The Angel with Michael Conniff

Michael Conniff (00:01)
Hello again, everybody, and welcome back to The Angel. We're a podcast. I'm your host, Michael Conyff, and of course we're dedicated to founders, startups, but really the angels, the investors, the people who help them. And to that end, I am really happy to welcome to the podcast, Melissa Withers. She's the managing partner and co-founder of RevUp Capital. Welcome, Melissa, great to have you.

Melissa Withers (00:25)
Yeah, thanks Michael, really happy to be here.

Michael Conniff (00:27)
And I want to remind everybody you can subscribe to us on Substack, thea or we're on all the major platforms, Audible, Amazon, Apple, et cetera, for podcasting. For video, you can find us on Spotify and YouTube. So this is what I've been looking forward to. Melissa has carved out a very interesting niche in the startup ecosystem. She's

Her company, Rev Up Capital, I don't know if you know this, you're almost 10 years old. You're nine years.

Melissa Withers (01:01)
I am old. When I started RevUp, I dropped my son off at school. When I closed my last fund, he drove himself. I made a video, it was unbelievable. I was like, how is this possibly happening? Yes, yes, I'm old. I am old, my organization is old, just sorry.

Michael Conniff (01:10)
Ha ha

I would never say you're old because the only people who are older are older than me, Melissa. So you're safe.

Melissa Withers (01:23)
I like a fine wine. Just getting better with age.

True story. Yeah, but we have been at it for quite some time.

Michael Conniff (01:33)
Yeah, and so you are a revenue-based model. I'm gonna let you describe it because it's very interesting. And first describe what it is, then let's talk to how you got there.

Melissa Withers (01:43)
Yeah, sure.

Yeah. So the model that we use at RevUp is often described as non-dilutive in so much that we use a non-equity model to invest into our companies. We use a low volume, high touch portfolio approach. So in that sense, we look like boutique equity, but rather than use an ownership model, companies return value to the fund through their revenue growth over time. So what that allows us to do is invest in a way that I often describe as exit agnostic. So we can focus more on the journey and a little bit less on the terminus.

which allows us to work with, in many ways, a broader spectrum of companies, because I don't need every company that I invest into to be a winner in a winner take all market. We're not unicorn hunting, right? So it's slightly different model, but similar approach in how we work with our companies over a long period of time.

Michael Conniff (02:36)
I believe the terminus was in the third season of The Walking Dead. And that's where they discovered that they would give you food, but they were cannibals. So that's an interesting way to describe the option. But tell us, I know you've had an interesting career. You worked for the state of Rhode Island. You worked in public relations and marketing. But how did you come to believe that there was a need for this kind of different

Melissa Withers (02:42)
A terminus.

Yeah, yes, determinists. Yes, determinists. Yeah.

Michael Conniff (03:06)
or alternative way to help startups.

Melissa Withers (03:08)
Yeah, well, that's the nice thing about being old is I've been able to have a couple of different careers. I actually started out in biological life sciences, spent six years working at the intersection of basic research and the commercialization of that research, which was my first contact with startups. I did do a public sector sabbatical where I provided some support to a couple of my friends that were working in government, but I would say that was more of a zig than a zag. I started professional investing a little over a decade ago.

my partner and I ran a seed stage, but at this point we call it pre-seed stage equity fund and kind of got the taste for it. I had started my own company and once you get the bug, it's pretty hard, you're sort of ruined for all other things. And in the process of running this equity pre-seed stage fund, we did 90 companies through that model. And at the conclusion of that model, I found myself both professionally and personally frustrated by the...

the exit or bust constraints of the equity only model. You know, the idea that every company out there needed to be a runaway unicorn hit to be valuable just struck me as farcical. And it was also a setup for a lot of the inequities in that model. There was a reason why you saw so much racial and gender discrimination and a lot of just some bad cultural phenomena were many ways fueled by that sort of unicorn hunting frenzy.

