Podcast Transcript
Poya: Welcome back to The Uncharted podcast. This is Poya. I’m here with Baxter, who’s the founder and CEO of Alternative. Baxter, welcome to the show.
Baxter: Oh, yeah. Thanks so much for having me. Really excited.
Poya: Yeah, yeah. No, we’re excited to have you. So, Baxter, we’d like to kick it off with a quick bio, both the personal side as well as business side. So, give us a little bit of context on who you are.
Baxter: Yeah, definitely. So, I grew up in New York City, the financial hub of the world. And I always thought I wanted to get into Finance. Finance was everything back in the 80s, 90s and early 2000s. So, when I graduated from Lehigh University in 2013, I entered investment banking. I worked for two different investment banks and had two very different experiences. One was just much more grueling than the first one, but learned a tremendous amount about financial markets, about equity, debt, about everything that was kind of going on in the world, both from a US perspective as well as a global perspective, and ultimately decided to leave and work for a private equity fund called Victory Park Capital.
Victory Park was one of the first FinTech investors. They started investing in FinTech in 2011. And I really kind of liked this angle that they were continuing to develop and this kind of competitive advantage in the market. So, I spent about four years working in FinTech at Victory Park. I sat on the boards of a number of early-stage FinTech companies, and evaluated investments in the hundreds if not billions of dollars, over the course of that time. This kind of gets it back a little bit to fintech. But I know we’ll talk a lot about fintech. So, I’ll move on. I then joined Apollo Global. I invested in technology companies. Apollo Global manages close to $600 billion now and I was a principal on one of their private equity funds. And then I left to start Alternative about a year ago now.
Poya: So, I got to ask. It sounds like you were enjoying FinTech, you were enjoying your previous world. What got you so excited that you’re like, “Hey, I’m gonna jump in to the wild and found Alternative?”
Baxter: So, my first foray into FinTech was in 2014. I would call this fintech 0.5 and FinTech at the time really came out of the Great Financial Crisis as a way to distribute capital that the banks no longer could distribute given different regulatory challenges. And the world of FinTech at that time was really all about customer acquisition. It was not about back-end underwriting, back-end risk evaluation, it was, you know, “Let’s deploy as much capital as possible, at the highest rate possible, and build a massively profitable book.”
Now, inherently, that’s a predatory model that takes advantage of consumers who don’t have access to capital, to businesses who don’t have access to capital. And it wasn’t until you know, probably 2017, 2018, 2019 when businesses and fintech companies really thought that they could actually lend at a superior level to these earlier FinTech players. And so, I kind of saw the trajectory of this market, and it started to excite me as I left from Victory Park to Apollo and was evaluating leaving Apollo and thought that the whole world would change where, you know, banks ultimately were too slow to move and too slow to underwrite. And this whole new kind of tech neobank environment will ultimately provide capital into this market, and really use the API economy as well as cloud infrastructure to underwrite companies better and assess risks better to bring down the cost of capital for small businesses and for consumers. So, you’re seeing now in FinTech, I would say 1.0, this revolution happened in terms of cost of capital, and being a little bit more efficient as small businesses and consumers get access to capital, which will continue to proliferate. And given that it’s still 1.0, I was just really excited to get into the market and build a business in the space because FinTech 2.0, 3.0, 4.0 is just around the corner.
Poya: 100%. And once you got the idea, one thing I always find fascinating, is like how you go and convince your first set of customers. And this is from like, my go to market background. Like, talk to us, like how you convince your first initial set of customers to take a bet on you?
Baxter: It was a challenge. It’s not easy. I think that what we saw in the market is that we saw a partnership strategy, with the goal to bring down the cost of capital to SMBs, that really does not exist in the market today. And that partnership is really what allowed us to take advantage of some of these early – not take advantage, but to partner with these customers, to ultimately start at $100,000, increase to $200,000, and bring down the cost of capital from 15 to 10, whatever it may be. And I think we developed a number of really strong relationships with our customer base, given that thesis and given that approach.
“Baxter does not want me to have a high cost of capital that I can’t afford. And as I grow, he will allow us to take out more capital.” Now, what ultimately happened is, the competitive market got very competitive very, very quickly. And we saw Pipe and Capchase and a number of other companies raise a tremendous amount of capital. And we knew that that type of financing solution, whether its revenue based or just general, non-diluted financing, would not be a competitive moat to us. And so, we decided pretty early on after raising our seed round to really focus on a payments’ product within the b2b market where we can really create a competitive differentiation, still take the approach of partnering with companies. But that’s really our core product today.
Poya: So, I personally have been a little unimpressed with the consumer products that kind of do what you guys do for a bunch of different reasons. What do you think gives you more confidence that it’ll be stickier and better for the b2b market?
