0:00:00 - (Melissa Widner): It feels to me like the dot com boom but on steroids. And Today it's like 97% are AI companies. They're the same companies, but the incumbent's not going to give up the customer. They should always, always, always take $1 million in revenue based financing. Because you're saying no 99 times for every one time you say yes. Companies don't think they have to have venture early on to be credible.

0:00:28 - (Andrew Kazlow): Welcome to the Diligent observer where we help angel investors see what most miss. I'm your host, Andrew, and every week we explore what works, what doesn't, and why through conversations with experienced startup investors and operators. My guest today is Melissa Widner, CEO of Lighter Capital, which specializes in providing revenue based financing for B2B SaaS companies. In this episode, Melissa explains why the so called SaaS pocalypse hasn't really shown up.

0:00:55 - (Andrew Kazlow): The Lighter portfolio walks through how the revenue based model differs from the venture model and we get to chat about how every company is now an AI company. I hope you enjoy learning from Melissa as much as I did. Melissa, thank you for being with me today.

0:01:19 - (Melissa Widner): Thank you for having me, Andy.

0:01:21 - (Andrew Kazlow): Well, I am excited for this conversation on a number of fronts, but what I would love to start with is what are you excited about right now?

0:01:30 - (Melissa Widner): I love talking about angel investing, so I'm very excited about this conversation. And it's just an exciting time in the market right now. I think everything that it's just an exciting time in the world right now. Everything going on with AI, it feels to me like the dot com boom, but on steroids. So it's just a wonderful time to be in a business.

0:01:55 - (Andrew Kazlow): So say more about that because you were there and you're a key part of the boom. As I understand you ran a business exited just prior to 2000. Tell me more about the similarities you see.

0:02:10 - (Melissa Widner): Well, just a lot of excitement and a lot of change. Right. The Internet was going to change everything and it did change everything. And the same thing is happening with AI, but just at a much faster pace.

0:02:22 - (Andrew Kazlow): One of the conversations I've had a number of times on this show is AI replacing SaaS. People thinking SaaS is dead. I love your reaction to that. I imagine as a, you know, given the work that you do, you have a pretty well rehearsed kind of rebuttal to that. So I'd love to hear your take on the SaaS is dead line of thinking.

0:02:41 - (Melissa Widner): Well, Lighter Capital has been around for 16 years and we mostly fund B2B SaaS companies. So yeah, this SaaS apocalypse has been an interesting topic for us and I can tell you what we're seeing in our portfolio. We've done over 1200 rounds of financing and at any time we have between 100 and 150 companies in our portfolio. It's all non dilutive funding. So we have. About a year and a half ago we were much more concerned with the effect AI would have on our portfolio than we are today. Because what we've seen happen is we haven't seen our customer, we haven't seen mass churn among our customers customers where they're deciding that vive code or switching to an AI native product.

0:03:36 - (Melissa Widner): But what we are seeing is that our customers are just becoming a lot more efficient. So they're able to sometimes cut costs or grow without adding costs because development costs, which was the primary expense line on their balance sheet have just gone down dramatically with AI, as everybody knows. So what we're seeing is the most important aspect is understanding business processes. So our customers who understand these, who've been in this business for, who've been in the business for a long time are the best position to solve the, solve the problems of their customers.

0:04:16 - (Andrew Kazlow): So essentially what you're seeing in the portfolio is customers of your software. Of our customers, which are the software startups aren't actually weaving their, just relying on and benefiting from the expanded pace of innovation in those customers in those companies.

0:04:36 - (Melissa Widner): Yeah, we're not, we're not seeing churn as a result of AI at all. What, what we are seeing is the, the exit multiples. As you probably know, public company SaaS exit multiples dropped a lot in Q1, they rebounded somewhat in Q2, but they're still below what they were if you, you know, if you look at sort of average historical levels, especially over the last 10 years. So VCs have pulled back on investing in SaaS, companies that are looking at, you know, native AI.

0:05:12 - (Melissa Widner): Every VC who was a SAS investor two years ago is saying we do deep tech or native AI, but because they're not sure exit multiples. And as a dc, you're looking for that, you're looking for, you know, I'm going to examine invest today at a certain valuation and hopefully sell it at 10 plus X at some point. And at lighter capital, we're, we're not focused on that at all. We're focused on consistent revenue. So revenue based financing is really where we're financing the revenue and the ability to predict the revenue.