And so at the conclusion of that, really pulled back and thought to myself, I know that there's more than one way to build successful companies. Why, why don't we have more than one tool in for early stage companies? So for later stage companies, there's a thousand different capital tools that you can use to build your business. But for lots of complicated reasons in early stage investing, we just sort of got locked into this one model and this kind of notional idea that you march down a linear progression of equity funding rounds.

that produces a lot of outcomes that both founders and investors in the end aren't very happy with. So in 2016, my partner and I started noodling with the idea of how could we use a different model to achieve the same goal. So we wanted to invest into the same kind of asset class and wanted to support those kinds of founders, but we wanted to be able to do it in a way that had a little more flexibility and optionality. So that's when we started our first Rev-Up Fund back in 2016. Turns out it works. Fast forward, we closed our seventh fund in 2023.

and have done about 60 companies through that model and have had an incredible experience working with a really amazing group of founders and companies across industries and disciplines and geographies. Essentially, proving what's more important to me isn't so much my model is better than your model. It's that this opening up the opportunity to innovate the capital toolkit. So really thinking more, having a more robust sense about how we can

use capital in different ways to support early stage companies to unlock the power of entrepreneurship for founders and investors. So that's sort of, and spiritually how it came to be. And certainly things have changed over the years. And what has also changed is many, many people have followed us. So revenue-based funding is now a very large and rapidly growing asset class, and it's very diverse. It can mean many, many different things. But we were really lucky to be able to be pioneers in that and retain a lot of the

A lot of the nuances of investing that we wanted, a lot of the founder-focused stuff that were important to my partners and I, and been able to do that for the years and really have a good time doing it.

Michael Conniff (06:34)
Yeah, it's interesting. Revenue based, I think of those people tied to e-commerce revenue seems to be very popular. I guess it's because it's repetitive or somewhat reliable in some companies. But I'm not aware of a lot of other models. What am I missing?

Melissa Withers (06:59)
Oh, yeah, most certainly. Yeah, I would love to say that we're the only ones, but that's I mean, I actually think it's great that we're not the only ones. There are, it's a very broad spectrum. So again, so what you just described is a is a very transactional model that is not really strategic investing, it's more transactional capital. And then you can go all the way on the other side where there are there are other funds like ours who do a relatively low number of investments.

are highly engaged, providing a lot of strategic value, but are using a revenue-based model over an equity-based model. So no, there are others. I think it's still, I wouldn't call it over-saturated. And I think it is overall difficult to be successful in building early stage companies and investing. So some people try it out and it doesn't quite work out. But no, there are some other funds in the space that I think very high love and admire. And we often work together and through the years have worked together to advocate

overall, right, for more education around capital and giving founders access to better education earlier so that they can become better capital navigators. So no, not the only one for sure.

Michael Conniff (08:07)
Now, so having said that, I know that you, I think you'll go up to $500,000 and explain how you get paid back. And in particular, what I'm interested in is it's a model, I've been trying, I've been sort of noodling this. So this is just me spitballing a little bit, but it seems to me that if a company that you help in this fashion does really well.

You can do really well too, rather quickly, but I know there's a cap on what you can make back. So explain how that works. You lend somebody $500,000. When do you typically get that back and how much do you make on the $500,000?

Melissa Withers (08:53)
Yeah, so a few things. One, it's a little different than Lend. And I think for people listening, the structure is very different. So I think, so when we invest, let's say I invest $500,000 into your company. I also, it's very important to just point out to anybody listening that my model is my model. And there are 50 other versions of this that don't look anything like my model. So when I'm describing how my model works, I am not describing how it works, right? So the devil is in the details.

Michael Conniff (09:22)
Right.

Melissa Withers (09:22)
And there are some amazing, uh, other funds out there that I love and recommend all the time, and there's like some garbage, like a dumpster fire of predatory stuff. There are actually a lot of predatory lenders changing their name to have it feel softer, right? So it's a huge spectrum. So to any founder that's listening, the devil is in the details. There are things you need to think about before approaching.

these kinds of investors like anything. You could say the same about equity investors, right? There are good equity investors and really, really bad ones and you wanna make sure you end up with the good ones. In our model for currently, we do use a fixed return model. So there is a maximum amount of money that a company will ever give us back. It's defined, we have a term sheet, just like any other investment. I tell you how much money I'm gonna invest into your company.

