#12 | Building Trust & Transparency in Venture Debt Financing with John Markell - Managing Partner at Armentum Capital

John Markell has over 20 years technology industry experience having worked as an engineer, project manager and investment banker. His career in finance began at JP Morgan in New York and he has worked in New York, Toronto, London, and San Francisco as an investment banker prior to co-founding Armentum over 11 years ago. John has an MBA, a degree in Engineering Mathematics, and he is also a Licensed Professional Engineer.

Transcript

SPEAKER_01 0:10

Hello, friends. Welcome to the Best2Go Fintech podcast. I'm Fraser Anderson. Today I'm excited to be joined by John Markle, managing partner of Armentum Partners. John has over 20 years technology industry experience, having worked as an engineer, project manager, and investment banker. His career in finance began at JP Morgan in New York, and he has worked in New York, Toronto, London, and San Francisco as an investment banker prior to co-founding Armentum over 11 years ago. John has an MBA and a degree in engineering mathematics, and he is also a licensed professional engineer. Prior to his finance career, John was a competitive distance runner in Canada, and he continues to race competitively in distance running and even the beer mile. There will be an explanation for this detail, by the way. John continues to belong San Francisco, where he lives with his wife and college-age daughters. John, welcome to the show. Happy to be here. Thanks for having me. It's funny how this business is because it's sort of impossible to tell which people you run into and take a liking to, and then, much to my surprise often, are willing to subsequently give you more time. And I uh I very distinctly remember you and I having dinner together in Montreal the first time we met, thanks to our to our friends at Portage and watching um Paul 3 and uh Harley from Shopify give that pretty remarkable fire shot fireside, and now here we are. For those of the uh the viewers who don't know you, perhaps you could talk uh a little bit about your background. So my name's John Markle.

SPEAKER_02 1:42

I'm managing partner of Armentum Partners. We are a full service investment bank that focuses exclusively on debt raising services for venture-backed technology and healthcare companies.

SPEAKER_01 1:56

And aside from sort of the obvious pieces of what that means, can you talk a little bit about the scale of your business? Because I think one of the remarkable things is how deep your network goes. We'd love to hear a little bit more about that.

SPEAKER_02 2:10

So we're a relatively small company. There's there's nine of us total at the firm, but there's a lot of throughput per head as we describe it. So I think the simplest way to think of the volume of our business, uh in 2022, we raised a little over $3.2 billion worth of debt for our target client. Just to put that in perspective, so Silicon Valley Bank in the same year raised $6.7 billion worth of venture debt. Um, venture debt defined the same way we define it. So we raised a little less than half of what they did. Silicon Valley Bank had 8,000 employees.

SPEAKER_01 2:49

We had more I was about to say, somewhat more than nine employees, I believe.

SPEAKER_02 2:53

Yeah, so it's just it's we're we're we're sort of a bottleneck of information, uh, is how I like to think of our business.

SPEAKER_01 3:01

And and John, the venture capital ecosystem, much to the detriment of its LPs, has done an excellent job of glamorizing itself as well as the job of buying uh equity in startups. So against that backdrop, what got you into venture debt of all things? Oh gosh.

SPEAKER_02 3:23

It was almost kind of by it was sort of almost born out of frustration. I was doing MA and private placements for about four and a half, five years at a firm in San Francisco called Seven Hills Partners. We worked with smaller, you know, venture-backed private businesses. And this was call it 2009 through 2011. Not much was happening in the way of MA. But what we were doing was venture debt deals on the backs or on the heels of broken broken MA processes. So I brought up the idea. One of the things I learned in that process, like through those years, was gee, nobody really can speak debt and speak early stage tech. Um, but I could do it because my background was sort of weird having started doing esoteric debt structures at JP Morgan many years prior. So I thought, hey, this is something where we have a bit of an edge, we have a knowledge base that other people don't have. So I brought it up with my bosses about, hey, we should we should advise on venture debt. And they said, well, no, no, no, we do MA. And I said, Well, well, no, we don't, we're not doing any of that. Um, so I told them, I said, I think I'm gonna leave them start my own firm. And then one of my colleagues said, Oh, you should meet Chris Carthy. He's a friend of mine. Our wives play tennis together. You should meet him. So Chris and I met in a in a bar down San Francisco, and I said, Hey, I have this idea, here's what it is. And he's like, Oh, I, you know, I'm doing the same thing. And he's like, We can have a name of a firm. What is it? Oh, it's our mentor. I was like, that sounds awesome. It's perfect. Let's go. Um, so we we came together and kind of institutionalized Armentum, knowing that venture debt was a poorly understood asset class, um, but a very appropriate financing vehicle that had high utility in the right use cases.

SPEAKER_01 5:30

And what's the origin of the name? Because Armentum sounds like a Soros spin-out or something. It's sort of grand.

