Understanding Venture Debt and its Role in Financing with Denis Mosolov of Flashpoint Ventures

Summary

Welcome to the podcast! In this episode, Denis a venture debt investor at Flashpoint, shares insights on venture debt and the qualities he looks for in founders. Venture debt exists as a form of capital that is lower risk than equity and becomes available to companies at a certain level of maturity.Denis discusses various aspects of venture growth debt in this conversation and shares insights into the venture capital industry. He explains the dividend yield and DPI of funds, the management of deal flow, and the importance of taking board seats.

Takeaways

1. Venture debt is a form of capital that becomes available to companies at a certain level of maturity and is lower risk than equity.
2. Denis looks for companies with clear product-market fit, revenues of at least $5 million, and evidence of growth.
3. Unit economics is the fundamental profitability and efficiency of a business or product.
4. Flashpoint's deals include a debt instrument with an equity kicker, but they do not co-invest with their equity fund.
5. Denis values founders who are resilient, tenacious, and able to pivot in difficult situations. Venture growth debt allows companies to optimize their capital structure and reduce dilution for early investors.
6. Deal flow in venture capital can come from various sources, including companies approaching the firm, relationships with other VCs, data-driven analysis, and partnerships with advisors and scouts.
7. Taking board seats is important for venture growth debt providers, especially during challenging times, as it allows for better communication and decision-making.
8. Raising a fund in the current market is challenging, and stability in the global economy is crucial for making fundraising easier.

Chapters

00:00 Trailer
01:18 Introduction Of Denis
04:20 What is venture debt
13:55 The Importance of Unit Economics in Assessing a Business
16:10 What he looks in founder before investment
20:50 Structuring Deals: Debt Instruments with Equity Kickers
27:06 Fund Size, Check Size, and DPI
30:25 Taking Board Seats in Venture Growth Debt and Deal Flow
34:33 Challenges and Trends in Raising a Fund
37:15 Our Subscribers Questions
47:30 Ritual
49:15 Conclusion

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Transcript

Mudassir (00:04.021)
Okay, please do a clap for me

Mudassir (00:10.101)
Yeah, yeah, very light, but I can hear that. Thank you for that. This is actually a tip, so to sync the audio and video. Because when we do online, there's a drift between audio and video. So when you do that, there's a spike and there's a visual. That's why we do it, OK? Yeah. Yeah, I just learned it. OK, awesome. Rolling now. Hey, guys. Welcome to the show. How are you doing today?

Denis (00:24.774)
all right, good tip, man. Good tip from a professional.

Denis (00:36.294)
Hey, good, good thanks for having me. How are you?

Mudassir (00:39.061)
Pleasure to have you. I'm doing great. We were chatting before the call, so you can resonate and you can relate what having kids and business feels like. So yeah, that's how I am. Awesome. Okay, so I had Anton on the podcast already. So we talked about Flashpoint, we talked about all the amazing stuff that he's doing and all the amazing stuff that they're investing in. I want to focus today's interview primarily towards...

venture debt, growth debt, all of that stuff. It's gonna sound a little bit nuanced, but I try to make it as easy for the audience to understand as possible. Okay, awesome. So everybody that I have on the podcast, I start us off with just one point, which is the context of your life. What is your story? How did you end up at Flashpoint? How did you end up becoming a VC of all things?

Denis (01:17.862)
Sounds good. Let's do it.

Denis (01:34.182)
How detailed do you want this to be? I don't want to make you people fall asleep on the first question. So give me a little bit of guidance, you know.

Mudassir (01:38.037)
as much as you feel comfortable.

Okay.

Mudassir (01:45.877)
All right, go ahead. Yeah, just keep it like who you are. So this is not going to be part of the recording, but just to give you some tips. Usually what I think is performed best is who you are, like at the heart. For example, you are a physicist or you are an acurial scientist. And then how did an acurial scientist ended up in this particular job? That would be a good one, yeah.

Denis (01:55.942)
Thank you.

Denis (02:11.142)
Okay, well look, as you mentioned, or maybe you haven't, by trade or by training, I am actually an actuary. So I started off my career a long time ago, mind you, and I'm dating myself a little bit, a long time ago back in Australia, I started off as an actuary. So I thought that was...

you know, a profession that played to my strengths. I liked maths, I liked statistics, you know, I liked numbers. I liked to kind of work with numbers, sometimes more than working with people. And so I thought, and they pay well. So I thought, okay, this is this kind of ticks all boxes, why don't I do this? And that was that was good, I think for.

two or three years. And I worked for, you know, for good companies and it was fun, but it's quite a limited sort of job in a way. You learn, you know, there's a steep learning curve and then, you know, you kind of learn most of the things and then it becomes a little bit less exciting. And this was like...

mid 2000s. So this is when this is pre GFC. All my friends were joining investment banks and making like three times more money than I was. And I thought, all right, this is like, why don't I do this instead? And so I started looking for a job, either investment banking or in private equity. And I got a job with Macquarie Bank, which is Australia's kind of main bank, they do a lot of infrastructure investing.

Mudassir (03:25.045)
You

Mudassir (03:37.717)
Mm -hmm.

Denis (03:40.326)
And I joined them in January 2008. I managed to stay alive during that year. But that really was the start of my career in, I would say, private markets and investing. So this is not VC, but it's private equity. And I've done that for almost 15 years. I was there for a long time. But then at some point, you know...

you as well, but generally some people want to do things that are a little bit more entrepreneurial. You know, you sometimes get frustrated at being part of a corporate machine, you know, like doing political things rather than, rather than kind of what you think is the right thing. And an opportunity came up to join Flashpoint because I know one of the founders very well. We go back a long way, you know, over a decade since before Flashpoint and he needed somebody to help him with the venture debt or the growth debt product.

Excuse me, which they launched a year ago and they just needed to strengthen the team. And I thought, okay, this is an opportunity to do something that's a little bit more entrepreneurial. So it's not kind of your corporate job, which is very comfortable and all of that. But this is a little bit more.

You know, as my former boss used to say, this, you know, put some hair on your chest until it's a little more risky, but more exciting and get to build something. And that's how I became, you know, part of Flashpoint's Venture Debt Team, which I head up at the moment.

