Podcast: Breaking new ground in fintech by reducing payment friction for SaaS companies with Capchase CEO Miguel Fernandez Larrea

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Show notes

Bios

Bill Cilluffo joined QED as a Special Advisor in the fall of 2014 and became a Partner in 2015. He is currently Head of Early Stage Investments after six years as Head of International, leading QED’s Investment teams in Latin America, Europe and Asia.

Prior to joining QED, Bill spent nearly 20 years at Capital One, spanning several roles and leading several businesses. He spent the first 6 years of his career leading Marketing, product development and credit policy for Capital One’s subprime credit card business; ultimately having overall P&L responsibility, and growing the business to become the most significant player in the market. He moved on to spend 2 years in various new business development roles, spanning the telecom, medical finance and small business finance industries. Bill spent 3 years as Deputy Chief Credit Officer for the bank, playing nearly every role there was to play in the central credit function, after helping build the department from scratch in 2002.

Bill then pivoted his career to general management, leading Capital One’s Canadian, and ultimately International businesses, over the course of 6 years. Profitability of the business grew significantly under Bill’s leadership, through new product and channel introductions, acquisitions, and significant cost take out. During Bill’s last 3 years at Capital One, he led its Co-Brand and Private Label credit card business, building the business nearly from scratch to one of the top few players in the US market, through a series of acquisitions, most notably including leading the acquisition and post-merger integration of HSBC’s US credit card business, which closed in May 2012.

Bill graduated with a BA in economics from the University of Michigan, and competed the SEP program at Stanford GSB.

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Bill Cilluffo:                  

You are listening to the Fintech Thought Leaders Podcast from QED Investors, your deep dive into the world of venture capital and financial services with today's digital disruptors. QED is a global venture capital firm focused on investing in Fintech companies all the way from pre-seed to IPO. Fintech Thought leaders brings together the most talented entrepreneurs tackling today's [00:00:30] biggest problems. If you're looking to learn more about what motivates our founders and team members to succeed, you're in the right place. Hello and welcome to the Fintech Thought Leaders Podcast. I'm Bill Cilluffo, head of Early Stage Investments at QED Investors. Today on the podcast, I'm very excited to be joined by Miguel Fernandez, co-founder and CEO of Capchase. Miguel, thanks for joining us today.

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Miguel:                        

Thank you for having me here, Bill. It's a pleasure.

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Bill Cilluffo:                  

Last time I guess we saw each other, we are riding bikes in the Shenandoah Mountains, so [00:01:00] that was awesome.

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Miguel:                        

That's a good time.

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Bill Cilluffo:                  

So look, we're going to go into a lot about both Capchase and about your background, but just so the listeners get a little bit of an orientation, I wonder if you can give us about a 60-second commercial into who Capchase is and what Capchase does?

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Miguel:                        

Great. So Capchase is a Fintech company and what we do is we offer lending and payment solutions to B2B software businesses both in the U.S, Canada, so basically North America, and Europe. We've been around for four years, so I'm very excited [00:01:30] about what we're doing.

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Bill Cilluffo:                  

Awesome. And I know we've, we've been with you guys for a good chunk of that ride.

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Miguel:                        

Yeah, pretty much all of it.

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Bill Cilluffo:                  

It's been very exciting to watch your guys' massive progress over the years. So look, before we get into Capchase, I know that you've got kind of a long background in entrepreneurship. This isn't your first startup. I'd love to hear a little bit about what caused you to get attracted to entrepreneurship and maybe hear a little bit about your first couple startups.

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Miguel:                        

Yeah. So I think that since I was very little, I loved to see things grow. [00:02:00] The toys that I would use, everything was just, you could see growth and visually and also from a progress point of view. And then I was lucky that my grandfather was an entrepreneur and my father as well. So they both launched their own companies. Some of them went well, some of them didn't go well. So I think that I was fortunate to just grow accustomed to risk. Where I would just see my family taking risks, sometimes those risks would pay off, sometimes they wouldn't. So [00:02:30] I think that was an incredible privilege and a good position to be in. And then I started engineering, again trying to understand how things work and how things are built. So I did it because of that. I had no intention of working as an engineer ever. And in fact, I actually joined consulting right after school.

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But I had always ideas of how things could work. I was doing the typical entrepreneurship courses and seminars during engineering studies. And [00:03:00] when I graduated, I started working in consulting and I saw that what I was doing in the day-to-day wasn't that fascinating. In my mind I was working on problems for super-large companies, and I felt that if I wanted to have a company in the future, those things that I was solving were not really going to transfer so much to a company. Because I was working for Fortune 100 companies, so huge, huge, huge businesses. So on the side I tried to work on different entrepreneurial ideas and I launched two startups with [00:03:30] friends. And I always say that when people ask me if I'm like a serial entrepreneur, I don't really consider those two early ventures as proper startups because they were just so small and they failed so early.

