I’ve said this for years now to anyone who cares to listen or is just stuck with me for 5 minutes.
Putting it on paper here is my way of showing exactly what I mean.
What’s our beef with transactions?
It’s not the transaction itself with which we take issue. A transaction is required to provide capital. Bigfoot provides capital, so it’s requisite that we regularly close transactions to grow.
It’s the focus on transactions in isolation and at all costs and the tradeoffs required to pursue that focus that we just can’t get excited about. This focus does not align with the type of company we’re building.
For a volume-driven capital business (fintech or boiler room), transactions are the north star. Transactions drive loan volume at scale. It’s less so about them being profitable or durable.
For a concentrated capital business (us), relationships should be the north star. It’s relationships that primarily drive our funnel consistency and quality, revenue growth & loan retention in a loop.
Great recent article Lenny Rachitsky on choosing a north star metric here (published by A16Z).
A bit on the Transactional Capital Model
In the transactional model, throughput is driven by algorithms (product) and heavy sales and marketing spend to feed a big funnel that converts quickly.
Using SMB product and go-to-market playbooks to optimize transactional throughput is what it’s all about to drive volume (loans) in the hundreds or thousands to achieve scale. This machine is meant to function in rinse, repeat, and onto the next format. Given this, I get why building actual relationships with the companies borrowing the money cannot truly exist. They don’t scale! (within that playbook)
Generally, borrowers do not stick around all that long, so LTV is reduced. This necessitates minimized CAC paired with quick revenue capture, primarily derived from upfront fees and near-term repayment (sub 12 months).
Some folks want this type of capital experience. It feels lighter weight, faster, and less scary (maybe) and seems like it may cost less (maybe not). They’re totally fine wading into a sea of many where they are viewed and measured as a conversion metric. So be it!
If they are able and willing to spend a bit of time to understand the potential risks and costs of taking that capital and still value the speed of the transaction above all else, then it could be the right option for them at that time.
I’m of the opinion that this model materially increases the risk not only to the company and the capital supporting it but also to the borrowers relying on that capital to fund their growth. No lender can actually sustain 10-25% of their portfolio going kaput, but that’s often what happens when pursuing scale solely through volume. Things blow up and the capital runs dry, not only bad for the lender but also anyone relying on that capital for their own business.
Note: these risks pertain to any lending business, I just think they are dramatically exacerbated in the transactional model.
Our Approach as a Relationships-first Capital Partner
Our model is one of providing meaningful amounts of capital to fewer companies over a longer time period. Our success is not predicated upon conducting a massive amount of smaller transactions to achieve meteoric growth as quickly as possible. The transaction itself is a means to an end. It’s simply an implementation detail to execute in structuring a longer-term relationship with a company.
With a much more concentrated portfolio with larger dollars in play to any company, our success ultimately depends on selecting solid companies and supporting them for as long as they have our money.
To be clear, we’re not purely altruistic and our primary motivation is not losing money. It’s hard to grow a lending business when you make bad loans and lose money. Beyond being painful for our business, it likely means that whichever company we lent that money to is in a world of pain, possibly struggling to survive. Either way, one or both of us has messed up and will incur pain.
Given this, our approach could be categorized as more enterprise-y in nature. It’s simply not enough to conduct transactions with algorithms and salespeople, a broader aperture is required. I don’t know of a better way to do this than focusing on our relationships and it’s this commitment that really matters to ensure mutual success by driving outcomes together.
For all parties, this should be an enjoyable rather than a painful experience. Relationships are not meant to “get in the way” but rather to cement alignment and drive value creation.
Our job is to treat relationships as our core product and surround them with scale in other areas of our business so we can focus on them and provide repeatedly delightful experiences (that’s our goal at least). We deploy process, data and technology as supporting pillars to enable this.
Thus far, five years in, our approach has worked. We have not lost money and nobody has gone out of business, yay! Actually, every company we have worked with to date has never really struggled to pay us along the way and many have achieved wonderful outcomes with continued capital support from us.
Not to say there have not been some bumps along the way. There will always be bumps, which is another reason I believe relationships to be paramount. Without them, how are you supposed to see, understand and collaborate to smooth things out? Algorithms just can’t do that. In those scenarios, algorithms can raise alerts (good) and pull a kill switch that turns off money (maybe the right call, maybe an overreaction without broader context), that’s about it.
At the end of the day, it’s about where we put our focus, how that drives our execution, and what that means for our business and our counterparties’ businesses. I believe that our more prudent (and less sexy?) path of sustainable growth dramatically reduces the risk of our flaming out and the negative impacts that outcome can have on other people’s businesses.
Relationships Don’t Scale
A lot of people question the “scalability” of relationships. I don’t actually view relationships to be unscalable. As with anything, you can build in processes and even products to foster scalability.
These can and should be both directly pointed to relationships as well as to other areas of your business that take up time and detract from the core focus on relationships.
I call this building “surrounding scale”. And being incremental in building surrounding scale is totally fine. Incremental improvements add up over time. I’m not talking about moonshots here.
Relationships can also actually carry some semblance of network effects. The more and better relationships you have the more you develop from those and the more high-quality referrals you receive. It can be self-perpetuating if you focus on it and are a good actor that provides value.
Our team must constantly challenge ourselves to think and operate with scale in mind while still engaging at a personal level. The folks we work with don’t need to know our implementation details, that’s for us to figure out. What we absolutely want them to know is that for us, relationships always come first.
It’s important to call out that in business there are the company and its results, and then there are the people behind it. Relationships are how we see beyond the headline results with greater context and empathy.
They’re also how we help support the outcomes people are out to achieve for their business and ultimately for themselves and their families.
At the end of the day, we’re growing Bigfoot alongside a lot of the companies that we’re funding as peers. We can help them and they can help us. That’s the kind of environment we choose to operate in.