Mudassir (05:12.501)
Awesome. Yeah, thank you for sharing that. So let's start with what exactly is a venture debt, but most importantly, why venture debt exists.

Denis (05:23.91)
Well sure, I mean, venture debt exists is, why it exists I would say, it's the same answer as to why any debt exists. It's a form of capital that's on a different risk spectrum, a risk return spectrum to equity. The only question is, at different stages of a company's lifetime, is debt available to the company?

because debt assumes a certain amount of risk, which is lower risk. It's a lower risk exposure to the company. And therefore, you know, if a company is at the very beginning of its life cycle, then that is just not available to it. It needs to have a certain level of maturity. But once it's reached a certain level of maturity, then debt becomes a viable instrument. And therefore it exists because it's, you know, it's available to it. And it should always be part of a capital structure because, you know, if you think about how you fund the company,

your goal is to take the cheapest possible capital and optimize the cost of capital for your company. And debt is cheaper than equity, right? So you'd always, you know, always take some debt if you can. And so venture debt is effectively, it's a senior secured amortizing loan to companies that are largely, and for the most part, VC backed.

So there are companies that are still going through a growth phase. They're scaling. They're not profitable in most cases. But, you know, and therefore because they're not profitable, they're not bankable. But at the same time, they have VC support and they have enough substance and revenue to, you know, to make them creditable from our perspective. And the loans that we provide to these companies is, you know, we call them growth debt.

Mudassir (07:11.509)
Got it. It's just a two -part question. And you'll hear a lot of two -part questions that I have. So I don't know. Somehow I have two. Yeah, OK. Awesome. So two -part questions on that. So one is, what stage usually you come in? Is it post -series A, close to IPO, early stage? So that is one. And two is, while you're answering this thing, you mentioned most of these companies are not profitable. Do VCs actually care about profitability? Is that a thing?

Denis (07:17.446)
As many pots as you like, mate.

Denis (07:29.062)
Yeah.

Denis (07:42.566)
If you have to excuse me, I've got a cold, so I'm going to cough every now and then. So look, let me maybe answer the second part first. Do VCs care about profitability? I think everybody should care about profitability at the right time, right? So the purpose of making a business is to make money. It's not to lose money and just grow endlessly by losing money. You have to have a path. It's great to grow.

Mudassir (08:06.453)
Mm -hmm.

Denis (08:11.846)
and take advantage of that opportunity whilst you can and whilst it makes sense. But you've got to understand that eventually, like even Amazon became profitable. So eventually everybody becomes profitable. And you need to keep that in mind, that it's not just a journey of growth forever, you need to have growth with profitability at the end of it finally in mind. That's sort of the first thing. And so, VCs care about value and creating value and...

for the first part of a company's lifetime or for some part of a company's lifetime, creation of that value means that you have to be loss making. And that's perfectly fine because if you don't care about growth, then you'll never get anywhere. You're never gonna go beyond like a 1 million revenue company if you just grow 20 % a year. Like you have to go through that period. In terms of when venture debt becomes possible, and this is my personal view and I guess what...

how I think about it at Flashpoint. And I guess different lenders might think about it differently. But the way I think about it is that we fund a very specific thing. Like, we don't just fund the company in a sense. We fund a specific risk and a specific activity that the company does, and that's scaling, right? It's executing on something that's already working. It's not like developing a new product. You know, it's not necessarily going to a new market.

Mudassir (09:07.157)
Okay.

Denis (09:36.678)
You know, it's really, you know, the company is saying, I've got a great product, the market is buying it, look at my growth. You know, I just need more money to get more clients. You know, that's all I need, right? It's the scaling and execution of that scaling. That's what I'd like to fund. And so in order to fund that, I need to understand a few things about the company. And that's what that's important to me. One, I need to...

see very clear product market fit. So, you know, what does that mean in practice, revenues and growth. So I want to see revenues of at least 5 million a year, you know, and because you don't just want to see product market fit yesterday, you want to see the kind of evidence of that, you want to see that ramping up. And so you need to see kind of a bit of history before you can lend. And so getting revenues around 5 million means that well,

Maybe last year there were two million, maybe the year before there were one million. And so having that ramp up gives me that confidence. And so that's typically what I look for. As I said before, growth is also important because growth is evidence of product market fit, but there's demand and you're really sort of ramping up to meet the supply for that demand. So that's the second thing.

you can always buy growth. And this is important, right? Like anybody can spend money on marketing and buy growth. Because obviously, like, you know, the more you spend, the more customers you're going to get. But it's important to understand, like, does that actually add fundamental value to you? If you spend $1 ,000 acquiring a customer, the customer makes one order for $100 and leaves, okay, you've got revenue, and you can say, look at how I'm growing.

Mudassir (10:59.861)
Yeah.

Denis (11:16.454)
but that growth is not accretive. And so the third thing I look for is unit economics, which means that the company understands that it's scaling profitably. So fundamentally it is profitable. It's just temporarily unprofitable because of subscale size and spend and marketing, right? But if you strip those two things away, it makes money, right? So that's important. And the fourth thing is, you know, you need to be creative because...

you know, while you continue to grow, you continue to raise money. You can't, you know, you can't sort of assume that the company doesn't raise any more money. And then in 12 months, when it runs out of money, that's kind of the end of its story. And so having VCs in the cap table with reserves gives me confidence that if I give it a loan, you know, in 12, 18 months, when it runs out of cash again, you know, I can have confidence that it'll, even if it can't raise from a new VC.

it's still got backers that will help it survive and keep going. So these are the kind of main things. There's a lot more kind of nuance within all of that. But I would say that that's a main thing. I mean, one other thing I should mention though is, and this is maybe kind of a feature of our product more than kind of a general market feature is we tend to stay away from company. Like we want to see a company that is, that is,

Mudassir (12:33.429)
Mm -hmm.

Denis (12:42.918)
that has a path to profitability if it needs it. It sort of goes back to a similar comment I made on unit economics, but I'll give you an example. There are some companies that need to get to a very large scale. Like, I don't know, like, you know, delivery, you know, like delivery or whatever, like the margins are very thin. You need to really dominate that market, you know, in order to become profitable and successful. And if you're at the early stage of that, like if things don't go well,

Mudassir (12:49.789)
Mm -hmm.