But they were both really good learning lessons. So one of them was imagine an Airbnb for sports equipment and gadgets. So for example, imagine that you're going to go to Utah this weekend and you don't want to bring your skis or you don't even have skis. Instead of renting them from a shop, you could rent them from [00:04:00] somebody that have skis in Utah. And that way that person has a spare asset that they're monetizing and you can get better equipment at a cheaper rate and you don't have to buy it. So the lessons learned there was that renting peer-to-peer is really, really hard. There's a lot of friction in a transaction. And we only figured out once we brought the product to market because we had done all the research, all the user research with all of our friends and all of our families. So [00:04:30] classic first time founder mistake.

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So when push came to shove, we saw that we would make $2 off a transaction and each transaction cost us about $17 to take place. Unit economies were upside down and we stopped. And the second one was another marketplace, which also made me realize how hard marketplaces are. It was a marketplace where we would hold in storage and deliver within two hours up-and-coming brands apparel within the [00:05:00] city of Madrid. So you could go and buy a really cool jacket, you have delivered in your place in two hours. The problem there I think was the time, the time was tiny. The unit economies were really good actually, but the time was very small and after all, you don't need fashion on a two-hour timeline. So anyways, we shut those down. It was super interesting. And then I actually joined the pre-revenue startup where I thought I could learn from people that actually knew how to do it.

Bill Cilluffo:                  

No, that's really cool. I mean, it's ironic you mentioned [00:05:30] the ski idea. Literally I'm leaving tomorrow morning for Colorado.

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Miguel:                        

Oh nice.

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Bill Cilluffo:                  

I've had this debate with myself. I don't really want to bring my skis, I don't really want to rent. So I settled on bringing my boots and renting the skis.

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Miguel:                        

Exactly.

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Bill Cilluffo:                  

So I could see where it wouldn't be very profitable, but you can see where there's consumer idea there. That's pretty good. Is there anything as you look back over that period that you learned that you could point to that was particularly important to you as you eventually started Capchase?

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Miguel:                        

Yeah. So one was talking to a customer. In [00:06:00] the first case, we didn't talk to a customer until we had built the website, the marketplace and everything. We had talked to some customers, they just didn't happen to be the ICP that we were trying to make money off of. So that was a massive learning. And then I think it was focus. We launched the tool, basically the marketplace, and we had people uploading bicycles in Madrid, which is where we were based out of. But then people were adding apartments in Cuba or motorbikes in Laos and Vietnam. So it [00:06:30] didn't make a lot of sense. We should have focused on launching or saturating one market first before going to others. I think the idea is bad, but regardless, we should have focused on launching in a much more focused kind of way.

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And then also the power of full-time. And we were both, I mean the founders, I was working in consulting, so really long weeks and my co-founder was working in energy trading, so pretty long weeks as well. So after we're just working on this at nights and the weekends. So yeah, we're putting [00:07:00] a bunch of hours, but you need to be putting all your hours and all your attention in any kind of venture because it's going to help you to have way faster feedback loops and also to move it to the next stage or learn way quicker.

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Bill Cilluffo:

Maybe now you look back and why did I do that or whatever. It's got to be fantastic learnings. I mean, it's almost when I talked to a few people that started up X, Y, or Z business when they were 16. Didn't turn into a business, but just the amount that kind of carries through over time [00:07:30] is just awesome to get rolling.

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Miguel:                        

Yeah.

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Bill Cilluffo:                  

So you mentioned you then, after these couple startups and your consulting days, went on to get this job working for a SaaS company in Europe. Can you talk a little bit about what that was? And I'm assuming that that had a much more direct impact on what caused you to eventually see the opportunity with Capchase?

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Miguel:                        

Yeah. I learned so much there, and also we experimented most of the pains that we're trying to solve right now. So the interesting thing is that I had never worked in sales ever. [00:08:00] And when I applied to that company, I applied for a role as a business development associate. And if you look at the description of the role, it was all about figuring out how to enter new verticals, new industries, new clients and so on. I was like, okay, this is perfect. This is what I've been doing as a management consultant.

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Bill Cilluffo:                  

So a perfect job for an ex-consultant.

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Miguel:                        

Exactly, exactly. I was like, okay, this is exactly the same that I've been doing, but for a startup. This is going to be amazing. So then I got the job. When I joined, they were like, "Okay, so you're going to be cold calling this list of prospects". [00:08:30] I'm like, oh, I guess this is a different job than I expected anyways. So I'd never been comfortable cold calling people, but I just had to do it. So I started doing it and I was doing a consultative sale trying to understand their problems really well, and it worked. And then I was promoted quickly and ended up running the sales and customer success teams. And then when it was time to take the company international, I moved to London to start the international team and international go-to-market structure and everything. [00:09:00] And so learned the thunder to the company from zero to a few million ARR and then left after three years to go to business school.

