Operators Ep 19 Transcript
Delian Asparouhov:
Hi, everyone. My name is Delian, and I'm a principal at Founders Fund, a venture capital firm based in San Francisco. This is Operators, where I interview non-VC, non-CEO, non-founder operators that make the startup world go round.
Delian Asparouhov:
Today I'm interviewing Michal Cieplinski, general counsel and COO at Pipe, a financing platform. Michal joined Pipe nine months ago, when the company was less than a year old. Prior to joining pipe, he was the general counsel at LendingClub and Fundbox. I hope you enjoy the show.
Delian Asparouhov:
Hey, Michal. Thanks so much for coming on the podcast today. Excited to have you.
Michal Cieplinski:
Thank you for having me.
Delian Asparouhov:
Sweet. So before we dive into... Pipe has been all over Twitter, AngelList lately, I wanted to dive into the very beginning of your career, which you started off as a lawyer. Were you one of those kids that was always reading the encyclopedias and knew that you were going to be into constitutional law even from day one?
Michal Cieplinski:
Interestingly enough, both of my parents are artists. I had no connection to law. I was a history major. I wanted to become a politician, and my dad said, "Oh my god, please no." It was back in [inaudible 00:01:33], originally I'm Polish, my dad ran solidarity movement way back when under the communism, so he basically said, "No more politics in this family," and told me, "Go become a lawyer, you can do whatever you want if you have a real trade." So I was told to be the one that is not scraping for money, but has a real job, at the end of the college education. So here I am.
Delian Asparouhov:
Here you are with real jobs now in real San Francisco. So you came out of law school, and then you worked at a couple of different law firms, mostly it sounds like in M&A and investment management, and you were in Europe primarily and then moved to New York. What got you interested in moving to the States? Was that difficult to make that big switch, and I assume have to re-take the bar over here in the States? What moved you out here?
Michal Cieplinski:
So actually I did the opposite. I went to law school in Europe, but then I realized I wanted to study more, and I went to again law school in America, so I have two of those, and then got a job in Europe, interestingly enough, so I went back to Europe, to Brussels, and worked in M&A, then investment management, and then was one of the first lawyers at Schulte Roth & Zabel, London office, which is this major law firm dealing with primarily hedge funds. If you are in the hedge fund industry, they are serviced by Schulte, it's even called the Schulte Mafia, like the PayPal mafia, it's the same thing. It's pretty much every operator or lawyer at a hedge fund has one way or another worked at Schulte.
Michal Cieplinski:
So I worked at Schulte for years, but first out of London office, and then I started commuting between London and New York. But one of my clients early in my career, the Bank of New York Mellon, called me and I helped to launch their funds, and Bob Kelly who was the CEO of the bank at that point, asked me to join the wealth management unit and investment management unit. So I joined in this dual role of a lawyer and an operator. And from the very beginning, interestingly enough, that has been my career of... I guess I talk a lot and I have opinions, which is not typical of a lawyer, the opinion part. And opinion part is my operator part.
Delian Asparouhov:
And so was the BNY stint your first time being basically not at a law firm but in an operational role? Was that always the long term goal, that you weren't necessarily going to be a career [inaudible 00:04:14] staying at a law firm, or was it more happenstance because they happened to be one of your clients and made you a killer offer?
Michal Cieplinski:
The thing is that, even when I was at Schulte, interestingly enough, I was always... There are two types of lawyers, the ones that are an island and provide an advice, and there's nothing wrong with it, it's just the fact of life, and then there's the ones that are deeply involved in the business. I was always that one that was deeply involved. And I think for me it was natural. My whole family runs businesses. I live for running businesses. And then the move in-house was natural... [inaudible 00:04:52]
Delian Asparouhov:
And so you moved in-house at BNY, and then from your next role was as Fundbox, the GC. And it sounds like also not just the GC but also the effective COO. How did you come across Fundbox? What made you want to join such an early stage company in comparison to obviously even BNY, which was smaller than some of the firms you were at, was obviously a very early stage company? What got you interested in Fundbox? And maybe just for people that don't know Fundbox super well, giving just a brief background on the company.