Mudassir (12:56.469)
Uber. Okay.

Denis (13:07.622)
Like no matter how many costs you cut, you just can't survive. Like the margins are just not there for you, right? You need to really grow, grow, grow, grow, grow. You can't at some point in time kind of turtle, you know, stay flat, you know, survive and then, and then go again. And so I don't like having to be in that position because then you're the subject of market sentiment. You know, you have another crash or whatever and another 2022.

Mudassir (13:28.789)
Yeah, yeah.

Denis (13:30.918)
the funding isn't there and then you're kind of screwed, not because the company doesn't work, but because the money is just not there. And so I like to see companies that have bigger margins, that can cut costs and become break even, or at least reduce burn dramatically if they really need to. And so that's another kind of safety measure for me.

Mudassir (13:49.077)
So that potentially means that you'll be focusing on B2B SaaS and probably staying away from consumer products, CPG products, I think. Right?

Denis (14:00.934)
Yes and no. I mean, look, I love B2B SaaS. Everybody loves B2B SaaS. I'd love to just do B2B SaaS because then I would have a much easier life. But unfortunately, there's not enough B2B SaaS that's VC backed that is getting debt to deploy 100 million into. So maybe there is at a later stage, but not at the stage that we're at. So I...

I look at any B2B, any decent quality B2B SaaS opportunity that comes my way. Devil is always in the details because a lot of things can be like B2B SaaS, but are they really, do the economics work? You know, like, do you have like two big clients and that's it? And then you kind of screwed if one of them happens to churn. So a lot of devil in the details, but I will look at anything that is like tech enabled or tech related. So, you know, I won't look at a fireworks factory.

Mudassir (14:38.261)
Yeah, yeah.

Denis (14:54.982)
And that's just not, it's got to be tech enabled. And people ask sort of, why is that? Why don't you look at any business? And it's really because tech is the only kind of segment that is suitable for venture investment because of the growth, right? Tech is a field that facilitates rapid growth if done right and if you have a good idea. And that's why VCs look at tech. And for us,

Mudassir (15:02.613)
Yep.

Denis (15:21.702)
You know, to fund the business, it's got to have VC backing. And therefore, if you look at a company outside of this, without VC backing, that's unprofitable. I just don't know where the funding comes from. Those companies tend not to grow very fast. They tend to become profitable very early and they tend to go down a different route. So they, they, they get bank debt, you know, or things like that very early in their life cycle, you know, so tech enabled or tech related companies that are on kind of the VC path.

Mudassir (15:32.149)
Yeah.

Denis (15:51.238)
They're within my universe. It doesn't have to be B2B SaaS. We can do consumer. The key thing for me is the unit economics, the four or five things I mentioned before. So that's really how I assess them.

Mudassir (15:54.997)
Okay.

Mudassir (16:06.421)
One question that I really want to ask and understand because of your intensive experience in economics and investment banking and in this finance world, how do you define unit economics? What exactly is unit economics to you? Because a lot of people have, it's pretty much the same sort of a definition. It's just like, hey, does unit economics work? And nobody wants to explain that, like, what the heck is that thing? And how do you find if that works or not?

Denis (16:30.534)
Yeah.

Denis (16:35.302)
Yeah, look, I mean, I guess the principle is, you know, it's the economics of the most basic unit of the company's business to me. Because the business, you know, the way I look at it consists of, you know, the unit economics. And then on top of that, you have like scale, GNA, one offs and all other things that can happen to the company, right? But unit economics to me is the fundamental profitability and efficiency of a business or a product, right?

And so to me, you have to strip away all the temporary things that affect its P &L and look at like, you know, basically for, you know, is a dollar that you invest in the company buying you $3 or 50 cents of value.

That's fundamentally what it is. And it's not just one metric, right? It's not like LTV to CAC is the most kind of useful metric, but there's also like capital efficiency and sort of how much revenue do you generate from the amount of capital you raise. There's other kind of metrics and that the PC is used, but I don't want to kind of attach myself to LTV to CAC because it doesn't work for all businesses. It's a very like important metric. And you always have to make sure that...

Mudassir (17:50.645)
Mm -hmm.

Denis (17:52.23)
When you invest money in marketing and getting new clients, that money is invested properly. But it's really like a metric for repeating businesses and B2B SaaS. You know, other businesses don't necessarily have that metric. To me, it's not just the metric, it's understanding the scalability of a business, whatever that business is. It might be a hospitality business that isn't necessarily lending itself to, you know, LTV to calculation. Okay. What is the right calculation for that business? Like, how do you ensure that that business can scale profitably? You know, maybe it's a different metric.

Mudassir (18:18.613)
Mm -hmm. Yeah.

Denis (18:22.598)
And so it's not sort of like, well, here's the things you've got to figure out. It's a more fundamental question about scalability and fundamental profitability of a business.

Mudassir (18:34.485)
That makes sense. That makes sense. What do you have in terms of a front thesis? Like, do you invest in certain geographics, certain founders? By the way, when I mentioned founders, this is a question that I meant to ask initially. What do you look for in a founders? Or do you care about the founding team? Or contrary to that, because you're investing in companies that are doing at least five million plus in revenue.

Does that even matter, like, you know, what the founding team looks like, or you're actually looking for a CEO that can actually make that company from 5 million to probably 100 million in revenue. So what would you prioritize and what do you look for?

Denis (19:11.846)
Yeah, I mean, it's an interesting question. We've looked at both cases. Let me sort of do it in two parts. One is, what do we look for, I guess, in founders slash people that are fundamentally driving the business? And two is, is it a founder or a CEO?

We've looked at both kind of looking at the second part first. We looked at both at both situations. We have a company or a couple of companies in our portfolio that are CEO kind of driven where the founders are no longer active. And then we have, I guess most of the companies in our portfolio are still led by founders. To me, it's less about like whether it's a founder or CEO. It's more about, you know,

the capability of this person and their incentive to drive the business, right? Early on in the company's life cycle, like the incentive is very different to like a CEO of a mature business, right? And so naturally, like founders having, you know,

30 or 40 % of a company or whatever they might have is the incentive, right? And it's their business. And so they have an attachment to it and that works and they're incentivized to make it a success. On the other hand, a lot of founders are not like natural CEOs. They're entrepreneurs. And so at some point you've got to kind of transition. And so there's kind of two sides of that coin. And so if you have a founder, you're like, well, how good are you at actually executing?

