This episode of Dtcpod is also brought to you by Peel Insights, the e commerce analytics platform that supercharges all of your retention efforts every day and with every customer. Go to peelinsights.com.

The subscription market is predicted to grow nearly $500 billion by 2025. Recharge is the leading subscription management solution, helping ecommerce merchants of all sizes launch and scale their subscription offerings. Over 15,000 merchants use subscriptions powered by Recharge to grow their business and their communities by increasing average order value, reducing churn, and providing predictable recurring revenue, turn transactions into long term customer relationships, and experience seamless subscription commerce with Recharge. Check them out at slash dtcpod. What's up, Dtcpod? Today we're joined by Ben Trigo, who is the co founder and CEO of Bainbridge. So, Ben, I'll let you kick us off. Why don't you tell us a little bit about Bainbridge and your background as well?

Thanks, Blaine. It's awesome to be here. So my co founder and I Austin, who's my co founder, believe that connecting networks is what makes the difference in, you know, you want to connect data and you want to connect finance, you want to connect insights and knowledge, and then you want to take action. So Bainbridge is really built around doing those things. It's the combination of data and finance to enable CEOs and leaders of ecom businesses to understand their priorities and take the best actions. And those actions, like today, it's around cash. How do I generate it or get it? How do I maximize profitability? And then how do I maximize my outcomes? How do I get the best possible outcome for all this work and blood, sweat and tears that I'm putting in?

Yeah. And I think one reason that we're really excited to do this episode is because as a founder, when you're starting your business, you have to think about capitalizing in a certain way. And then as that business grows, especially because of the heavy operational aspect of Ecommerce, things start to change. You're making bigger purchase orders, you're scaling up. And so the way you're running a business when you're doing ten to $50 million in revenue annually is much different from when you're on your first purchase order and you're doing your first couple of hundred thousand or first million in revenue. And then obviously it changes and changes as you continue to scale up. So I thought for this episode, what would be really fun to do is kind of do a little crash course in finance, and not too heavy or too boring of finance, but more just like as a founder sort of field guide. In terms of what are the things that you should be thinking about when you're raising capital? What are all your channels to raise capital in? How does that affect the business? How do you think about growing? And then after that we can maybe go into the product.

So does that sound all Right with you?

Yeah, that's awesome.

Cool. So why don't you kick us off? Why don't you tell us a little bit about how a founder should think about capital from the inception of their business? Right, so let's imagine that I want to start maybe a supplements business or an apparel business. I have an idea for a product. I have a name, I have a brand. I'm ready to spin up a website. Maybe I'm even ready to I've been talking to a supplier and they've given me a couple of quotes and I'm ready to get started with my first PO. And now I'm like, okay, this Stuff is really starting to come together. I need to turn this into a company and now I need to start thinking about capitalizing it, to start building it.

What are the first thoughts that kind of come into your mind and what a founder should be thinking about as we cross that first bridge?

Well, that's a great framing of this because the initial reaction of most People is like, okay, let me go out and put a pitch tech together. Let me go raise money, let me go out to friends and family or maybe even some Precede or angel networks. But I think the very first step should be you got to think about capital as just another tool for your business and you also have to be planning ahead for, how am I going to get that capital? So initially you got to get it somehow because your Business isn't generating it, but you ultimately need to generate it yourself. As everybody's found out, it's getting harder and harder to raise money, and even the alternative lending is getting harder. And your ability to raise money is also directly related to your ability to generate cash because all the investors are going to Be like, eventually you need to make money and make a profit. So really wrapping your head around that initially is critical. And thinking through some of those issues where we start people is you think of capital just as like, you're going to generate it yourself or you're going to basically buy it. If you're buying it, you're selling equity or you're buying it in the form of loans where you're paying interest.

And then you want to think through, how profitable can this business be, because that's going to directly determine my ability to generate my own cash. Then you want to start thinking through things around. If I have a repeat purchase business, like a supplements business, I should have good repeat business out of that. How am I going to do that and how important is that going to be and how am I going to drive that, and how quickly do I get paid back when I acquire those customers and how much profit or excess cash are they generating for me? And then the last thing to really think through is like, how can I shorten my cash conversion cycle as much as possible? So this sounds technical, but it's not really not. The cash conversion cycle is literally you buy inventory from your suppliers, you put money out, and then there's this period of time when it comes into you, and then you sell it. And then when you sell it, that's the end of the cash conversion cycle. And oftentimes people don't think through that well enough. And the problem is you have ever increasing money going out before you can generate it yourself.

So it sounds like sorry, go ahead.

Blaine no, and I think that's a really good point and really good framework to think about things, and one that you just touched on. It's like, obviously here you're in the business of coming up with a product that can generate more revenue and you can sell it for more than you're making it, and you can cover all your input costs and then some, and that's going to make you happy, your investors happy. And that's ultimately what a business is about. But I think a couple of the inputs that you had just pointed out that people may not think so much about is a the capital, what's the cost of it, what are you selling to get it? B, how can I use whatever product I'm making? How can I invest in a product that I can turn into cash generating as quick as possible? And three, how can I cut down that cash conversion cycle as quickly as I think, you know, just to piggyback off of an episode that we just did with this guy, Kean Golzari, who's an absolute beast in Sourcing, right? And we were talking about him, he sourced for everyone, and we're like, okay, how does it work? How long does it take? How should a business think about when they're sourcing and he's like, look, when you're sourcing products, you're going to have 14 days where you're getting the spec sheet. Then you can budget another 14 until you get the sample. After that, it's going to be another 30 days before you get the production sample, and you're going to have more time before they actually ship it to you. And then you're going to see it, and then you're going to have to go back to them, maybe you have to make changes. And then you're like, okay, now I need you to actually send me the real production sample off the line to make sure the whole batch is good once we've approved that, okay, great.