Baxter: So, in the consumer market, it’s a really challenging profile to underwrite. Many folks are living paycheck to paycheck and want a little access to capital and the risk profile of those individuals is very, very high. So, it’s very challenging to narrow down your go-to-market and customer acquisition strategy for the customers that will not be living paycheck to paycheck and will have a little bit more savings. Now, I think a lot of people are doing interesting things in the consumer market, to try to promote savings and try to promote efficient capital spend, that ultimately will allow them to get access to cheaper capital. In the SMB space, I think it’s a similar story. But ultimately, what’s happened is, as the technology markets have expanded, and as SaaS players have expanded, the business models that they ultimately have are much stronger than your typical SMB, whether it’s a local pizza shop, or a local coffee shop. And so, people are able to take a little bit more risk on some of these SaaS players, because of the growth opportunity inherent in the business models. And you’ve seen that both from a macro perspective in terms of just global credit products and flows to software companies. But you’ve also seen that at the early-stage VC market where Capchase and Pipe have been able to provide more efficient capital to some of these smaller businesses.
Poya: Yeah, absolutely. And talking about capital. If you’re willing to talk about it, you’ve raised money. And you’ve done both: debt as well as venture. And one of the things that sometimes I find fascinating is different people take different approaches. And you are the perfect type of person to give us some suggestions on why you did both and why you think founders should sometimes take one method and other times, they should do the other method. Give us some suggestions on how founders should make the kind of decision that you had to make?
Baxter: Yeah, so the decision that I had to make is a little bit different from the underlying – call it – early stage software business that is raising equity and debt to fund their business, right? Because we have a model where we raise equity alongside debt, but that debt is a credit facility that we then lend to our underlying customers. But if I was an early-stage CEO and founder and I am, I think the real goal of, do you raise non-diluted financing or not? Or do you take payment terms from a vendor is all about what the ROI is or the return on investment is. You never take capital from a non-dilutive financing provider if you don’t know where to invest that capital. Ultimately, your mindset should be always about, “If I’m raising capital at 10% from this financing provider, what is my return on that capital? Is it 15%? Is it 20%? Is it 30%?” And in the event that you feel very confident that it is 20%, or it is 25%, or it is even 30, or 40, or 50%, then I would argue to take non-diluted financing every day of the week.
Now, you also need to figure out different capital flows and there’s different spend that you’re able to finance versus not. But the great example is marketing spend. If you’re able to identify that $1 in the door will return $0.30 every month for the next four, five, six months, then, it makes a lot of sense to finance that dollar. Now going back to our business model, we raised equity and we raised debt. The debt was in the form of a credit facility to ultimately provide that dollar spend to our underlying customer. And our core product is a b2b payments product, which ultimately allows any software company to finance their end customer and bring terms to their end customer. So, let me give you a quick example.
If Salesforce has a contract for $60,000 (Salesforce has pretty restrictive pricing requirements). They don’t allow you to pay over time, they don’t allow you to pay quarterly, monthly. They want $60,000 upfront, and then they’ll also charge you for an implementation fee. When we think about our model, we slide into Salesforce, and we allow them to finance a whole massive SMB market that they wouldn’t be able to finance previously. And we finance that and we do that with a form of just a simple financing link that can be embedded in an existing invoice or existing billing platform that you use. So, there’s no integration required. We can set you up in minutes. And ultimately, you can provide that customer the ability to pay over six months or over 12 months. So, now the customer who previously was not able to afford the $60,000 CRM solution can now pay in six installments of $10,000. So, it’s a very efficient manner to finance on a specific product, as well as a specific product like Salesforce where there’s clearly a very, very high ROI attached to a really, really nice, attractive CRM software solution.
Poya: 100%. So, who’s the target audience? Is it software companies that serve SMBs? Is it everybody? I’m just trying to understand, like, who’s the focus if someone’s listening to this?
Baxter: Yeah, the focus is really software solutions and services companies. So, it’s the broader ecosystem. Now, within the ecosystem, you have a number of end customers or end markets, where this is a little bit more appropriate for where you have a large ACV (or Average Contract Value). And you also have a customer or a company who wants to continue to grow and expand into a new market that may or may not be price sensitive. But as everybody knows, whether you’re a Head of Sales or a VP of sales, I mean, how many times does pricing come up in a negotiation? And what we’ve seen with our existing customer base is, we’ve seen that with pay overtime flexible pricing solutions, our customers can bring down the sales cycle by about 15% and increase average contract values by 25% to drive revenue growth by just under 50% on an annualized basis. And this is a huge value driver. And it’s the same thesis and macro that’s played out within the b2c Buy Now Pay Later companies like Affirm and Klarna and Afterpay. And that’s why there’s so much attention in that market. But in the b2b space, there are really not that many players and there’s nobody other than Alternative that provides a complementary product to your existing billing and invoicing platform. Every other player is a rip-and-replace type of player that takes a long time to integrate, you know, is a lot of risk. And may ultimately not be the right solution for 100% of your customers.
Poya: And when you talk to VP of sales or CRO – do they get it and how often do you get objections and I’m curious with what some of the top objections are that you get?