0:05:44 - (Melissa Widner): So exit multiples aren't something that we take into consideration really at all when we're making our financing decisions. So. So actually what we've seen more than in the past is companies that would probably otherwise go down the venture path or maybe are already on the venture path coming to us because they don't want to go out and do a priced round because VCs have pulled back on SaaS and a lot of VCs are sending us their SaaS. Companies that are doing well, they're growing, they're not having customer churn.

0:06:17 - (Melissa Widner): But it's just a tough market to raise if you're from venture capitalists today.

0:06:24 - (Andrew Kazlow): So where would you draw the line? This, this is a question I've been thinking about and I struggle to answer is like what's the difference between a SaaS company and an AI company?

0:06:32 - (Melissa Widner): Exactly.

0:06:33 - (Andrew Kazlow): Because every company is an AI company now. And so like this is, I get, I get super confused on how you even draw the line between those businesses. Like re just react to that. Help me understand.

0:06:45 - (Melissa Widner): Well, I joke, but it's actually kind of of true. If you go back two years ago, you know, we had a few AI companies in our portfolio. A year ago maybe half of them were AI companies and today it's like 97% are AI companies. They're the same companies. So everyone's an AI company right now. So exactly where do you draw the line? Which is another similarity to the dot com area era when everybody just slapped a dot, every tech company just slapped dot com on the end of their name and they were a dot com company.

0:07:15 - (Andrew Kazlow): So I guess draw that line for me. Is it a, like this is how we charge, it's on a monthly basis and so that's where the line gets drawn versus like a token based model usage type business. Is it business model correlated? Like how do you articulate.

0:07:29 - (Melissa Widner): Very blurry right now. So what we're seeing is traditional SaaS companies, which is the world where we live, you know, we're funding companies that already, that have, that already have revenue and were funding their revenue in terms of where you would draw the line in terms of what's an AI company versus a non AI company. Almost every company is saying they're an AI company right now.

0:07:57 - (Andrew Kazlow): Yeah, that makes sense and checks with especially what I'm seeing. I'm glad you're confused too. Yeah, I'm glad you're confused too. So let's talk about some of the metrics and the things that you guys are publishing. I've personally enjoyed just getting into the weeds, but walk me through some of your favorite benchmarks. The things that you guys have uncovered with this portfolio that you think our audience should know about.

0:08:22 - (Melissa Widner): Well, Lighter Capital puts out a benchmarking report quarterly. So it's actually, there's a lot of really interesting data in there. And I think what's different is our data is private company data, which is typically difficult to get. I didn't have access to that kind of data even as a vc. So you can look at revenue growth, which we're seeing has slightly slow over the last year, but not as much as you would think.

0:08:53 - (Melissa Widner): So we've seen what we've seen a slight decline in revenue growth. What we have seen is an improvement to bottom lines because costs have gone down a lot as a result of AI.

0:09:08 - (Andrew Kazlow): Other, other key benchmark observations in the more recent reports you guys have published.

0:09:13 - (Melissa Widner): Well, what everybody, what most companies are focused on is they want to know what's my company worth? What's the valuation? And it's worth what someone will pay for it. But they, we put out public. We, you know, we, we, we publish public company benchmarks. And if you're looking at public SAS company valuations, they declined a lot like we talked about earlier in Q1, but they rebounded quite a bit in Q2 of this year.

0:09:41 - (Melissa Widner): But they're still down from historical levels, especially in the last decade. If you look at historical levels over the last decade, if you go back to, you know, 2009, 2010, we're still way above, you know, multiples for SaaS companies in, in those times.

0:09:58 - (Andrew Kazlow): It's fascinating to hear that given the doom and gloom around, you know, SaaS like to hear you articulate that. It's, it's fascinating to hear that it's not perhaps as dire as the story gets told.

0:10:11 - (Melissa Widner): Well, I mean, just think about, like, think about a specific case. Right? So a company that I'll, I'll talk about the company, you know, that I started a long time ago and sold to Concur. We did. We automated procurement. So we manage procurement for large enterprises. So think of a company in that space today. They've got a bunch of large enterprises. It probably took them, it's probably pretty expensive to build out their tech. When they built out their tech, you know, they had to hire very expensive developers to build that out. It took a lot to go acquire those customers.