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But that experience, three years scaling a SaaS company, was super helpful because we were suffering most of the pains that we're trying to solve right now as a SaaS company. And the seminal learning that we had there was that we were selling to a mix of SMBs or enterprise. So everybody wanted to pay late. Either [00:09:30] monthly or quarterly or bi-annually or just late, net 90 or net 120 days and so on. So we couldn't afford to do that because as a SaaS company, you have all these upfront costs that you need to incur on to develop the product, to sell the product, etc. And then you need to recover those as quickly as possible. And just allowing people to pay late or monthly, quarterly, meant that we need to plug that cash gap with something else, with our equity money, [00:10:00] and we wanted to preserve that for R&D research, etc.

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So yeah, the only tool we had back then was to give discounts. And we'd really give big discounts to get paid upfront and to recover that cost of customer acquisition, those upfront costs as quickly as possible. So that would distract a lot of lifetime value. It would hurt our growth rates. It was kind of like short-term gain, long-term pain, but it was the tool that we had. And then went to business school and started looking at different ideas, [00:10:30] and we ended up launching Capchase to try to solve all the pains around the, let's call it revenue value chain of a SaaS company, starting with that precise cash cap problem. So yeah, it was a really good learning experience.

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Bill Cilluffo:                  

Yeah, man, it's interesting to hear you say that because I think about a SaaS company, it makes sense why there's a working capital thing. You spend money on all your salespeople, you sell these contracts, they pay you over time. You've got to fill that gap. I guess what you're raising here is it's almost a double problem and that not only do you [00:11:00] as a SaaS company have this issue, but your clients also have a similar issue. And so somebody is going to have a working capital issue to solve probably both of you.

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Miguel:                        

Exactly.

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Bill Cilluffo:                  

And it's pretty insightful to think of that as both. What caused you to go to business school in the first place? Was this just the opportunity you were doing, knew it wasn't for you, or you wanted to go to school and find some co-founders or what was your logic on why you decided to head to Boston?

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Miguel:                        

So a mix of things really. So on the one hand, being from [00:11:30] Spain going to business school in the US is the closest thing to going to the moon. You're going to access a totally different universe and you're just going to be able to open doors that were closed. Also, I thought I had reached my ceiling at that company. I had learned a ton over the last three years, but I just didn't have very clear what we need to do as a company to get to the next stage. And then I also wanted to run my own thing. I learned a lot and I felt that I was closer to running my own thing and building my own thing, but I thought I wasn't ready yet. So I went [00:12:00] to business school to learn how to do it. And yeah, I landed in Boston. It was amazing. I met my co-founder there, and then we actually launched Capchase during the second half of the first year. And then we never finished business school because Capchase took off. It was just too much to do both things at the same time. And again, the power of focus, I learned that lesson and we decided to focus on Capchase. So business school was the best possible thing that I could have done at that time, and it really served the purpose that I was looking it to do.

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Bill Cilluffo:                  

[00:12:30] When you left to go to business school, did you have the idea that you wanted to do something related to this SaaS thing or it was more, Hey, I want to start something, and then as you started to work with your co-founder, you kind of came back to this idea later.

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Miguel:                        

So I knew that I wanted to do something in Fintech actually. And the reason why is I had experienced those working capital pains and that pain at the point of sale such company. I knew that cash really solved it. We were solving it with discounts, some kind of payment terms there with [00:13:00] VC money. So that was something that was lurking in the background. And then actually preparing for business school, doing an accounting course. We went through the cash conversion cycle. Where you go through paying your suppliers and then how much time you hold things in inventory, and then when do you get paid by your customers in the environment of a retail company and the different levers that you have to solve for that cash conversion cycle. And then things started to click, and obviously you have a company, you have a negative cash conversion cycle, [00:13:30] then your bottleneck will never be capital, it'll be anything else, but it'll never be capital. So we started looking into that and we looked at different spaces where we could solve a cash conversion cycle. We looked at healthcare clinics, we looked at bed care, we looked at e-commerce. And then when we're looking at SaaS, which was pretty coincidental, then everything clicked together. The cash conversion cycle clicked together with our pain while running the sales team in that SaaS company. [00:14:00] And then we started exploring that.

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I guess that's when you experience your passion, your insights and the incremental bits of learnings and iterations, you start to get together and suddenly you're like, oh, I can't stop thinking about this thing, so let's talk to customers about it.

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Bill Cilluffo:                  

Yeah, that's perfect. So as you started to take that leap and talk to customers, obviously you learned your lesson about friends and family and presumably went to a different set. But anything in particular from those interviews that [00:14:30] changed your thinking or altered your approach, or obviously this was one where you had hands-on experience already as a potential client. How did that research kind shape you in a different way than it did in your prior startups?