We can go into production. Now, budget this many days for production once your goods have been produced, now you have to ship it, right? And if you're shipping it from Asia, it's going to take longer to get to the East Coast than it is the West Coast. You got a budget for that. And then now, once you've got your goods, now you actually have to sell them. And then you have to think about restocking and all of that kind of ties into that cash conversion cycle that you were talking about. So as you think about that cash conversion cycle, what do you see from brands? How long does it take them to convert their cash from the goods that they're buying to the goods that they're selling? I don't know if you've seen any good benchmarks or how you would think about it across some of the brands that you've been working with.

Well, the all time hero of this is Amazon, right? Which was able to pull off a negative cash conversion cycle. And so what that means is that they were getting paid in advance of having to buy the inventory. And so when you think about Amazon, I'm old enough to kind of remember when they sold books, that's all they you know, that was like, why they could drive the prices down so low, because, in effect, they had this cash flywheel and they didn't have to worry about it.

How did they do that? How did they get to a negative cash conversion cycle?

Well, I don't know the exact answer, but I'm guessing that they probably took advantage of the fact that the Internet, everybody was used to selling to bookstores and sort of these credit terms, right? So they just probably took advantage of that and said, well, I'm selling it today, and then I'll go out and buy it from you tomorrow.

Got you.

In between, I have plenty of time to get it and ship it or whatever. So getting to negative would be incredible. It would almost guarantee success in your business. You'd have to really screw it up. Getting as close to zero is fantastic. And to answer your question about benchmarks, highly dependent on your supply chain, if it's China and what type of product it is and all sorts of things. And if you're buying finished goods or manufacturing yourself, but a pretty lousy cash conversion cycle would be up in 270 days and closing in on a year. Hey, you've got this thing pretty nailed.

Is getting down below 90 days and 60, and you can turn that quickly. A way to think about cash conversion cycle, sometimes it's helpful for people is if you think about like, compounding interest. So if I loan you money, Blaine, and I ask for it back in a year, I've done one turn of that money. But if I can loan you money and you have to pay me back tomorrow, I can do 365 turns of that money so I can grow up that much faster. And that's how you should be thinking about your cash as a founder, as you invest in inventory. How fast can I turn this? Because the faster I can turn it, the more I can make each spin through the flywheel. The more I'll have naturally over time, the less I'll have to go out and raise. So if you're interested in dilution, which you should be, if you're listening to this podcast, you should be thinking those issues through.

Yeah, I mean, I think that's a really great way to think about it in terms of almost just like interest. Right. The more times that it can compound, the better it's going to be. And the slower your cash conversion cycle is, the less amount of times you're going to be able to make it through that cash conversion cycle, which just slows the growth. Whereas if you can really shorten it, all of a sudden things start to like everyone knows compound interest becomes exponential over time. In the beginning it's slow, but the more and more times you go through that exponential equation, it starts to look pretty good over time. So I think that's a really good analogy for that. And before we get too far into the nuts and bolts and the finances of these business, let's just take a step back and go into just general financing.

I know we had talked about that. There's a couple of different options. Maybe things like people could bootstrap, people could turn to friends and family, people could think about VCs, people could think about crowdfunding. So as a founder who's getting into the space, how do you think about some of these different options? What are some of the pros and cons of each? And yeah, what are, what are your thoughts on raising that first initial capital to get that flywheel going?

Well, friends and family is great because they're your friends and family, right? So they're often buying into you, your vision. They're not going to hold you to a standard of a VC. Typically, crowdfunding, I think, is also really interesting because it oftentimes doesn't translate into equity and it gives you some really good signal on the viability of your product. What does the market think of it? So I think those are two awesome areas. I'd be super careful about running up my credit cards and taking on a lot of personal debt that stuff can just like the compounding, I mean there's compounding interest, right? And it really stings when it's like 18 20% and you're taking out a second mortgage or something like that even before you get going. So that I would try to avoid at all costs. I think the other thing that people will often do is they run out to institutional investors really quickly. I think you can waste an enormous amount of time doing that before you have the key proof points that they're going to want to see.

And then the last point I would make about a lot of the pitches that you see very early stage are really focused on the product. It's beautiful, here's how we're going to do it, the sourcing the market. But they haven't really laid out these concepts of like here's how we're going to make money and we're not going to endlessly be coming back to you or other people for more. So giving a little bit of extra thought there, sorry to cut you up. Friends and family crowdfunding would be my top choices.