0:10:51 - (Melissa Widner): There was a lot to do the implementation into those customers to get their product integrated at the customer site. So what are the customers doing now that there's AI? Are the customers saying, we're going to rip this out and by code it, you know that's not happening even though they might be able to who's going to maintain it. So we are not seeing that happening, especially with anything that has any kind of complexity to it or are they going to A company could start in that space with a lot lower costs than the incumbent because development costs are so much lower as a result of AI.

0:11:28 - (Melissa Widner): But the incumbent's not going to give up the customer, right? So there might be some pricing pressure because the customer has other options because it's easier for others to get into the space. But the incumbent has such an advantage because they already have the customer, their product's already on prem and they understand the business problem more than anybody. So we're not seeing, as we talked about a little bit earlier, this fear that really was in the market say a year and a half ago, companies customers ripping out products, either vibe coding or replacing them with AI native solutions.

0:12:03 - (Melissa Widner): What we have seen is our customers who tend to be smaller businesses, most of our companies that we fund have between 1 and 5 million in revenue at the time that lighter capital funds them. What we are seeing is they're just becoming a lot more efficient and a lot faster at releasing new products.

0:12:19 - (Andrew Kazlow): A quick note before we continue the conversation. Alongside the Diligent observer podcast and newsletter, I also run an outsourced operations service specifically built to serve angel networks. My team handles things like initial screening, social media, newsletter prep, platform management and a whole lot more. The kinds of things that either aren't getting done or shouldn't be done by busy community leaders.

0:12:40 - (Andrew Kazlow): If that sounds interesting to you, send me a note. Now back to it. So what makes a startup, let's say a good fit for a revenue based financing model specifically? Obviously a B2B SaaS startup. Like what makes it a good fit to go the revenue based financing route versus traditional equity or venture financing?

0:13:03 - (Melissa Widner): Well, so I, I was an entrepreneur and had two companies that were primarily bootstrapped, angel backed and had good exits and, and then I was in venture for the better part of two decades and I, I love this business model because as a venture capitalist, you know you can't fund a lot of businesses you're funding, you know, 1% of the businesses that you're looking at and a lot of companies just aren't are going to go down the venture path. It's really hard to get Venture capitalists are unicorn hunting. There's a lot of great companies out there that aren't necessarily going down that path or going down that path right now.

0:13:45 - (Melissa Widner): But if a company has an option to take say a million dollars from lighter capital or revenue based financing versus a million dollars in venture, they should always, always, always take the million dollars in revenue based financing, right? Because it's a lot less expensive, it's a lot less intrusive. We're not taking equity, we're not taking control. So at the exit you end up with a lot more of your company.

0:14:14 - (Melissa Widner): But why you would go down the venture path and why 25% of the companies that we fund do go down the venture path, they're either already on it or they take our money to start with and then go on a venture path is because you just need more than you can get revenue based financing. So we're able to fund for larger companies up to half of their arrival. So and if for smaller companies up generally up to a third of their their ARR.

0:14:40 - (Melissa Widner): So if you think of a company doing say a million and a half in revenue, if they fit our criteria, we could give them a half a million dollars, which is great for a company that's saying, okay, we're ready now to hire a couple salespeople, we want to launch a new product, we need a half a million dollars. But if that company wants to raise 5 million, they have to go down the venture path. Or even if they want to raise a million, they're going to have to go down the dilutive path.

0:15:03 - (Melissa Widner): But it's something that companies oftentimes choose to combine, especially if it's with angel investors. So a lot of times we're funding companies that are taking say half a million from angels and a half a million from lighter capital.

0:15:16 - (Andrew Kazlow): And what are some of the key metrics or key things that you guys uniquely focus on given your position? I can guess at a few of them. But like versus the traditional venture questions, I imagine your underwriting looks at a lot of the same things, but articulate what's distinct and is uniquely important. When you're looking at these B2B sites, companies for the lighter capital model, well,

0:15:37 - (Melissa Widner): the underwriting is actually pretty different. Of course we're, we're looking for stickiness, we're looking for low churn, which are metrics venture capitalists. And I as a venture capitalist looked at also. But really as a venture capitalist capitalist, I was looking at what's the ultimate exit going to be and what could this company sell for. And that's not something at lighter capital we take into account at all.