If you have a CEO, it's more like, well, what is your incentive? Are you incentivized in the right way for this stage of the company? So this is a key thing for me. What do we look for in founders? I mean, look, it's a different question. I could list like 10 qualities that are good for a founder, but it makes the whole thing meaningless. People talk about vision and all of that. Yes, important for the founder to think big and long.

Mudassir (21:05.301)
Okay.

Denis (21:18.502)
I don't want the founder to be focused on tomorrow's goal. I want him to be focused on 10 years from now or at least three years from now. The North Star has to be there. I want the founders, and this is my personal thing, I want them to be extremely resilient. This is, I think, a very important characteristic.

Mudassir (21:38.837)
Hmm, interesting.

Denis (21:42.406)
You know it and that's a broad term and I think it also encompasses, you know hard working in all of this so I want guys that are like and girls obviously that are like tenacious resilient and and react right not like laid -back and And kind of cruisy, you know something happens react like cut costs five twenty percent of the people don't care We're gonna survive. We're gonna get more money

Mudassir (22:00.309)
Yeah.

Denis (22:07.782)
like, you know, solve problems and move forward. I think this is a quality that, because I'm a debt investor, right? Like I want them to be able to deal with the difficult situations well, you know, not sort of kind of, you know, be good in the bull market. I want them to be like the winners in the bear market and resilient and survive. So founders and companies that I find that...

Mudassir (22:27.925)
Yeah.

Denis (22:35.27)
And I've seen this in my portfolio as well, like companies that have gone through a tough time, like, you know, in COVID, a lot of companies had a tough time, that have found a way through that, that have reacted, survived, optimized, you know, cut costs, became leaner, meaner and better. You know, they're flourishing and that's a lesson that they'll learn forever and they're going to be successful. You know, so I really value the situations where people have successfully pivoted.

And again, there are a few companies in my portfolio that have done that or in the press of doing that. And it's amazing. Like it's amazing when somebody's, you know, hits a snag, you know, a poor founder would, you know, would fall over the company would kind of, you know, get sold for, you know, for 10 cents on the dollar or whatever. But these people, they pivot and it's hard. And then they convince people to support them. And then you see this going again. And I think that's, that's, that's amazing. That's an amazing quality. And that really kind of sets.

Mudassir (23:19.509)
Yeah.

Denis (23:31.238)
So that's a good baseline for a personality of a founder. I want people that are also aggressive in a way. So I guess it's all part of the same kind of thing. You've got to be fast, aggressive, resilient. This is what I really like in people and founders as a personality type.

Mudassir (23:43.221)
Yeah.

Mudassir (23:51.701)
That's good to know because a lot of people would usually talk about the other side of the things, but it totally makes sense that you're focusing on people who are just like, if the shit hits the fan, they know how to take care of whatever. So it totally makes sense. Okay, so when you say you invest in startups as a debt,

Is it purely a debt instrument or do you actually take a little bit of equity? Do you like to have a little bit of a presence on the cap table or do you just like, no, that's not my thing? How do you structure the deal? I think that's a better way to ask the same question.

Denis (24:28.486)
Yeah, yeah, no, it's it's I should have covered this before. We're not pure debt. I mean, we are primarily debt in the sense that my primary concern is capital preservation. So like, for my LPs, you know, my number one priority is not to lose their money, right? I don't want to be kind of...

My job is not like a VC fund where, you know, sometimes it's great, sometimes it's not, you know, and that's just part of life. My job is like, you're going to get your money back. You're going to get a return. It's only a question of how much return you get. Right. So fundamentally with debt, but every loan that we give has an equity kicker. So it's, it's called a warrant, as I'm sure you'll, you'll listen as no, which is basically a call option on, on the company's shares. And it just means that we can, you know, at today's price, we can buy shares in the company.

of a certain amount and that amount is like 15 % of the loan amount. So in terms of dilution, it's a much, you know, if I give them equity, it's a hundred percent dilution. If I give them debt, it's 15 % dilution. So it's a much less dilutive instrument, but it's still for us, it's a, it gives us a little bit of upside in case we do lend to a future, you know, unicorn or a Google or something. You know, it means that there's an extra benefit to the fund. Also we, we,

Mudassir (25:27.413)
Yeah.

Denis (25:46.182)
And this maybe goes towards our strategy a bit, but we can talk about it separately. But we like to follow on. From my perspective, doing a single deal with a company is great, but...

doing a deal and then topping up and then giving them more money, you know, seeing them perform is much better because, you know, you spend one time doing due diligence, you spend one time doing the documents, you spend one time getting to know the company, it's a much easier decision to make to give the company another five million than to give the first five million, right? If it performs obviously. So we like to do that. And for companies that we have high conviction in, and so, you know, when...

we've had a relationship with them, we've got the loan, we see the management and see how that evolves, we can put in equity as well, but it's a much smaller amount. It's like 5 % of our fund. So for every 100 bucks that we lend, we can put five of that as equity, but only to companies that we lend to. So not just equity. It's only to companies that we know that we have in the portfolio that we have conviction.

Mudassir (26:42.709)
Okay.

Mudassir (26:58.517)
Okay, so do you also? Okay.

Denis (26:59.43)
And so all of that is the product, right? It's the debt, it's the warrant, it's a little bit of equity, and that's the kind of the combination.

Mudassir (27:06.965)
So do you also co -invest with your venture product? The actual equity product? Anton and you guys, do you actually invest together, lead it out or something like that? Or do you not totally separate?

Denis (27:22.79)
Look, it's a good question. We don't. It's, well, because there's a conflict of interest. I mean, fundamentally debt and equity are, you know, in a scenario where the company is short on cash. I mean, this, let me take a step back, right? So having spent quite a long time in PE, you know, just kind of...

Mudassir (27:27.413)
But why don't?