Michal Cieplinski:
Yeah, so first of all the brief background. Fundbox is a leading B2B fintech lender. What is very unique about Fundbox is that Fundbox was based actually out of Israel, majority of employees are in Israel, and it's a full... And you would wonder why Israel, why it's a U.S. lender. Well, all of its underwriting is machine learning based. It's one of the very, very unique... It's a long term approach, it's similar to what [inaudible 00:05:56] a firm did, is really focusing on algorithmic machine learning approach to underwriting, versus the old school [inaudible 00:06:05] a person looking at your profile, et cetera, et cetera. And that was the sell to me.
Michal Cieplinski:
So Eyal Shinar, who was the founder and the CEO of Fundbox, we knew each other from... I used to live in Israel. And he contacted me and asked, and said, "Look, I just moved to America, I'm launching after incubating it in Israel for a year, plus the company, I actually am launching it, and I need an operator. I need somebody that understands financial services, somebody that is a lawyer." It's a highly regulated area, lending, as is most of fintech. And as a result he was searching for somebody with big bank, big law firm experience, but somebody that was commercial, and understood how to run a business and what it takes... [inaudible 00:07:03]
Delian Asparouhov:
And I'm curious, it was obviously a very different role than your prior roles, I assume there were some things that were probably quite new to you, it sounds like you were pretty involved in some of the venture financings, including obviously I know that Khosla Ventures, my prior firm, funded you guys, which I imagine was very different, versus I'm sure there were things that were very natural for you. What were some of the things that felt natural, versus were very new to you?
Michal Cieplinski:
Well, the lending [inaudible 00:07:27] the banking scheme, the banking regs, that is natural for me. Venture capital raising, that was a steep learning, and my steep learning started with your previous firm, with Khosla Ventures, which is an interesting start.
Delian Asparouhov:
[crosstalk 00:07:41] You want to tell that story? How did that go? Was it rough?
Michal Cieplinski:
It was, let's put it that way, it wasn't rough. Interestingly enough, there are terms and there are terms. Fundbox is, was, and will be a very successful startup, and as a result has more power to negotiate terms, and also had a very strong leadership that wanted to retain control. And Mr. Khosla and David Weiden that sits on top of board understood it, and at the end it all worked, but still negotiating with Khosla, then the B round was [inaudible 00:08:22], the B extension was [inaudible 00:08:27], you have to learn very quickly how to negotiate firms.
Delian Asparouhov:
Yeah, I'm curious, did you lean on the Fundbox CEO and was he super familiar with these venture financings? Did you talk to a lot of other founders? As you were going through this process and you were so deeply involved, yeah, Vinod and David Weiden aren't particularly easy counterparties to negotiate against, given that I've tried to negotiate against them.
Michal Cieplinski:
[crosstalk 00:08:55] You said that. You said it, for the record.
Delian Asparouhov:
Correct. Hi Vinod, Hi David, if you're listening to this. But they're not the easiest to negotiate against, and so how did you onboard, or what were... Was it other founders that you talked to? Were there particular resources? How did you even get up to speed on such a foreign world, with also not just Joe Schmoe or random people in the venture community, but the top tier venture capitalists?
Michal Cieplinski:
Exactly. Two things. First, I was lucky, Eyal has been venture capitalist before, so it was amazing to rely on him. He led [inaudible 00:09:30] deal for his previous company. He was also, if you look at his background, he was before that hedge fund analyst, so let's put it that way. And I grew up in Schulte. Schulte in New York is called the [inaudible 00:09:46] Brooklyn boys that somehow made it to Manhattan. The world of hedge fund trading is not for the lighthearted, and the lawyers and operators that deal with it have to deal with that. So I think that was part... Eyal knew that he was negotiating with Vinod at that point, and he knew that he needed somebody that knows how to negotiate. But I interviewed a lot of outside law firms. I ended with Peter Werner at Cooley, who is probably one of the most fantastic lawyers I ever came across.