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Miguel:                        

That's an interesting point. Yeah, we definitely didn't talk to our family and nobody had experience in SaaS and our friends didn't either. So we did reach out to our network both from our previous experiences... co-founder as well. He was doing growth equity investing before business school. So [00:15:00] yeah, we had people to talk to. What we didn't know is which companies this would be the best option for. We didn't know if it was SMB, like early-stage startups, late-stage startups, if it depended on their final customer, et cetera. And also the original idea was more like an affirm for B2B SaaS, so actually point-of-sale financing for SaaS companies so that their customers could pay monthly for an annual license. So solving the working cap [00:15:30] for the buyers. And then when we started talking to SaaS companies, we started to narrow down the ICP, the ideal customer profile and the ideal segment where this was really valuable.

We started understanding more about the competition and about different options. And we also, recurrently got the question of CFOs saying like, "Hey, I love this, but instead of me getting the cash up front from every new customer that I sign, is there any way in which I can get [00:16:00] this same functionality for all my existing customers?" So actually people were thinking of how can I turn all my recurring paying customers into a source of funding today? So we thought that that was going to be an easier way to start as opposed to trying to build all the integrations and so on to enable a point-of-sale financing product. That is still our main product. So a financing product for SaaS companies that depends basically on their ARR, on their retention, [00:16:30] on their efficiency metrics, et cetera. And we ended up launching the Affirm for B2B SaaS much later. We actually ended up launching it last year, and now it's one of our fastest growing products ever. But only because we have a platform to make it possible, it would've been way harder to do at the beginning.

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Bill Cilluffo:                  

So when you went to jump into the business, I mean it's not like some people start businesses and it's like they're number seven person to do the same thing. I studied this one company and I think I can do it a little bit better. You weren't [00:17:00] really in that situation. I mean at some level it was an existing industry because banks exist and banks do commercial loans, but the idea of a custom product didn't really exist. How did you find really jumping in and creating something quite new, recognizing that there was some analogies from e-commerce out there, certainly banks have products. I mean, how did you really navigate that through the notion of being kind of a pioneer in the specific innovation that you created?

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Miguel:                        

Yeah. I think that [00:17:30] being a pioneer was an advantage because we didn't know how hard it was, so we sort of just did it. But we knew that the business was going to be a success or not... Let's see. There are a few things that could give us an option to be successful. If we didn't figure them out, we would fail for sure. And the main one was risk. And we knew that all the lending companies that died typically is because they miss on risk. It becomes an afterthought. So what we did at the beginning was [00:18:00] we tried to nail that we're going to be given money to companies, and that's the easy part, but we really needed to get it back and make money off of it.So we started talking to pretty much everybody that launched a lending or factoring receivable financing company. And we're talking to people that had been successful, people that had failed, to risk teams, to data analysts, just to try to understand what we needed to do in order to build a model to understand the vertical.

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And that helped us to narrow down a bunch [00:18:30] of things like one, do we focus on just one vertical. What could we learn from SMB lending? What could we learn from revenue-based financing in other verticals and so on. And we started getting advisors that would help us with those different things. And in fact, most of our hires were dictated by what we were getting in those initial stages. And then we decided to understand what were the levers that we had as a company to grow. And those levers in a lending company are more complex [00:19:00] than a regular B2B SaaS company. We needed to figure out capital markets, we needed to figure out the capital structure, and then we needed to learn how to operate as a team. So that was the framework that we used to figure out what we needed to learn about as quickly as possible, and also who we needed to have on board from the point of view of investors and team.

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And a lot of the things that we did, we did quicker than anybody because we didn't know how hard they were. We did [00:19:30] have a more or less similar states company, targeting a similar problem with a very different approach. So this company called Pipe, they were doing something similar. They had raised a bunch of money. I think that when we raised our seed round, they announced a 60 million round the following week. So they were one or two steps ahead of us from a capital point of view, and they had a totally different value proposition. So we didn't let that distract us, but we [00:20:00] always knew that there was going to be competition down the road. And in fact, at the beginning it was quite competitive. And then we eventually out competed everybody in the space, which was super interesting.

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Bill Cilluffo:                  

Now thinking back to those early years, I mean I'm sure you've learned a ton, right? Been at it for almost four years now. What's one thing as you think back that said, wow, we weren't sure, we're jumping in, but you know what, we assume something and we really got it right? And then is there something that you think back and like, wow, we really screwed that up. If I had to do it over again, I might've [00:20:30] done something very different.

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Miguel:                        

Yeah. So we assume one thing, we assume that the market was going to be way bigger. So we assume that the market that we could really access all the, let's say, seed to series big companies in the US and in Europe. But I think we forgot to actually focus on the SAM instead of the TAM, out of everybody that was out there who could we really work with. Because in an lending product, you typically don't want [00:21:00] to work with the companies that want to work with you. Or the people that find you, those are the ones that you really want to avoid because a lot of them are desperate. So our SAM was more than we thought. So that was probably something that we should have figured out much better or much earlier. And it would've dictated our go-to-market efforts much earlier and would've probably gained a few even a year or a year and a half in terms of go-to-market experience.