0:16:03 - (Melissa Widner): We're looking at can you use our money for growth and Will you be able to eventually pay back our money? And not through an exit, but just organically. So not through an exit or a future financing round. So it's a really different lens. We love to celebrate. We have so many of our companies that have had great exits and a lot of times the founder owns all or almost all of the company and we love to celebrate those. But that's not something that we're looking at when we do the underwriting or make the financing decision.

0:16:38 - (Melissa Widner): We're looking at churn, we're looking at growth, we're looking at burn. So we would like to see with our money that the company has at least 12 months of Runway.

0:16:48 - (Andrew Kazlow): It's so fascinating how the objective and the way that the investor makes money is so different. I'm curious what it was like for you, sort of transitioning from, you know, venture mindset to this mindset, like, what was that like? And maybe give a few words on your personal journey into the lighter capital model.

0:17:08 - (Melissa Widner): Well, my personal journey is I was a managing director at National Australia Bank's venture fund and we invested in fintech companies. And one of the companies we invested in was, along with Silicon Valley bank was lighter capital in 2018. And I went on their board and then I moved from the board position to the CEO role in 2020. And I just loved the business. I loved the fact that we could fund all of these companies.

0:17:36 - (Melissa Widner): And in venture, you're really in the rejection business and the disappointment business because you're saying no 99 times for every one time you say yes. So you're in venture. I was constantly seeing these companies that are growing nicely, great customers, great entrepreneurs, but we couldn't help them. You know, they, they because we, we funded such a small percentage of companies we met with and we're looking, you know, we're really doing that unicorn hunting.

0:18:04 - (Melissa Widner): So. But the, the transition is a good question because I, the mindset had to shift from, you know, looking at companies and saying I would never fund this company as a venture capitalist. Because you're looking through a lens of, you know, who's going to buy this for 10, 20, 30x of what we're paying today versus, you know, does this company have a steady, predictable revenue stream? So it's a very different lens, do you think?

0:18:31 - (Andrew Kazlow): I'm curious your thoughts on this because folks may disagree with me, but one of the things I love about angel investors is that they're individual investors and they can do whatever they want with their money. And so angels technically have the option to do A piece of their portfolio into the unicorn hunting strategy and potentially some into a comparable strategy here where angels can look at debt deals and you know, all kinds of creative ROI mechanisms. I'm curious, what if any overlap do you see for, for the angel investor listening to this. Like that's not really a question, but I'm just curious your reactions as I'm, as I'm talking.

0:19:11 - (Melissa Widner): Well, and I'm, I've been an angel investor for a long time. I think I made my first angel investment after I sold my second company and got really involved in the angel community in Seattle and was involved in alliance of Angels and on their board. And that was one of the first angel communities really in the country and probably in the world. And I can't even, I don't know how many angel investments I've done, probably over 40.

0:19:38 - (Melissa Widner): But in terms of how this fits with angel investing. Is that your question, how revenue based funding financing fits?

0:19:45 - (Andrew Kazlow): I guess I'm just curious your reactions on some, some folks would say that angel investing requires you to match essentially a venture strategy where every deal you're looking at could go to the moon and be a unicorn, all that. Others would say angel investing can also include other direct private investments that have more creative return profiles. And so.

0:20:04 - (Melissa Widner): No, absolutely. And, and I know especially these days there's been, for several years now there's been a real lack of dpi, that's distributions to paid in capital for venture funds. So we have seen angels, I mean angels don't want to do in general, aren't interested in doing debt themselves. There's a lot, you know, we're licensed in 36 states so you have to know what you're doing to lend and you have to make sure that you're in compliance there and you've got a service loan. It's much more complicated than just making an investment and then waiting for a return down the road.

0:20:42 - (Melissa Widner): But we have, we have a lot of angel investors that are, we have a lot of people that are also angel investors who are involved in our, what we call our strategic partners. And that's when we fund deals out of our general warehouse facility and we'll fund them with the group of angels because they want that steady income, they want that monthly check and as opposed to looking for, you know, that really big return at the end.