Yeah, and I think the interesting thing, especially every business is a little bit different. So even like VC, I know that there are definitely VC funds that focus on this sort of thing. But you also have to understand that the returns that a VC is looking for when you're raising are really outsized. So for you to do that, you have to be going after a really big market and then obviously it's about building a good product. But you need to be able to build from nothing operations that can really scale. Because whether you're going into retail, into Amazon, into your own channels, et cetera, you're going to have to build this omni channel sort of machine that's gonna be everywhere. If you really hope to be a big win for the VCs because they need outsized returns for your project to win. So I think what's appealing potentially about even bootstrap projects or when you can get early friends and family backing is the fact that you can really take your time in testing your product and growing it at a natural rate that your product sort of needs as opposed to being just all in or nothing.

Now that doesn't mean that once you've proven out initial product market fit and you're ready to scale, maybe there is a great VC partner that it makes sense to layer in some capital on top of the growth that you're already seeing. Or maybe for the right founders it makes sense to raise up front. But I just think it's nice to be able to understand what the mix is. And we've had many guests on the podcast and it's always interesting to hear from them how they've got funded. And we've kind of got an even mix. We've got a bunch of really great success stories where they went to crowdfunding sites and were able to fully launch there, pay for their whole production run. It gave them the capital they needed. They tested out their sale, they had proof of concept, people loved it.

And then that was the first turn of their cash conversion cycle, if you will. And then we've got others that went totally friends and family bootstrapped. Next thing you know, they're on Shark Tank raising a bunch of money and turning down the sharks and growing that way. And then you've got a couple that are going after really big markets and maybe they're doing something that's slightly different than a typical D to C brand. Maybe it has parts that like one or two parts that are very reminiscent of a D to C brand, but then it has a back end where this business can scale way beyond any one brand. And those are the types that VCs like with a little bit bigger market and a little bit different product. So that's a quick nice overview of the different types of funding paths to get launching with the business and then let's move on to growth capital, right? So let's assume that we've started our business now, whether through any of the avenues that we talked about and now we've got a product, we've locked in a cash conversion cycle, things are starting to work. People like our product, they're coming back, they're purchasing for us.

Unit economics on our product look good. So we can afford to store it, we can afford to ship it, we can afford everything. And the unit economics are really starting to look good. And now we're looking to go into more growth mode, right? We want to build out our team, we want to scale some operations, maybe invest in a bigger warehouse or something and start to scale things up. What do capital options look at that stage of the business?

Well, you are almost always going into institutional capital at this point. And so you're looking at VCs, you're looking at kind of growth PE and I'll explain what that means. And oftentimes people are starting to move towards like family offices, but before we explore those, I just want to go back to remember, hands down the best source of cash is the cash you generate yourself. So if you can get to that stage that you're describing and you will be able to have an analysis that says like, well look, if I grew a little slower but I generated more cash, would that be okay for my goals? And that could be a really good avenue because particularly in an environment like this that we're in, right? December of 22, very uncertain economic environment facing us in 23 and hard funding environment like hey, not growing 100% is perfectly okay if you can make it through 23 and still be growing at all. The other key thing to remember is what we tell founders is in capital, the company is paying for the debt. If you raise debt capital, the company pays for it. If you raise equity capital, you're paying for it. So that's a really key consideration to keep in mind.

Like when you see people going out and raising and they're like, well, what are you raising for? And like, oh, I need more inventory. And you're like, hang on a second, that's coming out of your pocket. You don't want to build 100 million dollar a year business and be left with 10% of it. You want to have a really big chunk of that when it's left. And so you'd be really careful around taking too much dilution or selling too much of your equity too early. And the simple way to remember it is just like you're paying for the equity, the company is paying for the debt.

No, I love that. That's another really simple way to look at things. And I guess the question then becomes, if that's the case, then the question becomes what's the right amount of capital that the company can take on based on how much cash you're generating? Right? Because if you take on too much debt, like you were saying before, that can compound against you. And then the amount that you're paying to service the debt becomes insurmountable based on the cash that you're generating. And if you sell too much equity, then you're selling out all your future potential. So how as a founder, do you kind of figure out that balance and understand what the right appropriate pace is for you to grow between those three? Call it those let's just focus on those three ways of generating cash, of equity financing, debt financing, and generating cash yourself through the products you're selling.

Well, the answer to that question is really what your vision for the business is, what your goals are. So there's a lot of founders who have great brands. They're building awesome brands and like, look, this is my life's work. I want to be doing this when I'm 60 or 70 years old. And that's great. So what really do you care how fast you grow, as long as you grow and can stay in control and achieve your vision and provide a nice life for yourself? And that's totally fine. The other thing to remember is you look at some of the brands that we idolize, especially in the luxury goods space. These brands were family businesses that grew over decades.

It took a long time. So the idea that you're like, oh, I'm going to stand up a brand and get to a billion dollars in like four years, that just doesn't happen. And so that, I think is one that people often overlook because they sometimes feel like I should be growing. Like what I see in TechCrunch or whatever if you are going the institutional route and you do want an exit, then you've got to sort of work your way backward from the exit. So you got to think of like and this is really hard to do because December of 2022, who knows what the IPO market is? But you got to have to think like, okay, realistically, what could I exit and when? Oh, maybe it's five years out. Okay, so I'm thinking, and what type of business am I? Well, I'm probably going to exit to a strategic, let's say that I'm like a food and beverage brand. So now I'm working my way back to what do I have to do to make myself really attractive to a Unilever or a PNG or Church and Dwight or whoever it might be that's likely to do my exit. The second exit path usually is to a PE that has a different set of criteria.