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And then it would've helped us to go multi-product earlier as well, [00:21:30] which we know eventually we need to do to enlarge our TAM and be able to go further up market, et cetera. And then another thing that probably was a mistake is that we treated equity and debt investors as the same, or expecting it would be the same. You just raise money from different pools for different purposes, but you can't treat them differently. And it's so different. That's been a learning even now. So as we've gone from, [00:22:00] let's say equity investors are all about the upside and their investment can go to zero, they can lose one X, or they can make 3, 10, 20, 100 X, right? But then investors, the best that can happen is that they make, I don't know, 12, 15% in return per year. And of course that means that they cannot lose their principle if they make on average, let's say 15% return.

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So they look at companies in a really different way. [00:22:30] They want to see a boring, predictable, slow-growing plan that has very little room for failure. And equity investors want to see exactly the opposite, they want to see you trying to reach for the moon as quickly as possible. So that was a big mistake and a big learning. And also as we've graduated from private credit funds to investment banks and so on, that learning compounds, those investment banks want to see things that are more boring than private credit funds because they're making [00:23:00] lower returns, so their capital needs to be at less risk than others. So that's been a really, really big learning from let's say FinTech immersion point of view.

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Bill Cilluffo:                  

Totally. I mean that's relevant I think to so many companies out there that need various debt products. I mean, it's funny I feel like I'm still continuously learning that same point from almost the inverse point of view. So many of us at QED came from Capital One, spent years doing lending at Capital One. We're excited [00:23:30] to get into equity where we care more about upside, but I think sometimes we have to catch ourselves. I think the kind of lending game is so ingrained that it's like, yes, I know intellectually my job is to find companies that have massive upside, and we focus on that. But I also think just the dynamics here of at some level, lose a little bit on the companies that don't work in hopes that you can make a lot off the companies that do is the exact opposite of lending.

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Miguel:                        

Exactly.

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Bill Cilluffo:                  

It is interesting. Whereas on the surface, they're both risk management businesses and you put your capital out and you hope to get it paid [00:24:00] back a lot later, but then you sort of get underneath the covers and it's very different dynamics and you're dealing with both at the same time. So it's kind of interesting.

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Miguel:                        

Exactly. And actually when we were talking to VCs at the beginning and they were asking us, "Hey, how are you evaluating these companies?" Because VCs were saying that they were evaluating the same companies that we're lending to, a VC would think differently. And what we always said is, look, we're looking at these companies from a lending point of view. We don't care about these companies being [00:24:30] a unicorn in five years. We only care about these companies continuing to exist in the next 12 months. So it's like a totally, totally different lens and yeah, good learnings overall.

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Bill Cilluffo:                  

Well, let me go back to one of your stories a bit from when you spent time in the SaaS business and you kind of thought you were getting hired to do some strategy work and you wound up doing a bunch of cold calling. If I understand correctly, the cold calling skill actually turned out to be quite useful and then was pretty important in the early days of Capchase. Obviously you've got a much more sophisticated [00:25:00] go-to-market today. I wonder if you can just talk through the journey. There's so many B2B companies go through this of kind of cold calling founder led sales and then ultimately have to do a more sophisticated version and then hire salespeople and figure out the model. I mean, I just wonder if you can walk through a little bit of your go-to-market journey, because I think that's very useful to a lot of different entrepreneurs starting up.

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Miguel:                        

Totally. Yeah. So it has changed a lot, but the fundamentals still apply. Basically what we did when we started is we [00:25:30] wanted to always grab the low hanging fruit. So when you start, that's the people that you know, then the next low hanging fruit is the people that know the people that you know, so your network's network, and then try to find the next easiest connection to these companies. So at the beginning it was all founder led sales. We had no sales team, and I think that we only hired our first salesperson once we reached about a million ARR, something like that. And we really did it to just scale things and also to be able to let's [00:26:00] say farm the existing companies and get them to continue drawing and continue scaling, et cetera. At the beginning, we're just trying to sell to our network then to our network's network and then trying to scale that and try to understand where the bottleneck was at any given point so that we could continue to scale the machine.

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So at the beginning we pretty much looked at our LinkedIns, we were connected with our professor's contacts as well, trying to validate the idea. And from those conversations we started to [00:26:30] get our first customers. And then whenever we got a customer, we'd ask the customer if they had any other companies or any other friends that were running companies that we should talk to. And there was some kind of referral circle going on. And then what we did is we started to look at all the B2B software companies, for example in Boston, which is where we were and we could meet people in person, et cetera. And then New York. And then we announced a seed round, it got featured on TechCrunch and started to get a bunch of inbound. And then [00:27:00] I think that for the following three, four months, it was pretty much inbound all that we got, and we were also continuing to reach out, looking at PitchBook and trying to look at different contacts, et cetera.