SPEAKER_02 5:37

So Chris Chris came up with the name. You know, part of what was important was like neither one of us wanted our names in the name. So Chris came up with that's very Canadian of you. Well, Chris is very Canadian, Chris is Canadian as well. Turns out we went to the same undergrad school. Who knew? But uh the name means to herd cattle. Okay. Which is I love that, which is sort of appropriate based on what we do. And it's and we like it because it's phonetic, our mentum. It's kind of hard to script the spelling of that, and it's at the beginning. Uh, and of course, the all-important, the URL was available.

SPEAKER_01 6:12

Well, I won't ask who the cows are, the VCs, or the startups. Well, the cat the cattle is bringing the cattle is bringing all the lenders together. Okay. Okay. Decision point happens at once. All right. All right. I I I won't I won't have any agrarian metaphors for uh for the noble industry of being a venture capitalist. And so as we've gotten to know each other, I think among among the many things that I've really found interesting is is just how deep your network goes. And I that was certainly not evident to me when we first got to speaking. Maybe it's because you're Canadian, you're polite, but I always I always think about things a little bit visually. And so being in the venture ecosystem, I kind of think of traditionally maybe a little bit as like a pyramid where you have the kind of super founders at the top, and the information just flows kind of one way from them to the venture ecosystem, but everybody's trying to get information from them, get access to them. And depending on where you sit in the sort of stage of your firm and the the various hierarchies within VCs, you're you're either closer to super founders or you're further away. And what's what's interesting, the way that I've learned about your business is it's kind of like it's not the bottom of the period, but the pyramid, but it's like a back door to everyone. Um, because there just aren't there aren't a lot of other ecosystem participants doing what you do. Is that is that fair? I think so.

SPEAKER_02 7:41

I you know, I hadn't heard it described that way before, so I I appreciate and like the way you're kind of putting a picture to it. Like you, I'm a visual person. So I I like it. And sort of carrying on with that analogy, I suppose, well, actually using the backdoor part, I I think I think that's an appropriate way to think of it because we're different in a couple ways from a typical advisor. When I say typical advisor, I mean of the investment banking sense, right? Most investment bankers spend most of their time pitching an idea. Right? They're always, hey, so and so, why don't you sell this company to that company? Why don't are you aware of these companies you could buy? They're always pitching an idea. We're we're almost the opposite in that there's never things we're pitching, we're always asked questions. So I guess that the the one thing that to put a finer point on it, the one thing is is we have nothing to sell to a lot of the venture firms, to a lot of the founders. We're not selling anything. Right? We're not asking them of anything. What we do make clear to them is we're a resource.

unknown 8:54

Yeah.

SPEAKER_02 8:55

Think of us as a resource. The second thing which makes that resource get tapped over and over again, is something that, you know, Chris and I was important to us from day one was was transparency. There were there were two flaws in in my mind with the venture debt industry, if you even want to call it an industry, you know, 12, 15 years ago. One was that all of the lenders were making outsized returns versus the risk they were taking. Didn't make sense. Mathematically, it didn't make sense. So that suggests that it was an opaque market with very little transparency. So we wanted to bring transparency from an educational perspective to the borrowers, to the investors in those borrowers. Hey, there's a bit of an education curve here that perhaps you're not aware of, and maybe you are aware of it that we're going to help complement and add to. But then the other side of it was to bring transparency to the lenders as well, which is really important with your getting to your network concept, which was to share more information with the lenders that help them arrive at a decision point faster. So if you think about your business or any investor's business, whether they're a lender, equity investor, or whatever, is they spend a lot of time figuring out what investment prospects to dedicate resources to and which ones not to. It's an investment in time. So one of the things we do at Armentum is we try to cut through that. And when we talk to lenders, say, look, here are the four or five things you need to get comfortable with right off the bat. We share things that we know are going to be germane to their own investment making decisions that help them get to that, those decision points of do I put more resources resources on this, yes or no? Do I put more resources on this at this point, yes or no? So we help with that. And as a result, over these accumulated years, the lenders tend to trust us that we're not gonna, oh, please give us a term sheet just so we look good to our borrowers. They know we're not gonna do that. So when we call them and say, hey, we're looking for something or whatever, they know that it's real. We know they know that we're not gonna waste their time and that it's worth their time. And so those two things I think have sort of defined who we are. Now, if I take a step back to your point about the network effect, what it's meant is a lot of these lenders they they trust us with information. So when they're raising a fund or when one of the lenders within a fund is leaving, they will call us and say, Hey, I'd love to get your input on this because you see, you know, an inch deep mile wide, you know, we'd love to get your sense of where we fit on the continuum of all these lenders. You know, are we targeting it the right way or we not? You know, how can we improve? And we have kind of the sum of all this information, but we don't share any one person's information either publicly with the group or with anyone else. So I think just being this repository of information that we've that we've gathered through trust has allowed us to actually be useful to kind of the other side of the equation, the the venture firms, the the borrowers or clients, around what we think of the market and how lenders look at the market and how we think of capital structure and all that stuff. So I think that's it's that trust, that trust and transparency that I think has been a huge contributor to the building of our network.

