for major banks. Jeremy also loves side hustles: he has launched a secondhand bike shop, a chain of escape rooms, and an Instagram museum. He graduated from the University of Texas.

Key Themes from the Episode
  • Depending on the type of company you run, capital strategy may be as important as go-to-market or product strategy. Treat it accordingly.
  • Struggling to raise an equity round? Debt financing is another avenue, but it's not any easier. Especially in early stages, VC-backed startups often don't qualify for debt.
  • Most companies would benefit from a stronger balance between debt and equity financing — because it's not about how much you raise, it's about how much you own.

Episode Highlights from Jeremy Tsui

10:04 — Finding a Lender

“In the contractual relationship with the debt lender, I look for one thing; I look for a capital provider who understands my business. As a startup founder, you’re oftentimes venturing off into a land of uncertainty. You’re building software in a new category; you’re assembling a team; you’re building in kind of an uncertain macro environment. But one thing your capital provider does owe you is understanding your business and showing you, ‘Hey, I have helped other Series A, Series B companies get to Series C and D and beyond; I understand FinTech or software or whatever category of business you’re creating, and here’s my track record.'”

12:10 — A Mix of Debt and Equity

“Historically, software companies have not had a ton of debt on them, on their balance sheet, and that might be because equity was really easy to raise; debt investors were scared by software companies. But we’re starting to see that change a little bit more now. Software companies, if they were light on debt, now they’re, maybe, a little heavier on debt. And so, founders and CFOs are starting to think about, ‘Hey, should I take out more venture debt to get ahead of the game?’ even if historically, software companies didn’t take out a lot of debt. That’s one example.

Another might be FinTech, where, historically, you had to raise a good amount of debt to scale your credit card company, your buy-now-pay-later company. And you still have to raise debt to scale those types of companies, but now we’re seeing the best leaders think years ahead of when that capital raise might be to set themselves up for success. So it’s, ‘Hey, who’s my debt capital partner at the Series A? Do they have a track record of helping companies graduate from maybe a smaller credit fund to a bigger JP Morgan or Credit Suisse at the Series C?’ And, ‘How do I set myself up with the right people tooling performance to get there?'”

15:07 — The Process of Raising Debt

“We mainly see two approaches for companies, and both can work. One is building up in-house expertise. Maybe that’s the founder, several years at a time, is thinking, learning, building relationships with debt capital providers or hiring someone who comes from the other side — from a bank or credit fund — with the expertise. 

And then, we’ve also seen companies go with consultants. Maybe it’s a founding team that is kind of spikier in product strategy, or it’s a very sales-heavy team that’s very strong in go-to-market. There are consultants as well who can help navigate what is a pretty spiky process in itself; you can be talking to ten banks at once and then, three months later, have your debt raised, and really your day-to-day could look a lot different as a finance leader. […]

In the debt raise process, generally, I like to think of it in three phases. One might be the relationship-building or introduction phase. So, you’re just meeting lenders; you’re learning if they’ve worked with similar profile companies; it’s the dating phase. The second phase would be the term sheet phase. So, this is when you might start receiving a few different term sheets — maybe more than one if you’re lucky — and starting to evaluate different commercial terms. What might make sense for your business? How will they let you use the debt that you take out? And then, once you’ve executed a term sheet, going from deciding if you’re going to evaluate to deciding if you want to purchase the relationship with a lender.”

22:14 Venture Debt and Asset-Backed Debt

“It’s mainly two types of debt that we see startup founders evaluate. It’s venture debt, and this is typically debt that is raised in conjunction or around the time of an equity round; it’s debt where there are fewer restrictions and can be used for extending runway, can be perhaps kept as a rainy day policy, and hopefully, never used. […]

The other would be asset-backed debt; at Finley, most of our companies actually have asset-backed debt. And this is debt that’s raised for a very specific purpose. In the instance of a lot of our customers who are FinTechs, they’re raising debt from Atalaya or Jefferies. While these debt lines are much bigger than venture debt lines, one of the key elements of the contract is, ‘Hey, you can only use this debt line for certain purposes.’ So, launching this product, acquiring that company, and if you don’t, it could go against the rules of your credit agreement, and there could be big implications.”

Full Transcript