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And then that evolved. At some point we started to try to understand what was the universe that we were trying to sell to, map it all out and put it in our CRM and started enriching all that universe with both qualification and intent data. So understanding who are the best [00:27:30] companies to work with and how can we understand the risk criterias even before we actually contact them. So that our funnel was more like a pipe than a real funnel, so that we weren't losing too much along the way. And then also understanding the intent. So for example, have they raced around recently? Are they hiring salespeople? Are they increasing their ad spend? Are they hiring new CFO or a new head of finance? So try to understand that and enriching the database. And then [00:28:00] we actually built a really robust outbound machine that nurtures people in our database, reaches out automatically, et cetera. And we also built a very, very strong referral network. So we set up a referral team that would go to VCs, to strategic advisors, to outsource CFOs, accelerators and so on, and would introduce Capchase. And what we were trying to do was try to get people that were aware [00:28:30] of the pains to recommend Capchase to their networks. And today 40% of our revenue comes from the automated outbound, and about 40% comes from the referral network and the 20% comes from traditional paid and inbound channels.

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Bill Cilluffo:                  

Wow, that's pretty phenomenal. If you're able to get that many alternative channels to work. Does formal partnerships play an important role for you or not so much? I know that's one of the commonly talked about subjects for [00:29:00] these B2B type businesses.

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Miguel:                        

Yeah, partnerships are important. We loop them in the referral team. But yeah, they're definitely important. Although most partnerships are more a marketing play and really like a business generation play. I would say that 8 out of 10 or 9 out of 10, the best thing you get out of the partnership is the announcement. And then there's this 10% of partnerships that you really get embedded and they become a reliable source of revenue. So you just have to incentivize those partners accordingly. And I [00:29:30] would say that as we've launched the second product, we've had to reinvent all these things because suddenly routing doesn't work that well. And then you need to train your team to sell to different products and to different motions and so on. So actually we have evolved and now we have separated the teams so that we have one team selling the grow product, which is our core product, and then another team selling our new product, which is pay. It's like a different ICP, different stage, different value prop, and [00:30:00] we just didn't find another way to do it. We had to separate it.

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Bill Cilluffo:                  

So one other aspect, I know that's been a big part of your success, is international expansion. I mean, you guys are, as you mentioned, you're in US, Canada, Europe, obviously big. Started in the US but then have grown. I know that's one topic that is always controversial. Some people really believe in let's go global, some really want to stick to, especially when you start in the US, you're obviously in a really big, big place. Have you had to make major changes to your business as [00:30:30] you've gone international, or do you feel like you've had a very similar approach that's kind of worked everywhere? I mean, I'd love to hear a little bit of that journey because I know that's one that again, lots of widely divergent views on international expansion and widely divergent success stories.

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Miguel:                        

Yeah. So we went international super early on, and the premise that we had to do so is that a SaaS company in Stockholm is very similar to a SaaS company in, I don't know, in San Francisco or Oklahoma, whatever. So that [00:31:00] was the main incentive to go international. Also, we're seeing, well, we started seeing a bunch of copycats coming up. That happens a lot, right? You start a company in the US and then you have the X company in Spain and the captains of France, the captains of Germany, whatever. So we decided to go international with it. We haven't entered every market in Europe because whenever we were going international, before entering a market, we would look at, we basically do a framework. We would look [00:31:30] at regulation, we would look at capital availability at competition and at size of the market and also add localization. How hard was it going to be to sell in the market?

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So for example, in Europe, we entered Spain, UK, Benelux and Nordics, and we avoided, for example, Germany and France. Germany and France from a regulatory point of view are insane. And we avoided Italy because the market was tiny for B2B SaaS. The rest of the markets are fine. [00:32:00] So international, it does enlarge your time. It adds a lot of complexity as well. In a lending business, specifically I think around money flows, money movement, capital markets for international is still yet not super developed. So we've gone from serving everything from a union trans facility in the US to actually having to set up facilities both sides of the Atlantic. And then, I mean, regulation is a complication as well. So for us it has worked, but we've had to figure it out. [00:32:30] And we have not expanded more internationally because any other market adds, let's say disproportionate amounts of headache. And also most markets are not that big for B2B SaaS.

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Bill Cilluffo:                  

Now you've spent this time doing product diversification in the US starting with your core lending product and then the BNPL, now the payments, are you really focusing your broadening efforts mostly in the US or have you also been able to scale some of these alternate products to other GEOs as well?