SPEAKER_01 12:28

And it's probably time for me to reveal some extreme ignorance, which I have plenty of practice doing. Um, but you know, when I think about the sort of usefulness of debt to a venture-backed startup as a kind of continuum, and the the further down you get in the alphabet, probably the more it makes sense to take less dilution, take on more debt, your unit economics are proven out. It all makes sense intuitively. Because operating, especially at the early stage of the ecosystem, we've we've looked at deals where we've also had come to term sheets alongside from lenders. And the sort of pitch has been, okay, you're we're gonna give you another year of runway or something, but there seem to often be a lot of covenants in that deal, which basically says if you get to a year of runway, you're you violate these covenants, or like you have to put more equity in. So it it I've looked at some of these and it's felt to me like it's not actually real runway. So am I just am I thinking about these kind of things incorrectly, or um, are there certain are in what situations does it become a lot more viable in terms of creating you know greater returns for equity holders?

SPEAKER_02 13:42

To answer your question, no, I don't I don't think you're you're viewing it the wrong way. I think more often than not we get brought into situations where we where our the prospective borrower has a term sheet in hand where it's really not usable money. It's really but it's not usable money. And most often it's from a bank. Yeah. Not to you know paint banks a certain way, but it's usually from a bank. If we think about the appropriateness of stage time use uh of venture debt, it really there's I think it's important to delineate when it's being used. So if it's a series A company who has a product, they've started selling and they kind of know their market, and all they know is that's all they know. Yeah. And maybe they want to perpetuate that and they've raised some equity and they want to strap on some venture debt to extend runway. The lender in that situation, chances are, is probably gonna attempt to align with the business and give you something that's fairly covenant-light, if any covenants at all, because of what I just said. All you know is that you're selling stuff, you really don't know what your margins are gonna, where they're gonna shake out to be. You really don't know, you know, the only thing you really know is that you need to raise more equity sometime down the road. So that's really the underwriting thesis early on, which is why you know I always say that you know, venture debt, there's sort of a two-pronged underwriting approach. One, one, sorry, but this is the new operating system for bullets. This is amazing.

SPEAKER_01 15:21

Um for the listeners, some balloons just flew up in my face or in John's face.

SPEAKER_02 15:26

One prong is uh, so I won't put my fingers up like that again. So one prong is okay, who's the equity syndicate? What's their underwriting thesis? Um, how strong are they? Do they have dry powder, all that? And the likelihood that the the answer to those questions is fairly positive is good. The second prong is what's the inherent credit worthiness of the business? So in a Series A company, the venture lender is gonna put a lot more weight on that first prong versus the second prong. As the company matures and evolves, when they think about raising debt, there's gonna be much more emphasis placed on, well, what is it going to be used for? Is it going to be used to do things that you already know that work, like selling more of the same product into the same market? You know, that's a great use of venture debt. And so that underwriting thesis shifts a bit. There's still the two-pronged approach, but more emphasis is placed on that second prong. And so that's usually when the company has a bit more predictability with its margins and growth rate and all that sort of stuff. And maybe does, maybe doesn't. But here's the key that's the point where you know venture debt by nature is enterprise value lending, right? It's not cash flow lending, it's not asset-based lending. So it's in those situations, certainly where we're involved, what we try to have the lender aligned to is what is driving enterprise value.

SPEAKER_01 16:54

And that's where you're Can you actually can you can you define what enterprise value lending is? Because I remember you having lunch and me hearing that that term for the first time coming out of your mouth.

SPEAKER_02 17:03

Sure. Enterprise value lending is where the lender is underwriting to a thesis that the overall value of the company far exceeds the the value of the loan. I mean, I've kind of skipped the whole enterprise value part, but but I'm kind of operating an assumption people know how to define enterprise value. Yes. I guess drilling like peeling that, peeling one layer down, what it means is the lender's trying to figure out you know what part of value here gets sustained in a downside scenario. Where's my floor and how is my floor defined? And how do I underwrite to that floor? So a lot of times when they just going back to how they underwrite and what's the covenant package and all that stuff, where we try to get folks to is alignment with the lender and with the equity investors and with the company of what drives enterprise value. Real simple example is lender comes in and says, Oh, you're you're a you're an application software company. You're right now you're, you know, call it CRC. The main thing that drives enterprise value is recurring revenue. And and not just recurring revenue, but like stable recurring revenue, meaning low churn, all that stuff. So chances are whatever equity investment was just done, it was going to be some valuation of recurring revenue, taking into account, okay, what is the margin on this? You know, is there any customization? All the all these things are kind of ancillary but important to that. Well, if that's the basis of driving enterprise value today, well, then you don't want the lender underwriting a covenant package that focuses on cash preservation and you know an EBADOC covenant, because that's not what's driving enterprise value in terms of the company's eyes or the equity investors' eyes. Right? Recurring revenue is. So maybe the covenant package should align kind of with that so that the company is saying, yeah, we we want to grow sustainable recurring revenue that aligns with what our equity investors want, that aligns with what we believe drives value, and what aligns with how the equity how the lenders believe is going to drive enterprise value in the long run. I mean, that's sort of a simple example, but it kind of highlights how you want them, you want the lender's view of what drives enterprise value to be the basis by which they set a covenant package. Because if there's a misalignment, you might have the tail wagon the dog, and that the lender is driving company decisions, which you never ever want in normal course. Yeah.