And then fundamentally, the simplest part of our deal is that there's a percentage, somewhere between four to 6%, and a company's gonna return four to 6% of their revenue minus COGS, or revenue minus anything that isn't really revenue, until they hit that cap. So most of our deals take anywhere between four to six years to fully mature. So we're with our companies for a pretty long period of time. There have been, of course, some companies that just grow explosively, and they're on the shorter end of that.

But if you do the math, you know, and you're taking, you're paying me back 4% quarterly, it's gonna take a while to give me back a multiple on a half million dollars.

Michael Conniff (10:48)
What kind of multiples do you usually get?

Melissa Withers (10:50)
We're anywhere between 2.2 and 3X depending on the maturity of the company and the amount of time that it's going to take the company to hit that target.

Michael Conniff (11:01)
Okay, and so what is the great advantage of this other than the fact that it's non-dilutive and they get to work with you and your partner? Why do it this way? And also I should point out, I think.

Melissa Withers (11:15)
So I would say that, you know, it's really, it's more about building the right capital stack, right? So it's a good company should have many different kinds of capital at play. There are some things that equity is much better at, right? More patient. You wouldn't want to use a revenue based investment to fund activities that don't produce revenue, right? Like till far out, because you'd be taking a pretty big risk, right? Which is why you don't see too many revenue based investors investing into free revenue companies. Although there are many people that.

continue to experiment with that. So I think it's not so much that there are absolute benefits, it's more about the appropriateness for the investment at the right time for the right company. Broad strokes, I think a few of the benefits for our founders, so why the founders, I can answer it from why the founders pick us, right? So in our case, the non-dilution is not insignificant. It's hard to get smart money, but while also protecting against dilution. So that's an added benefit.

I think one thing that's interesting about it is when you compare it to debt, if you even can qualify for debt, you're probably going to be personally guaranteeing it, which is highly problematic. Deals like ours don't have personal guarantees or securitization, and they don't sit like that in your cap table. But the other thing that's interesting is a revenue contract like ours is tied to a company's actual revenue. So if you have a good quarter, I have a good quarter. If you have a bad quarter, I have a bad quarter. So when you look at things like venture debt.

They usually have a pretty sweetheart front end. You don't owe us anything for a whole year. But then after that, right, you owe us $20,000 a month every single month. And if you miss a payment, we're coming for you. And I think for an early stage company, locking yourself into that sort of cadence of structured returns can be very challenging. So I think it's flexible in that it recognizes that an early stage company is going to have.

fluctuations in growth and it's going to have fluctuations in cash flow, right? So I think that's the other benefit. I think the primary benefit that most of our companies, why they work with us is when we built RevUp, we built it expressly to work with companies that were at a very particular inflection point. So if you think about going from zero to the first million dollars in revenue and then from a million to 10, those are two really different legs of the journey. So much so that many of the things that get you to your first million dollars in revenue

not only won't get you to 10, they will actively stop you from getting to 10. So yeah, so think about founder, founder led everything, um, personality driven, you know, approaches to things, all the really good dynamic stuff that gets you up and out, you know, being, having people that can do a little bit of everything, having the founders be, you know, just on top of all the things and leading all the things, right? That like, that's pretty helpful in the beginning.

Michael Conniff (13:42)
Can you give an example of that?

Melissa Withers (14:06)
But as you want to get to that inflection point, having founder led everything will stop you from building the infrastructure that you need to scale. And having everything be personality driven versus process driven will stop you from getting to 10 million. So not only does it not help you, in many cases I meet companies all the time that are I think are stalled out down there because they can't adjust the operating model inside the company in order to achieve that. And so when we built RevUp,

aside from how we wanted to structure our capital investment, we built our team and our capacity and the way that we add value around that process. So we're really gluttons for punishment, I guess you would say. So we spend a lot of time in that really messy space between that sort of first couple million and that 10 to $20 million.

Michael Conniff (14:56)
So a couple of questions there. I have sent a couple companies to you that have reached the million dollar plateau, you know, which is significant for a startup. I'm curious about when you look at companies like that, what are you looking for?

Melissa Withers (15:19)
Yeah. I mean, our selection criteria are, I mean, we publish them, right? So people can go to our website and see what we select for. You know, baseline revenue is in many ways the least significant factor. I mean, there are minimally viable things that, that I think any company should need before it considers any revenue based funding. So if you don't have enough revenue across a long enough period of time to understand the pattern, well, you probably shouldn't be betting against it. Right. So.