And then the third exit path would be an IPO, which would have a separate set altogether. So working our way through those, if you're thinking like my likely exit is to a strategic, then strategics buy you. They don't buy unprofitable companies, right? They're so big they don't have time to deal with it. They don't want to fund losses. So what they're doing is they're looking for evidence of dominance in a category that they're interested in and evidence that it'll work in their distribution network and then the fact that the thing can make money. So if we use Hero as an example because it came, it happened in the past few months, exited out to Church in Dwight for 600 plus million off of a 45% EBITDA margin, I believe, and a 14 multiple off that. So what they did though, the very first step of that was like, they had dominance in a new category of like Zit stickers or whatever happens. That's not the technical name, but whatever it was.

And they proved that they could sell on retail and they proved they were profitable. So that's like a very attractive target, right? So a lot of strategics are going to be interested in that. What they're not going to be interested in is like, hey, I'm the number seven brand, I've yet to crack where you guys are, and oh, by the way, I'm losing money. That's not going to happen on the PE side. Then the exits are going to come out. Private equity, that stands for that's going to come out. They're very financially focused. They're often selling, buying you and then selling you to another PE fund, right? So they want to see the ability that you're profitable and that through their kind of playbook, they can grow you and make you more profitable.

So you need evidence of those. And then the public markets, like, who knows, right? I mean, there's lots of companies that went public recently in our space, the D to C space, who are really struggling if you look at their stock prices, they were unprofitable, they're still unprofitable. They're rapidly running out of cash. But when they went public a year or 18 months ago, nobody cared. Right, so they were sort of opportunistic about it. Yeah.

The two things I definitely want to cover a little bit are I think you did a great job of summarizing the strategics and the angle there and what a brand really needs to show to be able to be a prime target for acquisition. Right. It's not just about being a cool marketing sort of play. You've got to be really innovating in a new category, something that they don't have. You got to be profitable, got to have great margins, and you have to add something to their existing network. And then they believe that with their added distribution, they're going to be able to continue to scale up whatever you're doing. And then on the PE side, I think it's definitely an interesting one to talk about because I know there is typically there's always been a lot of interest from PE with these sort of D to C brands. And they can all offer something different.

They come in with their own different operating things. So let's just go a little bit deeper into what selling to PE looks like in terms of what the requirements are for diligence and stuff like that, as well as what the outcome looks like. Are they owning part of the company, the whole company? What does that kind of look like? And then when they say they can come in and operate and optimize a couple of things to sell it to someone else, what are those things that they're actually able to do? What are they bringing to the table during the time that they own the business?

Yeah. Well, let's start with the PE business model. So the PE and this explains why they do what they do, right? So the PE business model is that they raise funds in the form of equity. Then they buy companies and they invest some of their equity and they put loans against it for the rest. So let's simple example is they buy a company for $100 million. They might take 20 million from their fund as the equity and then they're going out and borrowing the remaining 80 million. Right. So why would you do that? Well, the reason you do that is because if I can over three or four or five years take that company from 100 million to 300 million, not only do I get to pay off all that debt, so now I have like 3 million clear, right? 300 million rather clear.

So my returns are astronomical, right? I turn 20 million into 300 million. I'm massively simplifying the business model. This is why PE guys fly around in private chats, right? That's a really good business when you can do it. So what do they look for? Well, they look. For somebody that can handle the debt load that's generating enough free cash that they can lever it. They can put debt on the company, and then they're looking for the potential for growth, and then they're looking for the potential of even expanding that profitable margin. I can't speak to all these guys, but oftentimes the level of due diligence is really intense. These are some of the smartest people we've run into in terms of their questions and their ability to look at the data and particularly the finance.

Like, you are absolutely kidding yourself. If you go into a PE fund and you are not really well prepared, you are going to get blown out of the water or completely taken advantage of. And you won't know until two years go by and you're like, oh, I really sold this thing cheaply. So these guys are really smart and they're good at looking at numbers and data, so you've got to be prepared, which is something we can help with. Right. I'll plug myself for a second and then they're selling usually to strategics or other PE funds. So the pitch is like, hey, this thing's growing. We're ready to exit.

A bigger PE fund comes along, hey, this looks really interesting. I'll fold it into my other thing. That's why you see companies often changing hands, like every five years. Once they sell to PE, it becomes like a round robin until somebody runs the damn thing into the ground because they lever it at like 99% and then there's a downturn and the whole thing blows up.

No, I think that perspective and just, again, simplifying it for early operators and knowing how the PE model works, why it makes sense for them what they might be looking for, all of that is super important. And then moving on from PE IPO and public market exits, right? Like, what is required? I know that typically the ones that I'm sure most people are familiar with are the big IPOs that are like the major brands that people hear of. But companies can go public too, that maybe more quietly as well. So what's required for an IPO? Who's eligible? How long does it take and how do you get there?

Well, there used to be this sort of like, rule of thumb, like, oh, you got to be 100 million of sales. And then it became something else. And then it was like, oh, funds won't cover you or buy you until you're like a 3 billion market. On and on and on. There's all these rules of thumbs. But the real answer is that it completely depends on the market condition. So if you're in this insane bull market like we were past two or three years ago, hey, bankers are running around, like looking for deals and you look good enough, let's go. Right.