SPEAKER_01 19:47

It's interesting you mentioned the ARR piece because I would say there are a lot of different vectors operating in the sort of debt equity mix among startups today. I would say from call it like Q3 2020 to Q4 2021, there was a self-perpetuating belief that you could predict at a fairly early stage whether or not a SaaS company would be successful and you could predict revenue fairly quickly, which I think would have told you you can use more debt and juice equity returns that way. It turns out that those same metrics can can help you predict that a lot of these SaaS businesses are worth about 10% of what they what two years ago the conventional wisdom said they were worth. So that is sort of um a bit of a whipsaw, I would argue, for the role of venture debt. And then if you just kind of zoom out again, I think a total lay person might say, well, I think lending money to companies that lose money isn't a great idea. So when you take all those factors into account, I mean, how do you think about the future of the venture debt ecosystem?

SPEAKER_02 21:03

That's a loaded question. Has a lot of Pandora's boxed potential elements in it.

SPEAKER_01 21:08

Yeah. Well, maybe maybe let's start with, let's start just here and then and then we can make it as loaded as you like. But what if someone said to you, there's a bunch of there, there's more debt in the ecosystem than there has been? Obviously, it's it's very modest relative to other asset classes, but the companies lose money and they'll never be able to pay it back. I mean, what what's sort of the shake out near term? Is there a shakeout near term? So that's starting to happen.

SPEAKER_02 21:37

We're hearing of lenders that what's that expression, they're they got a bit too far over their ski tips.

SPEAKER_03 21:43

Yeah.

SPEAKER_02 21:44

You know, we're also reading about stuff in the paper or in the in the media that is sensationalized about lender behavior, which is never good for anybody in the market. I think like any ebb and flow in the market, there there will be a shakeout. I guess what I always fall back on is what does the data say? And historically speaking, and by historically speaking, I'm going back to only the data set that I know, which goes back to like 2011. Venture debt loss rates across the industry have been measured in basis points. Wow. Which is lower than mid-market lending. It's lower than leverage lending. It's way lower than private equity sponsor back lending. Right? So that begs the question well, how is that? Why is that? And let me just say that the short and the short version of my answer is I'm not really sure because there's no way to empirically say this is why. But what I believe, based on experience, is that it's a relationship-based product. And some lenders may shoot me for saying this, but like the loan and security agreement, by and large, for some of the most success, successful venture net lenders, while being a legal contrament contract, represents a guideline for what's going to prompt discussions with the equity investors and the company in advance so that things aren't catastrophic. So a lot of, and again, I'm giving this from the lender's perspective, not the equity investors' perspective. So in many cases, when things look like they're going sideways, it prompts the lender to say, hey, can we have a discussion? Can we do something? Maybe it's putting in more equity, maybe it's maybe it's not. Maybe, you know, in some cases, the lender puts in more money to give the company six months to sell themselves. It really depends on the situation. But what I can tell you data-wise is that it's yielded very low loss rates for the lenders. What I can tell you anecdotally from the venture firms that we know is that many of them, well, I'll I'll use I'll use the data from post-SVB. What I did following Silicon Valley Bank's demise nine months ago, I guess, eight months ago, was I called, reached out to about uh between 2025 venture capital firms that we know well and have been good referral sources for us, and we've done a lot of work with. And I asked them two questions. I asked, you know, does your view of the use of venture debt and its utility change with SVB's demise? And the second question I asked was, does your view of when a company should take on venture debt change? And the answer to the first question was unanimously, no. Our view and the utility of debt and when it could be used has not changed. And mind you, this is before that was nine months ago, right? Yeah. Um the answer to the second question was almost unanimously, yes. Our view has changed in terms of how early a company is to appropriately take on debt. So I I I don't have good hard data today because it's nine months later. You're you're starting to read about almost on a daily basis companies going out of business. Some have debt, some don't. Um, what you're not reading about is recoupment of dollars from both lender and equity investor. I think if a company is being shut down, the best case an equity investor can hope for is getting some capital back. Uh zero return, of course. Yeah. Uh worst case scenario is they get no capital back and they have to forego all kinds of wind-down liability obligations and all that sort of stuff. Um, you know, and I don't know where we are in terms of the continuum of that sort of thing happening, but I I believe we're kind of in the beginning of it.

SPEAKER_00 25:49

Okay.