Baseline revenue matters in so much that there needs to be enough of it. And it needs to have existed long enough for you and me to understand the pattern and understand how that pattern might play out over time. So I want to, I don't want to discount baseline revenue. But I've invested in companies that had, you know, a half million dollars in revenue, but they had other things. And I said no to many companies that had a million or two million dollars in revenue, but they were stuck. They had, they didn't have a good growth rate.

the team didn't have any, they were not able to demonstrate that they had the capacity to make those changes that we just talked about, right? So that the leadership team really wasn't gonna be able to make those internal transitions, no matter how much money you dumped on top of them, right? That they didn't have enough room in the market to run. And then of course, underlying unit economics is probably the part where I always feel the worst when a company gets really excited, they see my criteria, they're like, yay, this is gonna work. And then when we get to talking,

You know, either they have very low margins, you know, or they're operating in a manner that's just really unprofitable, right? And it's, it's okay to burn money with intent. It's okay to lean into growth. But I think fundamentally, if you are unprofitable and you can, you plan to be unprofitable for a long period of time, well, then you shouldn't revenue based investing isn't for you because you're going to be paying me back with other investors' money or you're, you're just not going to have the capital inside the company to.

to make the return. So the underlying unit economics are very, very important. But above all, because we are so selective, we also have to believe that we add value. Like I can't invest in your company if I think the only thing I can do for you is put $500,000 in your bank account, right? That it's just not what we do. And our cost of capital is too high for that. So probably the most important thing is the team. Like do we believe that we bring something special to the party?

You know, having done now 150 companies, do we believe that we have the right point of view, the right frameworks, right networks? Do we think they're going to be a good addition to our portfolio? So our founders, you know, support each other, you know, are that like, so they're in some ways the baseline revenue. It's important, but in the end, it's never the deciding factor on whether or not I'm a good capital partner for a company.

I also have to work with you for years. And if I hate you, if I don't love you in the beginning, we are not gonna love each other three years. Like, you know what I mean? Like you, like the honeymoon needs to be hot because there's nowhere to go but down, right? So they're like, like many, you know, small funds, you know, like cultural fit is, is paramount.

Michael Conniff (18:06)
Interesting.

I'm sorry.

not for the first time has investing or this kind of model been likened to love. It's hard not to fall in love. Yeah, and it's hard not to fall in love with founders. You really like, you really want them to succeed, you think they're quick, et cetera. So one question that strikes me is that because you're in this revenue-based niche, which is...

Melissa Withers (18:37)
It is definitely a relationship. It is definitely a relationship for sure.

Yeah, yeah, totally.

Michael Conniff (18:56)
You're not in venture capital. You're not in debt. You're in a very specific part of this world, which means your relationship, it's a question. It seems like your relationship with your founders or a founder would be different than where you, you've done this before. So you can actually compare what happened in the frustrating example of your first company doing this.

or lending, you know, or investing. What's different about the relationship now that you have this different model?

Melissa Withers (19:34)
I think the biggest difference is that I can balance my fiduciary responsibility to my investors without driving a founder exclusively towards outcomes that are good for equity investors. I can accept strategies and growth strategies and things that might be very good for the founder that an equity investor might find objectionable.

Michael Conniff (20:02)
What would be an example?

Melissa Withers (20:04)
Mostly an equity investor wants to push you to exit as quickly as possible at the highest multiple for them. So whatever their positioning is, right? So I'm on the board right now of a company where there's an acquisition offer on the table where all the cash goes to the investor and none of it goes to the founders. And the founders just get stock in the acquiring company and three-year required work contracts to access that stock.

and then have to figure out how to liquidate it, right? And that's what those equity investors want. And I don't have to do that. So like, I don't have to take board seats because I don't, again, because I'm not, I have more than one way to win. I don't need to focus all of my efforts on driving you towards an exit that is best for me, right? I can, I have a little more flexibility on where what's best for me and what's best for you overlap.

Michael Conniff (21:00)
Now you...