Baxter: Everybody gets it. And the reason why everybody gets it is because the consumer market has done so well. And many of us have only used Affirm, Klarna, and Afterpay. The objections sometimes come up in pricing. So, we charge 5% over six months. Now the way we think about it is, it’s 2% above what credit cards charge. So, it’s a little bit of a premium to credit cards. And many of our customers now want to pass that through to their end customers. So, pay $60,000 upfront, or we’ve partnered with Alternative and you can pay $63,000 over time. And this really empowers the customer to select the option and the solution that they want. Or maybe the end customer doesn’t want to pay $63,000 over six months, but they’re happy to pay $61,500 over two months or three months. And this kind of custom pricing model and alignment ultimately drives revenue growth, which is why it’s worth the 5%. Or it’s worth the 4% in the term of three months, and it allows our partners and our customers to cross sell and upsell additional services and solutions. So, there’s just there’s so much opportunity here, and there’s so much that’s untapped in the b2b space. And that’s really just what gets us so excited.
Poya: Yeah, it’s an exciting opportunity to say the least. And it’s a win-win for everybody. The incentives, I think are much more aligned because on the business side, right, you, in some ways can decrease the time to sale, your ACV goes up. There’s just a bunch of different value props from a SaaS software services business that I see. Well, this has been fantastic.
Baxter: No, no, I am just … I am excited. So, it’s hard for me to sit back. But I think that’s ultimately right. It’s a win-win from the vendor perspective. It’s a win-win from the end customer perspective. And again, going back to our conversation previously about non-dilutive financing, it’s all about aligning the ROI. So, if you’re going to invest in Salesforce, you better believe that it’s going to generate you a return on that investment, or else use a cheaper solution. And the same goes for all of these software products, whether it’s compliance software, and you’re signing up for SOC 2 compliance, you better believe that that SOC 2 compliance is going to be able to bring you on new customers who require SOC 2. And the same goes for this pay-over-time solution. If you can pay for Salesforce over 12 months, and better align your return on that 60,000 spend. So, let’s call it 10 months and call it $6,000 a month, you pay $6,000 month one, you pay $6,000 month two, you pay $6,000 month three, oh, and you’re able to generate more revenue growth from Salesforce because you’re able to identify an opportunity within your customer base. Then, from that investment, you’ve only invested $30,000, and you’re onboarding a customer for $20,000. So, the ROI on that just makes a tremendous amount of sense. And it basically pays for itself over that time horizon. And it allows your equity value of your business to really appreciate once you’ve fully paid off that specific contract. So, it’s a complete win-win. You’re exactly right.
Poya: Yeah. And I got to ask this, because I’m always interested. You can say the category, but I think it’d be even more interesting to say the product. What three products do you most frequently see people use your product to finance or purchase? So, common ones.
Baxter: Yeah, we see this with a couple of things. I mean, a big ad market for us is logistics software. So, you have high ACVs in the logistics space. And ultimately, typically, they’re selling to a very, very highly fragmented SMB market, who oftentimes can’t afford $30,000 or $40,000 up front, but they know and they need the software solution to continue to drive revenue growth. That’s been a really, really strong market for us and we really, really like that market. And same goes for compliance software. It’s a perfect spend, right? I mean, typically, when we think about SOC 2 compliance, specifically, you have J.P. Morgan as a customer onboarding. All of a sudden, they send you an email, and they ask you, are you SOC 2 compliant? And you go back and you realize that you’re not, and immediately you need to onboard with a number of really, really strong players in the space. And you get the bill from them and it’s $25,000. And you just, you have to invest in it, because you have to onboard J.P. Morgan. But now if you can pay over time, it’s a clear strategy, and a clear path forward. I would say those are two of the industries. I mean, there are a number of other end markets that we’re going after where it’s really about return on invested capital and aligning interests and creating this win-win solution.
Poya: Absolutely. Well, this has been fantastic. We appreciate you for coming on in the show and I can’t wait to have you back in six months to see if the categories have expanded because I am sure they’re going to. You have a very large TAM, Total Addressable Market, to hit.
Poya: The one question we love to end every show with: if you could go back to any time – it could be your first investment job when you got into FinTech, it could be before you became a founder – what advice would you give your younger self if you could go back?
Baxter: Take the leap. Build the business you think you can at all times. Take the leap, test it out. Entrepreneurship and building your own business is extremely exciting. It’s an amazing opportunity to learn and just keep going. So, take the leap.
Poya: Yeah, there’s no tomorrow. So, you might as well take advantage of what you want to go after. Well, thanks so much Baxter, for coming on the show. For the folks that want to connect and learn about Alternative and connect with Baxter, he’s one of the most welcoming people I’ve had the pleasure of recently getting to know. So, we will put his contact information in LinkedIn and Twitter, everything in the show notes. Reach out, thank him for coming on the show and until next time, be safe, be well, and thank you Baxter for coming on the show.
Baxter: Thank you so much for having me. It’s been awesome.