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Miguel:                        

Good question. So we start everything in the US. [00:33:00] I think it's where we have the biggest base of customers, is the biggest market as well, and the most sophisticated market too. So we start everything in the US, we try to find product market fit. If we don't find product market fit, we don't, I mean, we just shut down the product. If we find product market fit, then we bring it internationally. So our BNPL product, which is growing super fast now, we launched first in the US, then we bring internationally, and now it's just scaling it as quickly as we can. So yeah, I would say that that's [00:33:30] the path it takes. We talk to customers everywhere because again, a SaaS company in Spain is the same as SaaS company in San Francisco, but when you think about go-to-market, aversion to risk and so on, the US is definitely a few decades ahead of Europe at this point.

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Bill Cilluffo:                  

Well, hey, for our last segment here, I mean, I'd love to transition to talk a little bit about the team and kind of leadership of the team that you have. I mean, I know that you guys hold your mission and values very important. I wonder if you can give a little bit of a taste [00:34:00] of what a couple of those might be and what a couple of your general principles might be. And related, how do you wind up successfully driving those through the team, especially in a world of international expansion in multiple countries? And I know you've got some people sitting there in the office with you in New York and plenty of people spread. How do you think of really the mission and values and how you use that to really rally the team members?

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Miguel:                        

Absolutely. So yeah, I'll talk a little bit about the values and then also about the mistakes that we've made as well inadvertently with these values [00:34:30] and culture and so on. But in values, I mean, we set our values quite early on. So let's call it six months into a journey, basically, because we're seeing that when we were starting out, the people that we're hiring were really determining who we're hiring next. So the first three people determine the next 10 people, the first 15 people determine the next 50 people, et cetera. So we wanted people to have a common set of values, and we wanted to define that. [00:35:00] So we came up with the values early on is three values, courageous spirit, builder attitude and service mindset. And then what we did is we tried to highlight them all the time and try to motivate people with them, try to draw examples with them, promote people according to them, et cetera.

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So for example, again, all-hands meeting since day one, we've talked about our values in the form of somebody in the team talking about somebody else in the team highlighting one of the values.So for example, [00:35:30] given an example of somebody showing a courageous spirit or a service mindset or a builder attitude, and then why those is because we really wanted people that were doers and not just planners. And maybe that's one of our pet peeves, but I get nervous when people are like, we should do this, we should do that. I really like people that are like, Hey, we did this and this is the result, as opposed to just having a bunch of ideas. Ideas are good, but [00:36:00] unless those ideas are executed and you get data, they're worthless and very temporary. One of the mistakes that we did is that, for example, the way I operate is that I tend to focus on what's not working to try to solve it as quickly as possible.

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So then that means that there's more attention on what's not working than on celebrating the wins. So that's something that I was given feedback on. We need to celebrate the wins as a team as well, because yeah, it's great to solve on the things that are not working, but when things work, [00:36:30] let's celebrate it and get this culture of winning. And I think that at some point people thought that bringing mistakes or things that were not working actually put you in the spotlight in a negative way. I think that that is still a change that we're doing where we want to celebrate mistakes, we want to celebrate things that are not working, because if you don't celebrate them, if you don't see them, if they remain obscure and people don't raise them, then they never get fixed. People are afraid to bring up things that are not working and then they never [00:37:00] get fixed. Whereas we want to have a culture where bringing up things that don't work is actually celebrated, so we can put all our effort in solving them and again, celebrate the wins. So yeah, trying to instill this culture of people wanting to own things that are screwed up, that don't work, and solving them as being a catalyst for their career as opposed to getting fired.

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Bill Cilluffo:                  

Yeah. No, that's a great insight. I mean, at Capital One, we had this thing called Eureka moments that [00:37:30] back when somebody sort of found something in the business, they thought they could make it way better. And that was kind of a really interesting way to both celebrate the improvement, but also celebrate the, Hey, you found some problem and that was great.

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Miguel:                        

Exactly.

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Bill Cilluffo:                  

And everyone makes mistakes. Obviously if you make the same mistakes five times, that's the problem. But…

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Miguel:                        

Exactly.

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Bill Cilluffo:                  

... Learning from that, that's pretty critical. So it sounds like you really invested in this very early on in the journey. You're a much bigger, more complicated company now. Have you found that you've had to make changes to your values as [00:38:00] maybe different things are important now than they were then? Or have you found it to be quite consistent and really work through different stages of growth?

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Miguel:                        

We actually had five values at the beginning, and then we reduced it to three because five was too many and too complex. And then we also saw that in some cases, the leader for each team really influences that team and the culture and the subculture in that team. So we did see in some cases that we hired the wrong leader and then the wrong [00:38:30] values, let's say were being permeated across that specific leader's team, and then you need to take action quickly or then things deteriorate and then you need to change the whole team. So those were some painful learnings along the way, but we've been trying to be consistent with the values. Because if you attract people based on values and then you change them, then what does that mean? Does it mean that now you need different people? Does it mean that the people have changed, that you value different things [00:39:00] or I don't know. I feel like consistency is so important that, yeah, we've kind of kept them pretty stable.