SPEAKER_02 25:50

So I don't know if that answered your question. No, it doesn't. But the future venture debt, but I I do think there's a there's always gonna I I always go back to math, right? If you look at capital structure across every industry, every sector, there's debt. In fact, there's lots of leverage except tech and healthcare. Now that's you know, guys like Vista and Toma Bravo and and clearly capital and others, the private equity world is sort of changing that myth and appropriateness about debt. And I also recognize I'm first to admit, you know, early stage is very different than late stage. Yeah. Uh but the the beauty of the tech business by nature is that it always is inventing products. Yes.

SPEAKER_01 26:41

So wait, we're we're definitely gonna get to that. But one one thing that you and I had discussed when we were in New York a few weeks ago was, and I think it was maybe something that had interested you about what we do using alternative data to source screen accelerate portfolio companies. Um, you know, something that you said was if you're not if you're not integrating AI into your process as a VC fund in this day and age, you better have a lot of shoes because like you know, you're gonna you're gonna need to wear a lot of shoe leather shoe leather to compete. Do you see that same push within the venture debt ecosystem? Or is it so relationship-based that you think that it's sort of immune from that drive, or is there gonna be more AI-driven origination?

SPEAKER_02 27:32

So I'm gonna I'm gonna interpret your question slightly differently than I think the way you're intending it to. So in venture capital, there's this concept called the power law, right? Yeah, that does not apply at all in any way to venture debt, yeah, right? It's it's far more distributed. Returns are far more distributed. And because of that, a venture lender doesn't have to find the best investment to change because their returns are for the most part capped, right? They're they're you know mostly asymptotic, right? Yeah, and so for venture debt, it's about finding, it's you know, you're gonna have a fixed fund size, it's about finding enough investments where you can get that, you can approach that asymptotic return. Yeah, right. So that that, you know, from like from our conversation earlier, just um for the benefit of companies. I mean it's a total dynamic shift. It yeah, I think you know, if you're an early stage venture fund where you have to talk to a thousand companies to have to have one investment, I don't know how you can't use AI to sift through how you're gonna spend your time, given that all the commitment, you know, as you're a later stage fund, the importance of that I think decreases. But venture debt, I don't think, I don't think that's where the the utility of AI is gonna come in. I think where the utility of I is gonna come in is gonna be around structuring. It's gonna be around, okay, how do we define loss rates? So one of the one of the interesting pieces of data that was given to me by a BDC, like uh it was a group that's that no longer exists, it's called Triangle Capital many, many years ago. So I got I gotta give credit to where credit is due. Um they were a big believer in looking at the returns and losses based on where deals came from. And they had concluded that any deal that came from a licensed broker dealer acting as agent for the company, they had better risk-adjusted returns than their proprietary deals, which runs a little counter to what some lenders believe. Uh, they thought our overall return, our absolute returns are lower, but we take no losses, kind of thing. So I think venture lenders, I think lenders generally are gonna be using AI to figure out that sort of stuff in the context of portfolio mix. Right? Oh, we we don't have enough in this sector, enough in that sector, so we can therefore lean in on pricing a bit more here to win that deal because we need it for the sector, because sector-wise, it's gonna give us a better balance. Now I'm talking about very large funds, right? Because AI is useful when we're talking about large numbers. When you're talking about small numbers, it's useless.

SPEAKER_01 30:28

And perhaps I mean, well, you actually alluded to this earlier when you talked about you know technology inventing new products by its very nature. And perhaps this is ironic, or perhaps it's just a symptom of how much venture funding has, you know, pushed the limits of what's possible, um, or for that matter, sane in fintech. But there are a lot of technology-enabled companies that also lend to startups. And it's been a little bit perplexing to us because we've passed on scores of them. And at least for a while, all of our competitors seem to be having a really, really good time investing in them at higher and higher multiples. I mean, without putting anyone on blast, though, feel free to, you know, how should I think about these types of players? I mean, what what what do they do? I mean, like, are these really loans?

SPEAKER_02 31:18

So the reason for my pause is I was trying to think of some examples that I can use where there have been a really good product, some calling I'm gonna define. Yeah and and really businesses that don't really have good products, right? So let me start with the the good. So many years ago, when when Clear Co. was called Clear Bank, their initial product was what I thought was a brilliant financing tool for acquiring customers where you knew exactly what kind of customer you were targeting, you knew exactly how much it would cost, and you exactly knew what their payback curve repayment curve was going to look like. To me, and what what we witnessed with our clients and their using of that product was it was a very good tool to complement their overall capital structure as they grew. Thought this is great. We didn't really think of it as lending, not lending, whatever. We just thought it thought of it as a financing tool. And then then there was this proliferation of these products from recurring revenue lines to pardon me, recurring revenue financing tools to other things. And at first we thought, oh, well, let's talk to these businesses because they all needed warehouse lines, right? And we would get the phone call saying, hey, we need to raise 300 million from whoever will give it to us because we use that money to then finance software businesses. And having spoken to umpteen of these businesses and asked them, well, what is your product? What does it do? How does I think, and I can't speak for my entire firm, but we clearly have a firm-wide view on it. But I I I think I probably have the most critical view on them because they're not loans, and they're not loans simply by nature of they don't have a lien on assets. So technically, they're not really yeah.