Denis (27:51.014)
basic corporate governance states that once the company is in distress or it's in danger of insolvency, the board's fiduciary duty should prioritize its creditors rather than the equity. And so if you imagine in that situation you have both, then you're on opposite sides of the table. And all of a sudden the board has to act in a different way. And so having debt and equity together from the same, not from the same fund, but from the same...

Mudassir (28:20.181)
company the other day yeah yeah

Denis (28:20.422)
group, right, right, it's a little bit different if it's from the same fund because it's the same LPs. So you kind of, you can't benefit one set of LPs and not the other, but that's okay. But if it's a different set of LPs, but it's one manager, you know, one set of LPs will always say to the other set of LPs, you know, how are you acting in my best interest? Why don't you screw those guys and do a better deal for me, right? And that's a conflict that you can't really manage well.

Mudassir (28:28.565)
Mm -hmm. Yep.

Mudassir (28:41.844)
Yeah.

Denis (28:50.118)
aside from having like Chinese walls and all of this, but nobody really believes this stuff anyway. Like even if it's like Merrill Lynch telling you they got Chinese walls, like, you know, there's still going to be a little bit of kind of canteen talk, you know, about what's going on. So, and from personal experience, this is just a conflict that is very difficult to resolve. And so as a principle, we don't co -invest with the equity funds.

Mudassir (28:54.197)
Yeah. Hmm.

Denis (29:18.15)
we, you know, if there's a particularly interesting deal that we think is amazing for both parties, we will go to our LPs and we will tell them or LP panels that we have in our funds and we'll tell them, we'll explain to them and we will ask for their view, right? So we will never sort of take that decision. I mean, you could make the case the other way why it's a good idea.

And I know that some lenders and some VC funds actually build a business model around that. Because you lend, it's a lower risk entry point. You get a lot of information. You kind of onboard the company. You have its financials. You know everything about them. You might be a board observer or whatever. And then the decision to invest equity is then very easy. It's much easier than investing equity in the first place, which is a high kind of risk entry point.

Mudassir (29:48.693)
do that. Yeah.

Denis (30:12.454)
And so you could make a business, I guess, in a similar way to what we do with our fund by having a little bit of equity exposure, but like oversizing that and putting a different set of LPs behind it. But then you have that conflict, right? And so I personally don't think it's the right thing to do. Well, right or wrong is kind of the wrong way to put it. I think it's a long -term, not in the best interest of the firm thing to do.

Right? All the LPs. Because eventually somebody will be unhappy and you won't be able to explain it, to manage it, and reputation will suffer.

Mudassir (30:51.477)
It doesn't really make sense. So, you gave me so many talking points. So, I'm gonna go one by one. So, let's start with the first one. How big the pool is, how big the fund is that you manage. What's the average check size that you write? And what's the DPI of the fund that you have in mind compared to the equity side of the business?

Denis (31:13.638)
Yes, so the fund, we're fundraising at the moment. So the fund size is not finally determined, but we're aiming for about 100 million dollars and we're sort of close to halfway to that. And we're going to be fundraising for another 12 months or so. So, you know, that's, you know, we should be in good shape to get to that target. The average check size is an interesting question because like I said, I like to follow on.

And so my preferred path is to give a smaller check first and then follow them with a bigger check at the next kind of, at the next point. and so I anticipate that some companies in my portfolio will just get one check. Some will get two checks and the average of all of that, you know, might be six or 7 million, but half of it will be three. Half of it will be 10, 12, 15, something like this. Right. And so we can do a check of as little as, you know, 2 million.

upfront. Anything less than that just means that the work is not worth the legal fees and stuff like this. We could do up to like 10 million upfront if we've got high conviction in a borrower, but anything in between.

Mudassir (32:29.333)
Okay, and the DPI of the phone. The DPI, like what's the return that you, yeah.

Denis (32:32.422)
The what, sorry? the DPI, yeah, yeah, sorry. Okay, look, so I mean, that's, I want to give my investors about 1 .8 times their money at the end of the fund. So once everything is distributed, that's sort of my target, 1 .8 to two times. It's obviously less than VC funds, but obviously with VC funds, there's a much broader range, right?

If you think about it fundamentally, each loan, it's not a secret what the interest rates are on these loans, but if you give somebody a three or four year loan with an interest rate of like 13 % or something, and it's amortizing, then on this loan, your TVPI is gonna be like 1 .3. That's just kind of a...

a law of, that's just what it is. So you add a bit of warrants on top of that and you get to maybe 1 .5, right? And then you add kind of reinvestments on top of that. So you recycle the money and you get to a bigger number and then you're going to have the fund fees and costs come off that as well. And so at the end you kind of left, unless you have an amazing warrant portfolio, like no venture debt fund, it's going to give you much more than two. And so my target is 1 .8 to two times.

Mudassir (33:25.525)
Matt.

Yeah.

Mudassir (33:55.477)
That's very interesting. Okay. Yeah.

Denis (33:56.774)
TVPI at the end of the funds life, right? And so during the funds life, you know, for the first four years, there'll be like a dividend yield of about 5%. So that's what we, we, we pay dividend in the first four years of like 5 % of what the people invest. And so in the first year that in the DPI might be 0 .05 then 0 .1 point, you know,

Mudassir (34:05.045)
Okay.

Denis (34:15.43)
two after that. From year five, we give all the cash back that the fund receives. And then your kind of DVPI as sort of a metric of how much cash you've got back so far in your investment, it starts growing very rapidly. It goes to, we basically give the capital back. So we get to one times TVPI by end of year six and then 1 .8 probably end of year eight or year nine.

Mudassir (34:40.501)
OK, awesome. All right, so another two part question. So first is, do you take board seats? If no, why not? And the second part of that is, how do you manage the deal flow? Because you know from traditional VCs, I actually want to know how traditional VCs get the deal flow, but I also want to take your opinion on how do you manage the deal flow.

Denis (35:03.206)
Yeah, do you mean how we originate or how do we manage the deal flow? Like how we tree out it?

Mudassir (35:09.877)
how do you get like a lot of these people? So for example, 10 ,000 people pitches to you in a year and you pick like 10 of them. Like what are the sources of getting those 10 ,000 people?

Denis (35:16.934)
Yeah.