And if it's a difficult market, then you'd have to have exceptional finances to get public in that market. There's been one exception to the sort of general rule of thumb in the past couple of years, which is layered superfoods which went public at a very small revenue base, hasn't done very well as a stock, but they got public, they're liquid. So there's some kudos to them. But very difficult stock for people to trade because it's so thin. The reason that's hard is that imagine the size of a Fidelity, right, putting they, they need to be able to put tens of millions, hundreds of millions into a stock so they can't buy ranking stocks. It's too hard. You'd ask another question, what do you need to oh, the process takes a long time. It's a really long time.

You have to have lots of profitability, several quarters of it. You really got to ramp up your management team, your finances, your accounting. So you're looking at at least a year process, but probably people start thinking about it and then it happens like two years later. This would be my guess.

Got it. No, that's super helpful as well. And the next thing I wanted to talk about, now that we've kind of talked about the different exit paths and what those look like are there are a couple of different ways that you can start to build leverage in how you're thinking about cash. I know venture debt is an option. You can do supplier terms. There's a couple of different types of credit that you can get involved in your business. So could you give a quick run through of maybe what some of those other ways of sourcing capital are for your business beyond the capital that you're generating?

Well, you mentioned one which is like often overlooked, but it is hands down the best source of capital and almost always the cheapest, which is supplier terms. Some people are great at negotiating. There's a lot of times people aren't. And there's lots of things that you can do sort of in your favor. But every day that you can get credit is really valuable to the company. So you can get somebody from 15 to 30 or 30 to 45. They're huge wins. And you can see this when you do the modeling, and it doesn't have to end at just like, hey, can you give me some more credit? You can do things to make yourself more attractive.

Maybe you agree to put more business to that supplier so you increase your minimum order quantities, or they get more of your business, or you play suppliers off of each other so that, hey, one thing. Instead of negotiating price, you negotiate credit terms because maybe they're pretty well capitalized, so they can afford to do it, and it's cheap for them. And then what you see a lot of bigger brands do, like if you looked at Lululemon's Financials, for example, you would see that they set up banking relationships over in China. So they're providing letters of credit, which then their suppliers can look to. So their supplier isn't saying like, oh, I'm taking Lululemon credit, which is probably a pretty good credit, but it's not as good as Citibank credit. And so know, they're like, oh, that's pretty good, right? So you can get fancy on financing this after that. The key is matching. That's the thing that's often overlooked.

Everybody wants to jump into interest rates and the cost of capital, but you really want to focus on the matching. So what matching means is the use of the capital that you're borrowing matches your ability to I said this wrong. The term in which you have to repay it matches your ability to use it. So the way to think about this is like, if you were to go get a bank term loan and it's like a three year loan, right? You close it, and then the next day they wire you that million dollars, and guess what? You start paying interest on it. It's sitting on your balance sheet. And you're like, well, I don't need it, right? I don't need it for another eight months or whatever. Or the opposite example of that is like, merchant cash advances wavefire clear codes of the world, right? So what they're doing is they're like giving you money, but then they're asking for you to pay it back before you fully used it. So you're like, okay, well, that kind of hurts, right? I kind of need this money, right? I still haven't gotten my paid, sold my inventory.

So you really want to try to match as closely as possible to your cash conversion cycle.

Yeah, and I think that's really important because when you're matching the amount that you're because I think for different operators or when you're financing your business, when you're taking capital that's not your own, you're always paying for it. So the longer you're holding that capital without putting it to use, it's just costing you whatever percentage rate that they're charging for you to be borrowing it, right. So it can literally just burn a hole in your pocket just by sitting on it. So by matching, if you're borrowing capital, you want to get as close to using the exact amount of capital that you need and holding it for the shortest amount of time possible. And that's what generally matching is, right?

That's exactly right. And the best tool for that is called a revolver. We're all familiar with revolvers. We all have them in our wallet. We call them credit cards. But the revolvers are you get credit, you use it, and then you pay it back, right? And a revolver from a bank, ours in our wallet have 30 day terms on them. But a revolver from a bank typically allows you to pay it back over a year or whatever period you want to pay it back. Banks typically hate revolvers, though, so they're very difficult to get.

So it takes a little negotiation you have to be profitable and prove to be a strong credit and all those things to get them. But they're fantastic tools. After matching, the next biggest thing is focusing on the dollar amounts. And so you want to focus on getting enough money to achieve what you want to achieve, right? So there's no point in getting people are like, oh, I got a 6% bank loan. It's like, well, you needed 3 million, but you only got 500,000. So now what? Now what are we going to do for the rest of the 2.5? Right? So we argue our customers like, hey, you would be better off instead of focusing on 6% money. You'd be better off trying to get the full 3 million that you need, even if it costs you 15%. Assuming your business can support that, because now you actually have the money that you need to grow and achieve your goals.