SPEAKER_01 33:20

I mean, so yeah, like I mean, seriously, like I'm let's say I'm on the board of a B2B SAS company, we use one of these products to get, you know, to pull forward 60% of next year's ARR. We can't raise our next round, we're running low on cash, you know, we're we're getting emails because of our payment schedule, we're behind our payment schedule. I mean, what what should I do?

SPEAKER_02 33:45

So if it's somebody that's in your preference stack capital structure, it's something you have to respond to. And that preference stack goes from who has a senior lien of the business to a subordinated lien to preference on shares to a contract to pay. The contract to pay is at the bottom. Yeah, it's almost like an account's payable. I promise to pay you later. And if I don't sue me, yeah, they sit here. Right? So it's like come and get it. Right. So if you think about like taking on a material amount of finance, I mean, companies have been doing this for ages, right? They've been playing with AP and AR to manage working capital, right? Yeah, and that's how they do it. And sometimes they run into problems or whatever, but it's always a negotiation, which whoever that AP uh obligation is that they have to talk to, right? Well, in this case, it's like one person, right? They don't have a lien. So when they say, hey, we need to talk about refinancing the company or paying us back or putting in more equity or whatever, the companies, I mean, really, if I'm the company, I'm like, yeah, yeah, I'll talk to you when I feel like talking to you. I got other things to worry about right now. You know, unless you have a right to command that we do something about it, you know, get in line. Yeah. So I just think as much as people aren't going to be mean about it, like, yeah, that's really what it comes down to.

unknown 35:09

Yeah.

SPEAKER_02 35:09

Whereas if it's a shareholder with rights and obligations that come with shares, or a lien holder, which sits even above that, there really isn't any obligation on the company beyond a reputational one to say, okay, I'm going to listen to you now and make you whole ahead of all these other people in line.

unknown 35:26

Yeah.

SPEAKER_02 35:26

It's not going to happen.

SPEAKER_01 35:29

And I mean, that I don't know if you have any anecdotes around this, but I mean, that leads me to like, you know, how do you how do you do workouts at that kind of scale?

SPEAKER_02 35:39

Well, that that's a wonderful question that I don't know the answer to because we we've and this is where I'm not going to mention names. We've had calls from some of these ARR lenders. Hey, can you introduce us to so and so because they think we think they'd be a great partner for one of our one of our partners? And I'm like, well, what do you mean, one of your partners? What are you asking? Well, one of our partners, we think they'd be a good fan. Like, you mean one of your borrowers? Yeah, one of our borrowers. They think that, oh, see, so wait, let me get this straight. You want us to introduce you to an old client of ours because you think they should buy your borrowers behind on paying you your money. Yes. That's not what we do. Like, I'm sorry, figure this out. And then then I'd ask, what does your workout group say? And they're like, Well, what do you mean? Well, we don't really have a workout group. But but also, if you think about it, Fraser, of course they don't have a workout group because they have no authority to demand a workout. Yeah. So it's it's hard. Like it's yeah. And I think a lot of these businesses also will say, Well, that's okay. You know, we're you know, we're entitled to contractual cash flows from these software businesses. Well, what happens if these software businesses sell to only consumer companies where these consumer companies are gonna, you know, I love everyone says, oh, we only lend to like B2B companies. Well, ultimately, everything is to see. Everything is to see ultimately. Well, if you're like not too far down the chain from C, even if you're a software company with predictable revenue, that's gonna disappear too. And the problem, I mean, if this lender went far enough down the chain to be able to recoup.

SPEAKER_01 37:17

Yeah, I mean, that's uh I think every e-commerce P2B SaaS company has has learned that lesson in the last year or two. This is this is absolutely fantastic. John, I know we um you've shared some good stories with me, and I'm hoping we can tell this one, but we don't have to. Well, just ask the question anyway. You are visiting New York to see some of your BC partners, you're staying at a lovely hotel in Flatiron, and I know you're uh fitness freak, so you've gone down to the gym for a workout, and you see a technology mabled exercise bicycle. If you shuffle through your memories, what might come up?