Yeah, sure. So I'll answer that first and then you'll have to remind me what the first part of the question was. So look...

Mudassir (35:26.869)
Okay. Okay.

Sorry to interrupt. If you want to take a break because I know you have source work. Yeah, please do. Yeah, please, please do. No problem at all. Please do.

Denis (35:35.59)
Let me get a drink of glass of water, right? And then we can continue. One sec.

Denis (35:58.278)
Okay, I think we're in good shape.

Mudassir (36:03.029)
Yeah, no worries at all. If you need to take a break, just take it. No problem at all. OK.

Denis (36:03.686)
Okay.

Yeah, no worries. It's all right. It's just, you know, it's annoying cough. On Deal Flow. So there's a few channels. One is just called, you know, we get a lot of approaches by companies or by their advisors. That's one channel. We have a relationship with quite a lot of VCs.

and so there's an ongoing dialogue with these VCs and, you know, in some cases it's as deep as well. Let's kind of look at your portfolio. What's, what's, what's, you know, raising debts and, and, you know, then we kind of have visibility on that. That's a very good channel because by definition, we then already know the VCs. And so we can kind of be clear about who's back in the company. we have our own, I would say, kind of a, I'm not going to say AI.

But our own kind of data, AI driven, you know, data engine that, you know, automatically does all this shit. Sorry, I won't swear. But basically like there's a lot of data out there, right? In dealer room and crunch base and other databases. And it tells you, rounds companies raise the VC backing and all of that. And you can obviously crunch all that data and you can filter it and you can give yourself.

Mudassir (37:05.301)
Please say AI.

Denis (37:32.614)
a list of prospects. And so if there's anything that's particularly interesting, we actually reach out to them as well, just from kind of the data work that we do. And I guess fourth is there's advisors that we know that specialize in a particular region, whether it's kind of Daach, Germany, or whether it's in Israel or something like that, that have a lot of visibility, or maybe it's the Nordics.

that have a lot of visibility about what's going on in that ecosystem and we have relationships with them and they come to us and Finally, we have scouts. So we we have people that somehow plugged into this ecosystem that know founders and companies and VCs And we have you know, basically a contract with them that says, you know for each company you bring us That we end up, you know doing a deal with you get paid something. So it's like a you know, it's like a scouting network

All of that comes together and I think the first two I mentioned probably are the most important, which is companies already know us and so they come to us. And the quality of that has improved over the last few years as our brand has gotten better. And also just the VC relationships and dealing directly with the VCs, which has the added benefit of their de facto approval before we even start discussions.

Do we take board seats? We take observer seats where we can. It's not market everywhere. In the US, it's more difficult. For us, it's a very important tool. I would say that it's less important when things are going fine, but when things don't go well, being on the board and being in the live discussion and even steering the board if we can.

is much better than getting like some sort of summary, you know, afterwards from, from the founder. It's immeasurably better. And so our approach is to always be present at the board. You know, even if it's not a full -time observer, at least when the runway is like less than six months. So as soon as your runway drops and the board is, you know, concerned with fund, you know, finding new funding or whatever, or changing the business plan or extending the, you know, reducing burn, extending the runway, like we want to be part of that discussion. Like.

Denis (39:55.43)
When things are going great, just like getting updates on operations, let's fuss about that.

Mudassir (40:02.293)
That makes sense. That makes sense. Okay. How difficult is it to raise a fund for a VC firm these days?

Denis (40:10.502)
It's not easy to raise any fund at the moment. I mean, it's like, it's a simple, you know, we had a period of free money for two years during COVID, where, you know, everybody raised, you know, everybody who needed money got money, whether it's a fund or a company or, you know, it goes through the system, like, you know, like a warm glass of mulled wine, and everybody's happy. And then interest rates went up and so money became...

Mudassir (40:13.877)
Yeah. Okay.

Denis (40:38.726)
more expensive and there's less of it and it's a bit more scarce and asset prices changed, companies are changing their asset allocations. So it's not just us. I mean, it's branded large institutional VCs like the tigers of this world that are raising much less than they planned. We're a small...

Mudassir (40:39.573)
Yeah.

Denis (41:04.358)
business and our brand is not as well known as those guys and so for us it's twice as hard. So at the moment it's still difficult. It's still difficult.

Mudassir (41:14.229)
Do you think your AI driven platform thinks that it'll get better in 2025? Yeah, do you think that it will get better next year?

Denis (41:21.414)
I'm sorry, can you say that again?

Denis (41:30.022)
in terms of fundraising.

Mudassir (41:31.189)
Yeah.

Denis (41:33.286)
Look, it has to, like...

The reason these peaks and troughs exist is because there are events that happen and it takes time for the market participants to adjust. If you're a massive asset manager, you have private equity, you have equities, you have fixed interest, all these things react and shift and your allocation becomes unbalanced, you have to change things. And for those changes to work their way through the system for these shocks that cause other shocks and to get to a stable state,

It just takes time. But eventually, like, what facilitates fundraising is stability. It's not like any particular economic metric, right? And so I think, sure, it's going to get easier over time in the absence of new kind of macro shocks. Like if you see interest rates go up again by 5%, there's going to be another shock and another period of adjustment and so forth. So, you know, as long as there's no, as long as we...

Mudassir (42:15.445)
Yeah.

Denis (42:33.862)
have inflation under control generally in the Western markets, as long as unemployment doesn't go through the roof and cause a crisis, as long as there's no geopolitical disruptive events which disrupt prices of oil by a factor of two or whatever. Then I think things are on the road to stabilizing and fundraising will get easier. But if those things happen, then it won't.

Mudassir (43:02.933)
Totally makes sense. Okay, awesome. Thank you, Dennis, for just, you know, asking, answering all these nuanced questions. So what we do is we have a decent, big -open audience, so very fortunate to whoever listens to the podcast, read the newsletter, and like, like whatever we put on socials. So what we do is we ask, like, everybody, hey, Dennis is coming tomorrow on the podcast. It's gonna be around this, this, this. If there's any particular question you wanna ask us, please let me know. And I get, like, all kind of questions, like, all the crappiest ones, all the good ones. So I'll try to ask you some decent ones.

There's like a few of them. All right, so in no particular order, in what scenario would you advise a company to opt for a venture growth debt over raising another equity round? That's the first one.

