Borrow from risk-tolerant lenders at 15-20% to buy holiday inventory, not raise VC

David Barnard… I did see in researching, and anybody who listened to this episode and wants to enter this or is just more curious, we'll see, that you did I believe some form of venture debt or inventory debt. This won't be super applicable to most of our audience. But I'm curious, just a brief overview of in a hardware business, that facility is really important, but it's not actually raising money. So, how did that work? Give me the two minute overview.

Michael SegalIn the early days, I had personally a weekly cash flow model, because you could be at zero cash in the bank and then millions the next day, if the next day is Black Friday. By the way, you have to buy all your inventory weeks in advance for it to be produced, shipped over. So, you have to play this incredibly delicate cash planning game in a way that most businesses... And by the way, even most hardware businesses or physical goods. If you're in cosmetics, you don't care, because your cost of goods is 10%. Our cost of goods is like 50%, so we're spending insane amounts of money to just buy the stuff. Now your point is you don't have to raise venture. Well, yes and no. It depends how fast you're growing.

Michael SegalIf we're like, we want to grow four X and we need this much money, well the problem is the bank is going to say, I'm not on board with that. That's scary. What if you don't grow it all or you shrink, then we've lost all of our money and we're sitting on a bunch of inventory that, by the way, we can't even sell because it's connected device. You need to be around to run it. So, we've been incredibly prudent about growing fast, but not too fast. And then finding lenders who are more risk friendly than a bank, but less expensive than debt. It's that happy middle of... There were times when we paid 15 to 20% annualized, but it made sense when you do our profit numbers to do that, instead of raising equity. We could afford it.

Michael SegalI would trade off gross margins all day long instead of selling a piece of the company. So, that's what we did. We found those creative lenders and we still work with fantastic... I don't know if people say fantastic and we love them about their lenders, but they're fantastic and we love them. And we're very lucky to have found them and I think they're happy with us. So, it's finding that really good relationship with somebody who gets what you're doing and is willing to charge more for a little bit more risky debt, basically.

David BarnardAnd we do see this starting to happen in the software only side of things as well, Ladder raised $100 million facility with General Catalyst for user acquisition and very similar things. It's like they could've gone out and raised more venture capital, but why take the dilution when General Catalyst has a fantastic product to get access to tens or hundreds of millions of dollars, if you're the right product and the math works. So, it is …