And then the very last, the third consideration is the cost of capital. And that is, with a good model, you can figure out the cost of capital even on these very complex products that the alternative lenders come up with, which they often make purposely complex and hard to follow. And what you're trying to do is understand your company's ability to support those debt payments. And what you're really trying to focus on is like, does taking that money increase or decrease over time? My ability to generate free cash, to give you an example, is like if you were to take a merchant cash advance and let's say that the repayment on it was like, I don't know, 16% or 20%. I mean, some of them, you do the math on it, it's like outrageous. But let's say it's 15% and let's say you add a 10% EBITDA margin. I'm just totally making up numbers. They're taking their 15% off the top.

So you've reduced your sales by 15%. You no longer have a 10% EBITDA margin, right? Yeah. Your margin structure stayed the same, but you're not able to generate free cash. And so now you have this problem of like, well, jeez, okay, it got me through this period, but I'm no longer generating my own cash. Now what do I do? And hopefully you're okay, but you need to be really careful about it because it's the implications of your future cash generation that make those products dangerous and get people trapped.

So you're basically saying if you take on too much debt for yourself and where your business is at, all the cash you're generating is basically going towards repaying the debt on that cash. And then you're just kind of stuck treading water and you can't actually grow now because all your money is just going to service your debt.

Well, yeah, that's exactly right. And going back to the cash conversion cycle, let's say your cash conversion cycle is 180 days and you take this MCA and you're like paying it down. You might be done at 120 90. So you're borrowing and paying back faster than your cash conversion cycle. So it's not just that you're reducing the sales, but you're also giving the money back so much quicker. It's a really hard concept for people to put in their heads. That's why a really good model helps because you can just sit there and play with it and you're like, oh, I see the relationship now. But you effectively have these two big flywheels working and how they interplay can get confusing really quickly and get people in trouble if they can't conceptualize it or model it.

No, absolutely. And I think the last one, are there any other sort of alternative types of financing that are emerging in the ecom space? I know there might be things like not just revenue based financing, but also where you're lending against your inventory or different solutions like that for financing. What else exists? What are some of the other tools that maybe are either emerging or new ideas or a little bit different?

Yeah, well, the good news is there's fantastic product, there's a lot of innovation in the space and there's a lot of things to explore. So you mentioned a couple right there. So one is what's called asset based lending. ABLS, this grew up out of the retail space. The idea there was that the bank would come in and say, I'll look at your inventory and I'll basically put a dollar amount on how much I could liquidate it for and then I'm going to loan you some amount of money less than that. Right. So what they might, you know, a simple example is they might come in and say like, it looks like you have a million dollars of inventory. I think I could liquidate this at $0.50 on the dollar, therefore $500,000 and my advance on that will be whatever.

So I'll give you $400,000. So ABLS can be really good for and the rates tend to be very strong because the bank is secured against the inventory. So nice low cost of capital, you get sort of moves up and down with your thing. The issues with ABLS is that they typically don't fund your POS. They only fund what's sitting in the warehouse. So the payments that you're making, your suppliers or inventory that's on the water typically aren't funded through those. Some will get fancy and do it. The other issues with those is that it's highly reliant on name brand inventory.

So if you are a retailer and you had a ton of Patagonia in stock, it's like, well, jeez, I could sell Patagonia for $0.90 on the dollar. But if you're retail and you have a bunch of Ben sweaters, people are like, I've never heard of Ben's sweaters, then it's hard to get ABLS against that. There's some interesting things around. Another one to mention is like venture debt. Venture debt, though, is really only available once you've taken venture capital. So don't waste your time on it if you haven't taken a VC round recently. Because what they're doing is they're underwriting the sponsor. So they're saying like, oh, you just got money from Sequoia.

Like, I'm it. I'll loan you money. And if you're like, oh, you just got money from some fourth rate VC that I've never heard of. Maybe I will, maybe I won't. And if, oh, you haven't taken any VC money, then forget it. They don't want to talk to you because they're really underwriting the sponsor, the VC's ability to keep funding you. And then what else? Revenue based. That's popular in the SaaS space.

And it's starting to come into the ecom space because of the rise of subscription models, right? So there's a group called Pipe that does some of this where they're basically trying to look at the quality of your subscription business, and then they're saying, oh, that's a set of cash flows that I can model and that I can predict, so I'll lend against that. And then what else? We talked about Revolvers. We talked about ABLS. Oh, factoring. That's a huge one. So this is like D to C. Folks often don't understand factoring. And as we're all getting into, like, Walmart and Target, right, your financing options now have changed.

So the idea behind Factoring is like, it's a simple idea, right? So you get an order from Walmart or Target, and I can't remember the technical term now. It's not the PO, but it's the commitment to pay, right? And what the Factorer will do, the financing group will do is they'll say, oh, I'm now taking Walmart credit because this is an obligation by Walmart to give you a million dollars or whatever for that inventory. And so you can go sell that effectively or get a loan against it. It gets fancy, but that's effectively what you're doing. And because it's Walmart credit, they're like, oh, well, I'll give you like $0.95 on the dollar, some really high rate on it because they're basically just taking Walmart credit risk at that point. So Factoring can be a terrific way as you build your omnichannel business to find that growth because everybody faces that problem, right? Like, I got an order from Target, we're going to kill it. And it's like, holy shit, I got to come up with like $2 million of inventory. Now what do I do? Right?