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Bill Cilluffo:                  

So one last question about values, and then I'm looking at the clock, and we've kept you for a while here, so we'll be wrapping up. I've certainly both felt myself and talked to many others that one of the most difficult things about being a values led company is what happens to those fairly few people that are absolutely unbelievable performers that delivering results but really don't fit from [00:39:30] a values perspective or maybe from a culture perspective and figuring out how to deal with that. When do you give a little bit of permission to be a little different, when do you not, how do you think that through? I mean, any lessons on that front? I mean, I find those are some of the most difficult conversations to be had.

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Miguel:                        

Yeah. They are, 100%. I think that Ben Horowitz talks about this in a book called The Hard Thing About Hard Things. And yeah, basically you're going to have those, right? You have people that are really good, are making a difference, but they don't, let's [00:40:00] say they don't embody the values. I think that it's easy to live with it for a while, but then actually things start getting rotten under the surface, and then suddenly people don't want to work with that person. And then if that person is an IC, then it's somewhat easier. But if that person is a leader, then actually becomes really damaging to the organization to the point that people start leaving. And then if suddenly you're losing people because they can't work or it's just [00:40:30] too unpleasant to work with a brilliant, let's say, person that doesn't embody values, that's really bad.

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And then you start looking at trade-off, right? Is this one person more valuable than three people, than five people, then 10 people? Where does this end? And then typically these people are also, they know they're really good, and that gives them some kind of either urge of superiority or they're condescending or whatever. They know they're really good, they're ambitious as well, so they want to get [00:41:00] promoted. And then that's when it gets extra complicated because if you promote somebody that doesn't embody the values that says a lot about your values.

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Bill Cilluffo:                  

Right, right.

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Miguel:                        

If you're promoting people, then people are going to want to do what that person is doing, and then suddenly that can corrupt your organization a lot. So it is really painful, and that's a lesson that we've had to learn and people have talked about it. Sometimes it's less bad to have an empty seat than to have the wrong person in a seat and having somebody that can't [00:41:30] work with others, which is pretty much the embodiment of somebody that doesn't embody the values, that's really bad for an... really, really bad. And again, this is always easier to say than to do, but it has been one of our learnings for sure.

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Bill Cilluffo:                  

Yeah. Actually, the quote you made, I think it's useful in many contexts. It's way better to have an empty seat than the wrong person. And there's one version of the issue that we just talked about, Hey, when do you understand how to get rid of somebody? But then there's another one on hiring that hirings difficult, and [00:42:00] at times people I see subconsciously almost lower the bar for who they're trying to hire to fill a seat. And so it's one of the hardest things to do is understand, okay, when have I seen enough people that I'm just going to hire the best? Versus when do you feel like you've got to keep the absolute bar in the right spot?

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Miguel:                        

We've done all those mistakes more than once.

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Bill Cilluffo:                  

It's awesome, Miguel. Well, I know you've got a very big and complicated business to go run. We really appreciate you spending the time with us today, [00:42:30] and we've obviously at QED loved our experience working with you guys at CapChase, both in the office and cycling in mountains, and I'm sure it'll be great to come. I'd love to ask one more question as we wrap up. I mean, we try to ask the same question to anyone. You're now a three-time entrepreneur. Hopefully we've got a bunch of prospective entrepreneurs listening. What's one piece of advice you might give to someone thinking about starting their first company?

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Miguel:

I would say just talk to customers. Talk to customers or potential customers, because that's really going to make you jump into it. When you start talking to customers and they start demanding what you're thinking, that makes you much more motivated to actually do it, and it's going to make you jump the gun and just do it. One thing that we did at the beginning, there's a lot of endless analysis you can do to try to refine the idea, the business model and everything. None of those matter unless you talk to customers and they're going to tell you what you really need to do. Those analysis, you'll do that at some point, but it's definitely not the place to start. [00:43:30] So just spend all your time talking to customers, understanding the pains, really, that's just the thing to do at the beginning.

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Bill Cilluffo:                  

I love it. And something that kind of applies very broadly, right? Almost just about everyone starting a business can relate to that.

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Miguel:                        

100%.

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Bill Cilluffo:                  

Anyways, Miguel, I really appreciate you spending the time with us. And to all you listeners, take care and thanks for listening. This has been the Fintech [00:44:00] Thought Leaders podcast, your window into the world of venture capital and financial services with today's digital disruptors. QED is proud to provide the best Fintech advice you can get, to learn more or to read the full show notes from today's episode check out qedinvestors.com and be sure to also follow QED on Twitter and LinkedIn @qedinvestors. Thanks for listening.

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