Delian Asparouhov:
He's our lawyer for Varda as well, funnily enough.
Michal Cieplinski:
Yeah, really? Ah.
Delian Asparouhov:
[crosstalk 00:10:24] And he was my lawyer for my startup way back in the day, when I was dropping out of college, I somehow happened to stumble across him. But yeah, Peter's amazing.
Michal Cieplinski:
[crosstalk 00:10:30] ... that I basically told him, I was running a company between Israel, so I was sometimes in Israel, sometimes in America, and hence always available, really thoughtful, and giving advice that's concise, and really helpful in terms of negotiation tactics. It was Peter, me, and Eyal that really did that deal, and eternally grateful for it.
Delian Asparouhov:
That's awesome. And so I'm curious, if you were to look back now today, having gone through multiple other operating roles, are there things that maybe, given that Fundbox was your first tech operating roles, looking back now, you would have done quite differently, now having gone through a couple of other startups?
Michal Cieplinski:
Yes, because after Fundbox and even during Fundbox I started advising a lot of startups. Jumping from a huge ship like BNY Mellon... For those listening, BNY Mellon is actually stock number one on Wall Street, it's the oldest trading stock, it's a 70,000 people behemoth that many people don't know about, but it's a bank of a all banks, and majority of governments. It holds U.S. treasuries, it's one of the most stable financial services institutions in the world. And that ship is a big, big ship that barely moves. Jumping to a startup, the first few months were readjustment to the fastest pace of a rocket ship. The good news is that I always studied... Interestingly enough, I'm not a poker player, though I deeply rely on the concepts from the game theorists and the laws of uncertainty. I study what I don't know versus what I know. And I don't know, you play? Because you're shaking, for those not listening, Delian's shaking his head. You're like, yep, that's true. But the reality of it is that, I very keenly from the very beginning tried to understand what I don't know, and that was my focus. So what I would advise everybody, rely on your strengths, but really understand what you don't know.
Delian Asparouhov:
And I guess, what did you do around the things that you didn't know? If you could point to some examples in Fundbox of things that you were very unfamiliar with, especially on the legal... Was it mostly just going to...
Michal Cieplinski:
[crosstalk 00:13:05] Yeah, legal, but it's also operational. We were the first ones that applied... It's an accounts receivable financing, so we weren't the lender. We were the first ones that applied it in that scale. It has never been done. So doing things for the first time and getting comfortable, getting your banking partner comfortable, the ones that provide the money, getting the regulators comfortable, I would say from the very beginning, interestingly enough, we reached out to regulators, and [inaudible 00:13:37] the California regulator, the New York DFS regulator, we engaged in lobbying activity, both in the Hill, in Sacramento, and in New York, which were the three biggest jurisdictions for us, to introduce them. We weren't hiding, we were actually up front there explaining our products, because what we realized is, and it wasn't really legal, it was more a communications or maybe a government relations problem, is that the fear of unknown. We were definitely doing something that hasn't been done, and as a result, if we don't explain it, people will assume it's something nefarious.
Delian Asparouhov:
Right, right. Just because Fundbox is such a... It's B2B lending, and...
Michal Cieplinski:
[crosstalk 00:14:18] Actually, it wasn't lending. Initially, it was what I call maybe spin on factoring, a version of factoring, but with very few concepts out of factoring, but relying on a factoring legal body of law. And as a result, we needed to explain it to regulators, what [inaudible 00:14:41] we are relying, why it's not lending, and then later on as we received licenses and moved on, part of the operation became lending, for a variety of purposes, [inaudible 00:14:54] just larger lines, and that point the risks increases, et cetera.
Delian Asparouhov:
Right. And so from there you spent about three years at Fundbox, obviously. No, four years.
Michal Cieplinski:
[crosstalk 00:15:02] ... because I was advising before, yeah.