Denis (43:45.35)
I think a company should raise a growth debt round if it can raise a growth debt round. I believe that any company should seek to optimize its capital structure and having VCs and have reserves and reducing dilution for early investors is always a good thing. So there's a question of how much debt to take and that's a question that each company needs to think about.

It's probably a less kind of weighty question for an earlier company than a mature one. But if a company is in a position to take some debt, subject to that debt being on reasonable terms and in market terms, I think all companies that are able to do it should have some debt. Because that's the optimal way to manage your cost of capital.

Mudassir (44:37.973)
How should founder balance the use of venture growth debt with equity financing to optimize their capital structure?

Denis (44:47.686)
I mean, look, there's no right answer to that. So how much debt is this the right amount? You know, like...

Mudassir (44:52.341)
Yeah.

Denis (45:00.326)
I'll tell you how I think about it from my kind of selfish point of view or not the selfish but from the point of view of a lender like I'm concerned with capital preservation. I'm not concerned with like lending to own and so my goal is not to like over leverage the company and then use that as a kind of a wedge to somehow take control of the business, right? So my view is to give the company debt, have the company be successful, repay the debt, you know, and then maybe take more or whatever, right?

From that point of view, I don't want it to be over leveraged and how I think about it is, you know, it's a percentage of, I would say, there's a few metrics. One is, you know, you want to have a cash runway for at least the next 12 months, maybe 18 months. So I want to see the company, the company should be able to service the debt for like the foreseeable future.

which for startups is like 12 to 18 months, right? So you should be able to, you should look forward and say, like, I'll be able to service it for the next 12 to 18 months. The other thing is it's just a percentage of like the capital that's been raised to date. And so we really, and a percentage of the valuation of the business. So we come in alongside an equity round. So, you know, to give you an example, if there's an equity round of 10 million,

And the pre -money valuation is 40, so post -money is 50. How much is the right amount of debt for the company to have that has a valuation of 50, and has just raised 10 million, and maybe raised another 10 million before that in various other routes? And the answer to that is probably like 5 million or something like that. It's like 10 % of the value, 10 to 15, maybe 20 % of the valuation. And sort of, you know,

something like, you know, no more than 50 % of the current round and no more than maybe 30, 25 or so percent of the capital is raised. So that's how I would triangulate it. It should be like a minority piece of your capital structure at this stage, not like a majority piece, which happens when you're like, you know, an infrastructure business, you know, earning a billion a year.

Mudassir (47:16.245)
Totally makes sense. Okay. So where do you see the future of venture growth that heading in the next few years? Are there any emerging trends you think like there's going to be some somewhere around the horizon or something?

Denis (47:32.774)
Interesting question. I may not be the best person to answer that because

Mudassir (47:38.773)
Say something like, AI is going to take over venture debt.

Denis (47:42.854)
Yeah, AI is gonna... I actually don't think it will. I think AI might take over other debt because all the work that a bank does to credit score a company can easily be replaced by a mark one IBM computer from the 70s, but anyway, that's a different story. Whereas with growth debt, there's quite a lot of...

Mudassir (47:46.773)
Yeah, yeah, I agree.

Mudassir (47:56.949)
Yeah.

Denis (48:09.126)
like judgment and like a bespoke work that has to be done for each company. It's not a commodity, you know, just yet. But I was going to say, I mean, look, I've been in venture debt much less than a lot of people that are in my position, right? So, you know, I haven't had the benefit of kind of seeing the full history of the product, you know, from its inception. But look, I, yeah, I, I,

I don't think it's as susceptible to automation as or commoditization as direct debt. So, you know, like this sort of trend of automating and securitizing, you know, as much as possible, it's probably not applicable to venture debt. Interesting, interesting question about, you know, kind of trends.

It's tough to say because look, I think fundamentally in the first like two or three years of a company, like there's not that much, like you can, you can really like automate. It's not like AI is going to come and say, well, like, like starting a business is going to be, you know, AI driven, you know, you have to start a business like manually, right. And then at some point, like you put in AI to optimize this and that, and then you kind of do, do, do things like this. And we play at the end where it's still quite manual.

Mudassir (49:24.789)
Okay.

Denis (49:35.302)
And therefore we are still a fairly kind of, I wouldn't say manual, but we're still quite a judgment driven product. And so I think it's actually the least affected part of like the spectrum versus, you know, everything else that is more standardized and easy to kind of put into a stencil and work with. So look, I think it's, I don't think that, I don't foresee like massive.

Mudassir (49:43.125)
Hmm.

Denis (50:02.022)
shifts in either concept or how it's done. There's going to be swings and roundabouts about like good times and bad times, but I think fundamentally the product probably will have a place for the next 10 years in a similar form to now.

Mudassir (50:18.837)
Okay, second last, what's the biggest lesson you have learned in your career regarding investment and all? Like could be anything, like I don't want to limit it to just investment, but the biggest, like one biggest thing you have to narrow down to just one. What would that be?

Denis (50:28.678)
Mm -mm.

Denis (50:40.166)
like what do I say without being completely cliche? Look, if I look back, I learned the most in situations that have been the toughest. I've lived in different countries, I've done different things. And so, you know, you...

Mudassir (50:46.005)
Yeah.

Denis (51:08.198)
I wouldn't encourage people to drift. I think the lesson that I learned is, don't be comfortable. Do something that's uncomfortable, whether it's move somewhere or do something different because it will ultimately add dimensions to your skill set and your perspective that are...

difficult for others to obtain. So don't drift, don't be comfortable, take things that are risky, make them work, be resilient. And if they don't work, it's okay. Like, you know, I wouldn't recommend that people just focus on the promotion, next promotion, this and that and that, and becoming a title and all this sort of stuff. Like it's not about that. You know, the career is a winding path.

Mudassir (52:02.709)
Make sense. That's a good one. Okay. The last one is, which is kind of my favorite as well. What's your best and worst investments to the date?

Denis (52:10.502)
What's your best and best performance?

Denis (52:15.974)
Best and worst.