Yeah, I think that one is really great because a lot of these brands, they're starting online and then they're growing and they're going and actually from everyone we've been talking to, it seems like brands are going multi channel even sooner than you can. And a lot of the brands that we've had on, it's great to follow their success and see as they get placed into Whole Foods, get placed into Walmart, get placed into all these major retailers. So for them, and as you're thinking about building your business, and your strategy, just knowing that maybe when you're thinking about retail, knowing that that opens up maybe a more cost effective version of generating a little cash to continue to grow your business versus maybe some of the other more costly debt avenues. It's just a good tool for founders to have in their pocket. So that was awesome. That was a great crash course in everything that a founder needs to know. And I guess the last question about, like, I know we've been talking about cost of capital, the relationship between interest rates, markets, how they're pricing these companies, and actually the cost of capital itself. So could you talk a little bit about just that linkage between interest rates, company valuations and the cost of capital and how it actually affects businesses in real?

Yep. And before I do that, Blaine, I just want to mention that all that stuff and more that I've talked about is all up@bainbridgegrowth.com. You can find it, you can go in way more detail and we have interviews with chief credit officers. You can really see the behind the scenes of how they think about it. Okay, so interest rates and how that impacts businesses. Again, the way to think about capital, like we said, it's a tool, but it's also like something that people buy and sell, right? So if I'm a lender, I have to think about like, what's my source of capital? Because I'm marking it know, just like you like as a D to C brand, I'm buying capital, I'm marking it up, and then I'm selling it to somebody else. And if you're a bank, your source of funds is fantastic. It's all of us putting money in our checking accounts for which they give us zero interest rates on.

Like, how's that happen. And they're borrowing from the Fed, so they have fantastically low interest rates. That's why they can go out and make loans at like five, six, 7%. The flip side of that is that they are like, we are never going to lose money on a loan. Of course banks do, but they're terrified of losing money on a loan. So they're going to be incredibly conservative in their underwriting, right? If you're like an alternative lender, like a Wayfire or a Clearco or somebody like that, oftentimes you're borrowing money or getting money from credit funds. So these are big groups like typically New York or whatever, London, billions and billions of dollars that they've gone and raised money from pension funds, right? And they've said, hey, I'll give you a 10% return or something on this money. And their pension was like, that's fantastic.

So now these credit funds are coming out and saying like, well, I got to loan this money out and make more than 10%. I got to cover my cost and I want to fly in a private jet too. So I got to loan this thing out at like 15 or something. So then they're like loaning it at 15 right to the alternative lenders. And then the alternative lenders are turning around, they're like, well I just borrowed money at 15%, I can't get it. 16 is not going to do it for me. So I needed to put it out at like 20 or some markup. Just like you see it in retail, capital gets marked up.

And so that is why the rates tend to be so high as you go through these alternative lenders. It also explains why you as the small business like, I'm losing money, the only people coming calling are like Shopify Capital and Clearco and bank of America is like, I'm happy to run your checking account for you, but that's know because of the risk profile of the business. That was a really sloppy explanation.

But no, but I think what really stands out about that is just the fact that as you niche down and as you become more specific, like as your operations become more and more specific, the cost of capital gets marked up. So in an environment where interest rates are higher, then that cost gets passed along to you. So now before when you would be paying 10% on your loans now, well if interest rates go all the way up to seven, 8910 percent, whatever it is your loan that you're looking at now, that's getting bumped up and that cost is getting passed along to you. So the cost of everything gets more expensive, the cost of growth and everything. And that goes back to our conversation before when we're talking about in this environment. Do you grow versus just generate cash? It becomes very expensive and almost prohibitive in a lot of times to grow. Whereas if capital costs you 2%, then you should be trying to grow at all costs because it's basically free at that point. So that's kind of how small businesses can think about the relationship between interest rates and the cost of capital and then as well and the way you see that in the markets.

And we've seen it right? Like as soon as the Fed said they were going to start hiking rates up, the first thing that happened was tech stocks started to plunge. Right? And because people aren't there chasing yield and return a, it's just really important. I think as someone who's founding a business, maybe for the first time, maybe they're in it just to understand how these different macroeconomic indicators affect the actual day to day of what you're focused on building.

Well Blaine, that was very well said and much better than how I said it. And I think what you were making me think when you were saying that is it goes back to the importance of controlling your destiny too. So if you're going to build a business that's going to be highly reliant on outside capital, then you have to be thinking through these things all the time and be getting it, right? A lot. Whereas if you are saying, like, hey, I kind of want to control my destiny, then you should focus on generating your own cash. I can survive through any type of economic environment. I'm never going to have to do something I don't want to do. I think that's a great plan. I think it goes also back to brands.

It's so hard to build these brands, and so we don't need to be in a rush. Right. They take a little time. And giving yourself the ability to get there through your own cash, I think, is really well worth it. You'll have a better exit.

So, Ben, now that you've given us the entire I feel like we just went through MBA in crash course in finance, and I love it. So now that we've done that, why don't you tell us a little bit more about Bainbridge, the company that you're actually building to serve all these different needs and help founders through all this sort of stuff. So what is it that you're building? What are the tools that you're giving them? And how do you help them navigate all these different things that we just talked about as they all come together and interact with one another?

