Melissa Widner is the CEO of Lighter Capital and former Ventures Managing Director at National Australia Bank (NAB). With many years of experience in the financial industry as an entrepreneur, founder, CEO, and investor, Melissa Widner brings global insight to the most recent episode of the If I Ran the Bank podcast where they discuss how venture capital firms and revenue-based financial loans can boost innovation!
Venture Capital Firms
Banks and corporates have different reasons for starting venture firms. At NAB, the former CEO Andrew Thorburn “wanted to create a vehicle that would ultimately bring a stronger culture of innovation to the bank,” said Widner. In Australia, banks are arguably more innovative than in the United States because it’s easier to innovate in a smaller market with fewer competitors, but they still don’t move as quickly as a startup would. As a bank, having a venture firm of your own can slowly shift the culture through exposure to these newer, innovative companies.
Widner said that at NAB Ventures, two of the reasons they would invest in companies were to develop partnership opportunities and gain market insights. As a bank, investing for partnership opportunities enables them to engage with startups and newer companies at an early stage and question how they can provide them with real value. Additionally, gaining insights into the current market for potential disruptors is equally as important; this helps banks get a head start by investing in the companies that could potentially disrupt them in the future.
There are many areas of interest for a bank when it comes to investing. The bank will be interested in the areas where they make more of their money, specifically, mortgages and small business lending. If there is an opportunity to provide a better experience for both consumer and business customers, that’s where the venture fund would look.
For NAB, one of their areas of focus was cybersecurity. “Cybersecurity is obviously very important for a bank, so that’s an area where we used the venture fund to invest — primarily in companies where we were already a customer, or going to become a customer of with the thesis that by having that closer relationship through an investment, we'll really be at the forefront of what's going on in this space,” said Widner. Investing in areas like cybersecurity would protect both the bank and its customers.
Lighter Capital is a pioneer and leading provider of revenue-based financing loans for SaaS tech startups. Lighter Capital is able to get in early and provide startups with growth capital, having deployed over $200 million.
A revenue-based loan is when a company takes a dollar from Lighter Capital and pays them back a fixed amount, Widner adding that “we model that payback will happen over three years.” The company pays Lighter Capital a fixed percentage of their revenue until they pay back their amount, so they know exactly what they’re going to pay back. Lighter Capital’s credit decisioning tool forecasts the company’s revenue.
“The reason it's such a great product is that if the company grows a lot faster than they anticipated, or we anticipated, we get paid back faster. The company doesn't pay us back any more money,” said Widner, adding that “they’re still paying us back that fixed $1.30 or $1.40, but they’re paying us back faster and our IRR is higher.” This strategy ensures Lighter Capital’s interests are perfectly aligned with the customers, and Lighter Capital does better when the company is faring well.
COVID-19 has affected startups and smaller companies in various industries, but Lighter Capital has not lost one of their portfolio companies, despite some in the travel and event industries being hit hard. With their revenue-based loan, companies can be paying 90% less than the previous year because their revenues are 90% less than they were, which relieves a loan burden on the company.
One thing Widner has noticed over the years is the change in how trusting these companies are. In the past, “it would take a few phone calls and time with the customers before they trusted us to provide that information [banking and accounting data],” said Widner. Compared to now, where Widner sees companies connecting Lighter Capital directly to data sources before any interaction, enabling them to come back with a credit decision sooner. “That’s something that a few years ago, companies were very reluctant to do, but has become the norm,” Widner shared. The shift in trust over the years can be attributed to Lighter Capital’s growing reputation and the understanding that it is secure and protected, but also a shift in companies’ willingness to “to open up the data to lenders and other third parties, and partners.”