SPEAKER_02 38:10

So it's yeah, you're talking about a potential deal story that I can share. It's it's like a lot of I can share what is in the public domain. So this this this this please do this. Is probably self-deprecating, but it makes a good story. 90% of our deals, deal flow comes from venture investors. Hey, John, we have this portfolio company. You know, it's it's almost all like we do not cold call companies, we do not do any outbound marketing, it's it's all inbound. 90% comes from that source. The other 10% comes from a mix of sources, attorneys, other lenders, whatever. Every now and again, and it's since happened a few times, but every now and again, someone from LinkedIn will reach out to me or one of my team. Uh, in this case, we got a LinkedIn reach out from a guy named Larry White. And I he said, Hey, I've been reading a lot about you. I'm the VP of finance with Peloton Interactive. We'd like to raise some debt. Can we have a call? All right. So I get on the phone with Larry, who's a VP finance, and someone else on the call who claims to be the CFO. Don't remember the name. Um, they were silent. And so I'm on the call, and uh he's like, Yeah, we want to raise some money. You know, I'm gonna send over financials. Can you let us know how much you think you can raise? Um, so this is sort of typical for us. We get in, usually we get introduced, then we have a call with someone in the finance realm. Usually it's the CFO uh or someone with authority, and we have the intro call, and then we ask them for an NDA, um, which we did in this case, and then we get financial information. So that's what happened here, only we didn't get that warm intro. So we get the information, and of course it's Peloton. This is like several, several years ago, and thought, gee, this is I think they had just raised money from Tiger at the time, just to give you an idea of how far back it was. So share with my team and thought we thought, gee, this is this is pretty financiable. We we should tell them they can raise maybe 40 million bucks. So go back to Larry, yeah, we think we raised 40 million bucks. He says, Okay, and we asked for all the usual stuff. So we have board deck, send us like all this stuff. So we get all this stuff. He's like, when can we get going? I'm like, well, hang on, you know, we need to figure out what's doable and this and that. So we do all that, and he's like, send me an engagement letter, send the engagement letter. The engagement letter comes back signed. We're like, Well, don't you want to negotiate anything? Don't you want to like okay? So we get all this information, we go to market, a lot of interest. Lenders take calls with Larry. Larry's, you know, he's been at the firm, given all this. Here's the company, here's this, here's that. Yeah, we get term sheets, and then radio silence. No word from the company, nothing. Calling Larry, no response, email doesn't bounce back, nothing.

SPEAKER_00 41:17

These are these are clearly dark waters we're in at the time.

SPEAKER_02 41:20

Yeah, yeah. Or it's it's six months later, we're like, this is so bizarre. The company, I'm calling the CEO, no return, no callback thing.

SPEAKER_01 41:29

Like, what did your like what did the lenders you worked with? I mean, these must be long-standing relationships. Were they pinging you, being like, hey, are we gonna get going?

SPEAKER_02 41:37

or that happened for a while. And then, I mean, sometimes, not usually when we're involved, but like lenders, it's normal for lenders to do a bunch of work, submit a term sheet, then have something go dark. That happens with lenders. Usually when we're involved, that doesn't happen. Like, yeah, like that's one of the reasons lenders like work on this because they're like, hey, something will happen here. Yeah, so they just went dark, and we had we had no information. So I don't remember how much time, but maybe a year passed. I I'd have to check my notes, and then I get this phone call from a woman who is the CFO. Phone call says, Hi, or my name is so-and-so. I'm the CFO of Peloton. I'm calling to let you know that your engagement letter is not enforceable. And I I said, Hi, nice to meet you. Um, I'm John Markle. And then she repeated from the script, and I thought, I said, okay, I understand. Can we talk? Like, I'm confused as to where this is coming from, what's going on. You know, at any rate, it's nice to hear from you. You guys were silent for like a year. And she's like, Well, I can't talk. She wasn't like, let's just move this to Signal. Yeah, no, Signal didn't exist. And so I said, Well, look, I'm gonna be in New York next week. Why don't we meet in person? She's like, That's a great idea. I said, Okay, I'll come to your offices. And okay, so I go to the office, and uh, she's like, Well, come up to the top floor, and she meets me very friendly, very nice. We go out, she's like, Well, let's go talk like over here. So we go out onto this deck and like away from like all the like the employees, like way to the edge of the deck. And I thought, am I gonna be like thrown off the deck of this roof? What's going on here? And then she says, she says, Thank you for your patience. I'm sorry about the clandestine phone call, but Larry White is being arrested this morning by the FBI on seven counts of embezzlement, all this acted fraudulently on behalf of the company. I'm really sorry, not I'm like, oh crap, like now we feel like fools because you know, yeah. My mind, well, who is on the phone when he said the CFO? And she's like, I don't know, it wasn't me.

SPEAKER_01 43:52

Oh my god. Yeah, so yeah, I miss I guess maybe we should have done more do tell.

SPEAKER_02 43:56

We ended like obviously ended on good terms with Paloton, but it It was uh and all of this is in the I mean not the whole debt preamble stuff, but it's the Larry White stock of the in the public sphere.

SPEAKER_01 44:08

I mean it this is such a trust business. It's always I mean things like this do happen, and the first time it happens, it's always like astounding, but it's it's always surprising because you might have at least, I don't know, we probably have maybe once every 1200 interactions with a portfolio company, something, you know, not a portfolio company rather, with a prospective company, something fishy, I mean really fishy or bad comes out. But it's um I mean it's amazing how rare this is, actually, considering how much this whole ecosystem operates on trust.