0:21:06 - (Melissa Widner): So there's that. But then also a lot of companies, I think I mentioned about 25% of the companies that we fund have venture backing or go on to get venture backing, but 75% don't and a big chunk of those 75% have some angel backing. So we fund a lot of companies that have angel backing and a lot of times we're coming in alongside the angels on a deal where, you know, customer, I think we talked about this earlier, but they want a million dollars.

0:21:34 - (Melissa Widner): They might qualify for up to 500,000 from lighter capital and then they're raising 500,000 from angels.

0:21:40 - (Andrew Kazlow): It's a fascinating overlap because it's not an obvious one. Do you feel like there's like, is the revenue based financing world well understood? Is this new? Like it's not often talked about in Venture Circle. So obviously traditional banking has a lot to say about this but articulate what the landscape looks like in the sort of SaaS focused revenue based financing world for me.

0:22:08 - (Melissa Widner): Well, it's not new. Lighter really pioneered the space back in 2010, LiDAR started and really focused on SaaS exclusively or tech companies with recurring revenue exclusively starting in 2012. So it's been around a while. I would say the difference is what we're seeing more and more is companies don't think they have to have venture early on to be credible. Where you know, that was sort of a badge of honor or something that would help you get employees, you know, if you weren't venture backed. And I think more companies are saying wait, there's different ways to finance a company and you don't have to go down that route. And a lot of venture capitalists will tell you you don't have to go down that route. Like going down that route is a very specific path and you know, you better be prepared to be on it.

0:23:04 - (Melissa Widner): But if you want to maintain more control and more equity in your company, especially in the early days, this is a preferable route for most companies as long as you know the, the amount of capital they need doesn't exceed a third of their ARR. Today if you are a pre revenue company and you need money, you have to go down the dilutive path.

0:23:29 - (Andrew Kazlow): Right, Right. That completely makes sense. So I'd love to hear just a few words on your experience kind of in the sovereign wealth world. The you said the National Australia Bank Ventures arm. I think that's fascinating and not something that's deeply understood at least by me and many here in the US I'd love to say more, I'd love to hear just more about that experience. You've also worked across continents and so I'm curious if you have any thoughts or insights on that experience for our listeners.

0:24:04 - (Melissa Widner): Well, I came to Australia in 2009 and now I split my time between Australia and the US of an Australian husband. And the ecosystem was very nation at that time, the Australian ecosystem, I think there were literally three funds in the entire country that had any capital to invest in 2009 venture funds. And it's grown quite a bit. And we've had some, you know, there's some great success stories out of Australia. I mean there are lots, I think there's more Deca corns in Australia per capita right now than any other country in the world.

0:24:44 - (Andrew Kazlow): No kidding.

0:24:46 - (Melissa Widner): That's a per capita basis. But you know, Atlassian Canva, those are some that are really well known. So the, the ecosystem has grown quite a bit. People like to focus on the differences. It's a, it's a common topic for podcasts or panels, you know, what's the difference between the US and Australia? But I think there's actually a lot of similarities too. And the Australian ecosystem has modeled itself a lot over, you know, as, as most startup investment ecosystems.

0:25:17 - (Melissa Widner): They'd model themselves off of Silicon Valley. But I, I would say probably in general there's more companies here that bootstrap and are maybe a little bit scrappier because for so long there was no venture capital, so you had to self fund. So there was a pride in self funding at a time when in the US companies thought they had to be venture backed to be credible.

0:25:48 - (Andrew Kazlow): Do you think that's true across other geographies? Like for example, I recently had someone on the show who's very familiar with the Israeli startup ecosystem and they had something very similar to say that essentially you got to get it, like to get funded locally, you've got to show more, a little more traction than perhaps in other parts of the world. Would you say that that's true across multiple geographies? That the US market just tends to go all in, earlier, faster, or is that unique?

0:26:16 - (Melissa Widner): Well, this is the only other one I've worked in, so I probably can't comment from firsthand experience.

0:26:22 - (Andrew Kazlow): Melissa, thank you again for your time and I look forward to our next conversation. Very much. Thanks for listening to this episode of the Diligent Observer. I'm your host, Andrew, and if you're an angel investor looking for essential angel intel in five minutes every week, I think you'd enjoy my newsletter. I send my best friend stuff, interesting deals and more straight to your inbox so you never miss a thing. Subscribe today at thediligentobserver. Com.