Melissa Withers (21:01)
But otherwise it's indistinguishable. We designed the fund to be that way, right? That's why we don't do a, like, there's a revenue-based fund that does more deals in a day than I do in a year, right? You fill out an online, you fill out an application online, they run through some stuff, they run a credit check, a background check, and they call you, and if everything passes, then you have $250,000 in your checking account tomorrow. They do more deals in a day than I do in a year. So it's, we designed this model.

because we wanted to build businesses over a longer period of time. So like we optimized the model for wanting to engage in that way. So in many ways, the way that I interact with companies today is indistinguishable from the ways that I interacted when we had an equity model, except now that I don't feel so guilty about supporting the founders because I know that I'm not just privileging my LPs and doing so.

Michael Conniff (21:52)
You know, if you think of it as people having a place at the table and sitting at the table, and it strikes me that you were on the founder's side of the table.

Melissa Withers (22:02)
Most of the time. I mean until I'm not, right?

Michael Conniff (22:05)
What would be an example of that?

Melissa Withers (22:07)
Well, if somebody's not operating appropriately, right? Or I mean, it's not all rose petals and talcum powder, right? I mean, there certainly are cases where a leadership team fractures, right? Where like people get it wrong. Um, you know, there it's not like it's free of conflict, but I, and again, I know a lot of equity investors that are not myopically obsessed with their own skin either, so again, I don't, I don't own the space of being a well rounded investor who

actually has a moral compass, right? I know many people who share those values just functionally. I think there's quite a bit of clarity on what it is that we're trying to do. People are working with us usually in concert with lots of other investors. Like, so it's really, but it's not always perfect. And there are times when we have to support our company. So we've had companies that have had just a bad turn of events, right? We've had to...

give them some special considerations and have mechanisms for allowing them to skip our revenue payment, right? Because I don't want to kill the company to get, you know, a big deal. I get five grand from you now, but you died. That's not like we're in, it's a long game, right? So you have to navigate that conflict, I think, the same way that equity investors do. I will say one thing that is functionally different is we don't have a set it and forget it model. So when I was running an equity portfolio...

Everyone understood the model, which was that you're going to invest in 100 companies, 80 of them are going to die, 20% are going to somehow survive, and three of them are going to make the whole thing worthwhile. So a lot of the job was just sort of picking winners and figuring who you were going to rally around and gracefully letting the others go. And that's just how the model works. Outsides exits drive the value of these funds. And that's just sort of what happens.

The success of the model historically has predicated on most of the companies doing about what we want them to do. And I will say that the level of support and the paying attention-ness of it is different, right? So these companies are actively returning over four to six years, where in an equity portfolio, you could check in on them twice a year, right? And just be like any...

any goings on, right? Are you raising money? Are you dying? Are you, right? But in our model, we're with our companies in a way that's pretty operational. So I think I don't really have the luxury of picking winners and losers and ignoring people. I have to sort of pay attention a little bit more closely and more frequently than I think I did, or even than I do with my own equity investments, right?

I have some in my own personal portfolio that I talk to once a quarter. Like, okay, sale goes. Or every other year or whatever, right? You forget you even have, it's like zombie stock. You don't even know what you have anymore. So I think our model benefits from a relatively high level of engagement. But again, we're not the reason why our companies succeed. If it's actually we're in a position where I feel like I'm really watching so closely, then probably something's wrong too. So a lot of it looks very similar to.

how I think anyone who's a good steward of someone else's money kind of approaches it long-term.

Michael Conniff (25:31)
Sure. You know, you talk about success and the different ways of being successful. I'm just amazed at, maybe because I came to this world late in life at the VC model and how, you know.

I want to say bankrupt it is, how cynical it is. I get it, you know, you make a killing on one or two or a couple and off you go. But my question for you is, it speaks to something I tell founders, which is don't let other people define what's successful. You be the person who really determines what you want and how to get there and all of that. So my question for you, Melissa,

Melissa Withers (25:49)
Well, yeah.

Michael Conniff (26:14)
is can you give me an example of sort of a company that you personally, that RevUp considers successful, but you know maybe didn't have a conventional exit, maybe is still operating today. Any companies like that come to mind?