SPEAKER_02 44:41

I think it's fortunately Peloton had the controls in place to notice something was up. And it was he was charged with all of like from the previous companies. Okay. But but yeah, you're right. Like I mean, you're right, and and and and also I'm I'm not surprised too, because you know, we work with a lot of companies who who, and this is no fault of theirs, where they have controls in place, they have it, you know, they have all these administrative procedures and still stuff gets lost, and not not because of negligence or whatever, but just because of the complexity of the business or operating a business. Um, that's the one thing I will say about lenders. You know, the one thing we always tell clients um to prepare for versus an equity raise is lenders are gonna be much more administratively focused on controls and and and how to generate reports and all that stuff versus like ad hoc. I mean, equity investor is gonna go way deeper, but less into kind of the minutiae of some of the admin details. Yeah.

SPEAKER_01 45:50

John, you are always so generous with your time and very generous with your insights, especially around this topic that I was I was balefully ignorant before we met, and I'm sure your perspective is super interesting to the listeners. But what I'm sure they've been desperate to know since listening to me read out your bio extremely dramatically to begin this episode was was what they want to know is what put you on the cover of the Wall Street Journal. Oh god.

SPEAKER_02 46:22

The the beer mile did, which is it is a it is a race that involves drinking four beers while running a mile. So a mile is 1600 nine meters that's run on a 400 meter track. So if we think about a mile start, it's starts nine meters behind finish line. So gun goes off, you chug a beer in that nine meter chugs, and you have to have it done in that zone. Chug a beer or a lap. When you come up to that start line again, you grab a second beer, repeat.

SPEAKER_01 46:58

So it's four beers, four laps. This this fe this feels like a thoroughly Canadian enterprise. I'm gonna be honest.

SPEAKER_02 47:05

It started in Canada. I think I think one of the reasons I was um Oh, so the the Athenians weren't doing this? If they were, they didn't formalize it. But no, I was one of the guys who was there kind of in the beginning, or we did at the end of cross-country season, and I have a handful of talents in life. That's something I can do kind of well. Hey, what what was your world ranking in that? Oh gosh, I don't know. So the article was about the breaking of the five-minute barrier, which which I I did not do that. Um of my teammates at the time, his name was James Nielsen. He had run Fort 57. You know, I'm a 520s beer mileer, but the beer maller? Yeah, the article was just around, you know, what is this beer mile, who's fast, who's not, what makes someone fast, makes someone good, and where and who invented this sport.

SPEAKER_01 48:05

Yeah, so this is like you guys are like the stone men in the sort of Al Capitan breaking the four-hour mark type uh story.

SPEAKER_02 48:16

I'll go with it that an hour deal.

SPEAKER_01 48:18

Yeah, you're the gym the Jim Bridwell of Beer Miles. Less glamorous, yeah. Okay. Um now we're just completely wittering. But um uh shifting to some rapid fire questions, do you mind if I ask? And I'll let you go, I promise. Fire away. Okay. Who impresses you?

SPEAKER_02 48:37

Too many, too many people to mention. Um You don't have to say me. I I think the common theme is people who exhibit extraordinary humility uh alongside incredible intelligence or talent.

SPEAKER_01 48:50

What is the piece of media, book, podcast, movie, article, essay that you have gifted or shared the most?

SPEAKER_02 48:58

That's an easy question. There's a very small book, it's like that big. It's called On Confidence, uh, and it's written by the School of Life. It's like a group, and it's uh it's a book that talks about what confidence really is.

SPEAKER_01 49:15

Do you have a philosophy for onboarding employees? No, I just think yeah, in our in our ecosystem, it's that it just comes up so much. How do you bring amazing people into the organization and like how do you make them be amazing once they get here?

SPEAKER_02 49:30

I think you know, our firm's so small that it each person we brought on has been sort of bespokely picked. Is that even a word bespokely picked? Like, um, so I don't really think of it as onboarding so much as you know, where do they fit? Are they gonna fit with the organization? And and did they buy into our philosophy, which is transparency and and and doing the right thing, which sounds cliche, but investment bankers doing the right thing, yeah.

SPEAKER_01 50:02

All right, last one. Uh, what's the topic that you think people should learn more about? Other cultures. Tremendously. All right, John, thanks again so much. I will look forward to seeing you hopefully before the year is out, but I suspect it will be sometime in Q1. Have a very, very happy holiday season and uh enjoy San Francisco. Same to you, and I I appreciate the time and always good catching that phrasing. Cheers. Thanks, John. Hello again, friends, and thank you very much for listening till the end. One final thing before you go. If you enjoyed this episode, do you think you might also enjoy a monthly email from us where we share more stories, news, and perspectives from our early stage fintech ecosystem? If you think the answer might be yes, head over to our website, vestigoventures.com, and sign up for our Envisions newsletter. In addition to blog posts with our latest thinking and updates from our portfolio companies, we always include a short video interview with incredible people from our network. If you do sign up, I hope you enjoy it.