Thanks, plain. Yeah. So it's Bainbridgegrowth.com and we're combining data and finance to help founders maximize their outcomes. And the reason that that's so hard is that, as we were talking about, you have to master a lot of different flywheels. Right? So there's the flywheel of your cash conversion cycle. There's the flywheel of your unit economics. Like, what are my prices and how much do I make? Then there's the third flywheel, which for a lot of businesses is the repeat business from when I acquire a customer, how quickly do I get paid back and how much do those customers generate for me into the future? Add in the complexity of omnichannel. Right? So now I've got a model, a repeat business, a customer acquisition business.

There's my D to C. I've got to model Amazon, ad spend, buy in the buy box, inventory to Amazon. That's another type of model. And then I've got a model like, oh, selling Target and doors and accounts, doors, sell put. It gets complicated really quickly. And because the nature of this business is like, because cash is so tight and margins are hard, you're up on the high wire. Right. And I think that's where we really can be helpful, where founders are like, I have a decent sense of this and I have models, but I don't really know what to do next.

I don't know what levers are the most important. I don't know how do I generate more of my cash? I don't know what are the impacts? Should I be focused on first purchase AOV or repeat purchases? And to put a fine point on that, we had one of our customers, very subscription business, great business, very focused on twelve month retention rate of his subscription business, but he also wants to get to profitability. So we ran all these analysis and we're like, hey, the number one thing you could do right now is increase your first purchase AOE by $7 and you'll have a 12% EBIT margin next year. He was like, oh, my God. Yes. Let's do that. We can do that. And he got so excited, he's like, we're going to increase our product mix.

We're going to do these things. And he's like, I now can go that growth round. I can take some secondary meaning, put a little bit of money in my pocket. So that's really exciting because otherwise they're just sitting there spinning their wheels like, what do we do? I guess we've just tried to do it all. And the truth is, these levers have different weights, different impacts, so you really want to understand how to push them and get there faster without selling a lot of your equity to do it.

And Ben, I think that's such an important point. Know all these different businesses, sometimes the hardest thing is knowing exactly where you should be focusing on, right? And you hear so many times, oh, CACT LTV or we need to get our ROAS down, or we need to do this or we need to do that. But ultimately, every business is a little bit different. They have different inputs, and like you said, they have different flywheels. So maybe for the one brand that you were working with, it made all the sense in the world. You're like, okay, you need to get your first purchase AOV up by $7, and that's clearly the outcome for you. But there may be another subscription business that has great, totally different unit economics and amazing subscription numbers. And you're like, let's just sell more free trials of that first month of product because we know we're going to make it up on the back end.

So the most meaningful thing you can do is just drive first orders for free. You don't know what it is until you're actually able to plug your entire business into these sort of models and understand how all those different levers interact. And then you're able to understand which is the right lever to pull for your business. Which I think is really important about what you guys are working on and what you guys do in the service that you're providing to brands is providing that clarity of like, okay, what is it that I should be focusing on? Not like, what are the industry best practices for generic D to C brand, but what is it for my brand, given my mix, what my unit economics are, what channels I'm selling on, what my product is, how much it costs to ship, all these different inputs that need to work together as opposed to just like, oh, let's focus on ROAS today. Right?

Right? That's right. You're absolutely right. We have limited time, money and effort from our teams. And so if you waste it on the 7th, 9th and 15th most important levers, you don't get it back. Right? So you want to focus it on one, two and three. And that's how these it's no mystery. Like you see the companies that do well and they explode. They all figured out their levers and they focus relentlessly on those.

Great. So as we kind of wrap up here, what is an engagement working with you guys look like from a DDC brands perspective and where can they get in touch with you? Are you guys on social? Are you on LinkedIn? Where can brands connect with you guys as well?

Yep, absolutely. So we're on Twitter, LinkedIn, Bambridgegrowth.com, or Ben@bainbridgegrowth.com reach out directly I think a really cool engagement model, which know, this stuff is hard and it's complex. So a lot of times people are like, I don't know. So we start in our phase one, we just say, look, it's $5,000 and in three weeks we're going to take your data and we're going to take your finances and we're going to come back and teach you a lot about your business, right? And we're confident, we're so confident that we're going to teach you something about your business that's going to make a difference and help you prioritize that. If we don't, we'll just give you the 5000 back. And if you want to keep working with us, you can put it as a deposit towards your annual subscription so it's virtually no risk. And at the end of it they get this like 90 minutes session and it really just goes through the basics, which a lot of times people have kind of forgotten the first principles. Are you generating cash or are you using it? Okay, how much do you have left? Let's figure that one out right now.

And then it's really fun. Those are some of the funnest sessions because you see people's eyes light up and like, oh, I had no idea. We thought it was something else. I had no idea that this was going on. That's what makes our jobs fun because we really feel like we're making a big impact.

Yeah, and I think it's so interesting too because there's so many tools involved in the D to C stack and maybe you're looking at your shopify dashboard, but that's not really giving you the insights that you need to actually run the business, right? So what you guys are able to do is really help tell that story about what's actually happening at a business level and not just like a orders level, product level, the stuff that is really easy to get drawn into and focus on but really being able to bring that other side to it. So, anyway, Ben wanted to thank you for coming on the pod today, teaching myself and our audience and everyone a little bit more about what they really need to know about financing, especially in this sort of space, and can't wait to hear about more of the brands that you guys really help grow and help them pull all the right levers.

Thanks, Blaine. I had a blast. Thank you.