So look, I'm not going to talk about the fund. I'll talk about personal stuff. My best investment, okay, if I want to be really honest, I'll say it's family, but it's not a financial answer. So I understand that people are not looking for that, right? But that's the best investment you'll ever make.

family and kids. Yeah, well starting a family, having a family, you know, investing time, I guess, in your family, in your marriage, whatever. Like, that's like, don't underestimate that. But financially, look, like my best investments have been, you know, when COVID happened, I went and bought everything that wasn't nailed down.

Mudassir (52:50.453)
Is like starting a family?

Denis (53:17.574)
Basically, right. And so I put in, you know, a lot of, I was quite cash. I was quite liquid at the time. And so I, I bought everything from, you know, Amazon to Microsoft to Airbus and all those things are like plus 200 % since then. So to me, that was like a no brainer, in, in a way, I mean, I, I missed out on, on Nvidia because I thought it was already kind of overvalued and then it went up another tweet.

Mudassir (53:41.429)
my, okay. Okay. Yeah.

Denis (53:46.598)
And the worst investment was I got onto this, to an NFT fad and invested in a small company that was going to, it was actually started, not started, but supported by somebody I knew and a friend of mine. And so I thought, if nothing else, I'll learn about NFTs. And so I invested in this NFT business, which went under in under a year. So that was written off.

Mudassir (53:52.981)
Yeah.

Mudassir (54:10.933)
Do you still own any of those NFTs?

Denis (54:15.526)
It wasn't NFTs, it was an NFT platform, right? It was like the thing that would facilitate a brand to create NFTs. You'd sort of go to Nike and you'd say, well, use that platform to create Nike NFTs. But then after the whole fad ended, nobody cared about that anymore. And so this NFT platform ran out of cash and closed. So I lost all that money in a year.

Mudassir (54:18.661)
okay. Yeah. Yeah.

Mudassir (54:26.517)
Yeah.

Mudassir (54:41.204)
I know, I am kind of a victim of crypto, NFT, myself so I can totally relate to that. Question for the next guest.

Denis (54:52.742)
for the next guest.

Mudassir (54:55.861)
I haven't asked you. OK, so sorry. I just should have told you that. So rolling back. So Dennis, we do have this one small ritual on the podcast. So what we do is we ask all guests a question for the next guest without telling who the next guest is going to be. So the previous guest left a question for you, which I'm going to ask you. And then I'm obviously going to take a question from you for the next guest. But it's not going to be real. It's not going to be part of the recording. So the question that the last guest left for you is,

Denis (55:10.726)
Mudassir (55:25.077)
What is it that is coming up this year that you're very interested and excited about?

Denis (55:32.614)
mate, I can't tell you that yet. I mean there's a specific thing that's coming up, but I'm not at liberty to say what it is. I'm sorry.

Mudassir (55:35.445)
Okay.

Mudassir (55:40.885)
Let's share that. Let's take global trend or something like that. Let's talk about that. Maybe not something business related.

Denis (55:50.758)
Mate, that - that - that - there are -

Mudassir (55:52.181)
I think everything has an answer these days and the answer is AI. But let's see.

Denis (55:57.926)
No, I refuse to talk about AI and say AI.

Denis (56:07.782)
Look, there's a lot of interesting things happening this year. I guess I look forward to kind of the, you know, just less bloody war in the world. I think war is bad for business. So this year, I'm looking forward to at least some of these wars kind of coming to an end. You know, I don't have a stick in the sand. I'm not going to get political, but...

Mudassir (56:22.453)
Thank you. Yeah.

Mudassir (56:30.069)
Yeah.

Denis (56:37.414)
I just want people to stop having the bloody egos and just resolve things and move on.

Mudassir (56:38.901)
Everybody is stuck.

Mudassir (56:43.285)
Yeah.

Mudassir (56:47.365)
Yeah, I totally agree with that. And also considering that you invest in Israel and like all the stuff that's going on there and then you're in Europe, so Russia and all of that. So yeah, totally agree to that. Now the question for the next guest. Sorry I did not ask you that before.

Denis (57:06.47)
Man, you should have given me more time to think about this. Because I don't even know who the next guest is, or what they do. But I guess it's really like...

Mudassir (57:11.253)
Okay.

Yeah. I'll give you some hint. I'll give you some hint, okay? Let me see who the next guy is going to be. So today's ninth. And the next one. So that guy is an entrepreneur, and he's built at least five, 10 companies and sold all of them. So some context.

Denis (57:21.894)
Yeah.

Denis (57:37.958)
Which private island would you like to buy most if you sold 10 companies?

Mudassir (57:41.141)
same context, yeah.

Mudassir (57:45.461)
Okay. Okay. Probably the one in New York. Okay. Awesome. Yeah, I know. But you know, you sold 10 companies.

Denis (57:55.526)
Well, yeah, that's expensive.

Denis (58:01.894)
Let me think of a better question. It's a stupid question.

Mudassir (58:04.309)
Okay, please go ahead. Please go ahead. Okay.

Denis (58:12.55)
Look, I guess, what is it that drives somebody like that to keep starting new things? You know what I mean? Like, is it just money? Is it reaffirmation of success? Is it a competition and being a winner by having a successful exit? Like, what is the primary driver for you to do startup number 11?

Mudassir (58:22.517)
Interesting. Yeah.

Mudassir (58:30.321)
Mm -hmm.

Mudassir (58:42.869)
Good one, that's a deep one. Okay, thank you, thank you for that. Yeah, yeah. Probably number three, yeah. And then you'll stop and you'll be like, man, I'm done with it. I am a living testament of that. Once you do three or four and then you're like, go to hell. I don't wanna build another product. Okay, so let me pause the recording, but please stay after I've paused, okay? All right, awesome. Rolling back.

Denis (58:46.15)
No, because like I wouldn't do number 11. I would do number 2 and then do something else.

Denis (59:03.91)
Yeah.

Denis (59:08.518)
Mm -hmm.

Mudassir (59:11.573)
Thank you so much, Dennis. Thank you so much for the time. I really appreciate it. Appreciate talking to you. And thank you for all the wisdom, candor, knowledge. It means a lot to me.

Denis (59:21.67)
It's been fun man, hopefully we can do it again and thanks for having me.

Mudassir (59:23.637)
Thank you. Absolutely. Absolutely.