Melissa Withers (26:31)
the above. Yeah, I mean, that's the that's sort of the beauty of the model. So we have we have had companies that were very successful for us and also very successful for the founders. So we had a company about a year and a half ago that exited to for $600 million. And on that day, 20 people inside the company became millionaires, right. And and that was like a three X return for us on our deal. But for them, it was like a 10 X.

Michael Conniff (26:54)
What a great day.

Melissa Withers (27:00)
We have other companies that are...

Michael Conniff (27:03)
Well, who is who is that company? What is the name of that company?

Melissa Withers (27:06)
They're called Global Data Consortium. They're, they were based out of Raleigh, North Carolina.

Michael Conniff (27:10)
And what did they do?

Melissa Withers (27:11)
It was identity verification software for non-US markets. Yeah. Very cool company. That's it's they, it was acquired almost two years ago. And, but now those, those founders have, are doing some really amazing work as investors themselves and dedicating themselves to building the entrepreneurial ecosystem in particularly in the Raleigh-Durham area. So it's that's a big success in seeing it all move forward. Um, we've had successes where companies just hit the target and they continue to operate. We've had.

We have companies that have sold their companies in all different ways, right? That made a difference. I have a company that had a really modest PE exit, but for those founders, for them, it was a life-changing amount of money, right? Like founder bought his mama house, right? Like, and then we have lots of companies that, you know, are still in the middle of their journey. I mean, we've been actively investing since 2016, right? I've written three checks this quarter.

So there are companies that are just beginning on their journey. But I would say the nice thing about our model is success can be defined more broadly. So what happens, I'm not usually oppositional to the founder of success. So it's because of the flexibility of the model, a lot of like, you can have a smallish exit that worked for you and it's, I'm fine with that, right? Like it, where, you know, on the equity side, that might not, that might be more problematic.

Michael Conniff (28:36)
Yeah.

Melissa Withers (28:40)
If the expectations that I gave my investors was that we were going to have these 10 X exits and you only have a three X exit, that might be a game changing exit for you. I think about it this way. What people don't usually kind of think about is in an exit, it's kind of like what's cash and what's stock, right? So if you're an early, you know, you're a founder, you do the thing and someone comes to you and they want to give you a smaller amount, but all of it in cash and you don't have a ton of investors.

You might take that because it might actually be worth more to you than stock in the acquiring company, right? But in other situations, you may get less cash, but more stock, and you may really want to join the acquiring organization because you may see yourself having a really great role there, right? So like what is successful from a founder point of view is often tied to their own goals about their financial.

like reparations for their effort, but also what their dreams are for the future. Do they want to go start something new? Do they want to retire? Or do they want to take a, they want to work within a larger organization to like expand their reach, right? Those are all, those all could be good or bad depending on the person who's experiencing it, right? Like I know for, I've had a couple of founders who have had acquisitions who really didn't like the golden handcuffs, like did not enjoy it, felt really.

disheartened by it, really like watch their products get kind of shelved. You know, just now they're just a cog in a wheel. And the whole reason why they became entrepreneurs in the first place was because they weren't good cogs in the wheel. So, and then I've had others where the post-acquisition has been an awesome experience, like where they've grown and they've really seen their products put to use in new and exciting ways that they never could have done on their own. And then I've had founders that have chosen to continue to operate their companies for 10 more years because that's what they love to do. Yeah.

Michael Conniff (30:31)
Yeah. Well, listen, I want to remind everybody out there, you're listening to the angel podcast with Michael Conniff. That's me. We're on Spotify where we'd love you to subscribe. You can actually subscribe at the accelerator dot sub stack dot com. The accelerator is our sibling podcast. We're on all the platforms, all the audio platforms, also on video with Spotify and YouTube.

And today I want to thank really a fantastic guest, Melissa Withers. In her LinkedIn profile, it says she is bad on roller skates, but good with a microphone. So after this, I don't believe she's that bad on roller skate. She's probably pretty good. She is the managing partner and co-founder of RevUp Capital based in Boston.

Melissa Withers (31:15)
down on roller skates. Awesome.

Michael Conniff (31:23)
And Melissa, you're very nice to do this. It's been great. And this has been a pleasure. So thank you so much. Really appreciate it. And remember, we'll be back with another podcast before you know it.

Melissa Withers (31:32)
My pleasure. Thank you so much. I appreciate it.