Delian Asparouhov:
Ah, okay. So advising as well. But yeah, four years at Fundbox, and obviously made a killer ride while you were there, given the number of financings you led, how quickly the company grew, so I'm sure you learned a ton. But what made you go from... I think when you joined Fundbox, obviously super super early stage, to your next role [inaudible 00:15:22] a lot of similarities in some ways to Fundbox, LendingClub, in that lending marketplace, obviously LendingClub being B2C I guess versus Fundbox being B2B. But LendingClub also at the time was public, which is obviously a much later stage to join. What made you interested in joining a company at such a late stage? And then curious, we've never actually had somebody on the podcast that's been a general counsel at a public company, curious just what's the life like as a general counsel at a public company.
Michal Cieplinski:
So couple of things. It's always a personal story, as everything in life. So now I live mostly in Miami, but at that point I was living in Marin County, and a neighbor of mine, Steve Allocca in 2018, he ran PayPal Credit, and Wells Fargo, and became a President at LendingClub, and our kids go to the same school, and for months him and then departing general counsel at LendingClub, Russ Ellmer, were trying to convince me to join LendingClub. I even found out that Russ was taking the same ferries as I did from Larkspur just to have that 30 minutes of convincing me to join LendingClub. Later on they all admitted, it was all premeditated.
Michal Cieplinski:
But look, interestingly enough, I move the moment I get comfortable, and so it's kind of the opposite. I actually want to always... Maybe it's my philosophical concept that I could be doing everything, including sitting in my garden and counting stars. I choose every day to do something interesting, and something that challenges me. And my whole career is, the moment I build it or became comfortable, I move. So I don't wait for the fruits of my labor, that's not just me, because I get bored and I want to jump to the next thing and be excited. Because again, otherwise I'm going to spend time with my kids or count stars. And if those are the other options, I just want to do something exciting.
Michal Cieplinski:
So Steve presented me LendingClub, obviously the events, as we call it, [inaudible 00:18:00] shall not be named, which we were calling the events of 2016... For those listening, that was the day where LendingClub has not a near death experience but a death experience, the board has ousted the founder, there were certain issues with the loans that were marked differently, et cetera, et cetera. You guys can read on it, SEC and DOJ spoke a lot about this, so let's move on from that conversation. And the board then needed to rehire a majority of the C suite. And so Steve presented to me LendingClub, the largest lender in America. Very few people know that in December of last year, the last quarter before pandemic, LendingClub was issuing anywhere from $1.2 to $1.4 billion per month in loans. This is bigger than any credit card really in lending. And there were weeks, days, and months with 60 to 80 thousand applications a day. We're talking about massive, massive operation that had that event, and needed to be resurrected.
Michal Cieplinski:
And resurrecting an entity that has 4,000 people employed moves billions of dollars a month, and needs to underwrite, is like doing a heart surgery on marathon runner while he or she is running, effectively speaking. Because it can't stop, for a variety of reason. And this is going to your question about the public company. Being a public company... If I was a private company, I could stop, prepare, and then restart. Public companies can't do that. Public companies live quarter to quarter. Their investor requirements, there are perceptions of the marketplace, there are just a lot of other things. And this is the big change that happens between the private and the public. Private, I could always say to Eyal, "Eyal, let's stop, let's redo this stuff, we don't have to do this business line, let us rethink it, let us prepare so that we are correct," at Fundbox. At LendingClub, at any public company, you do not have that opportunity.
Michal Cieplinski:
So my advice always has been, think long and hard before you go public. Be prepared for it. It's great for the company valuation, so as an operator and investor, fantastic thing, and what [inaudible 00:21:02] is doing with SPACs, right now a lot more companies going public, that is fantastic. But it comes with huge operator and legal requirements.
Delian Asparouhov:
One thing that I think a lot of people in Silicon Valley get wrong that I'd love to ask you about is how you were thinking about making that career next step, since I think most people in Silicon Valley tend to think, "Oh, I've got to join something that's just like a rocket ship and everything's written perfectly, and it's going to succeed even if I don't join." Whereas I tend to believe a little bit more in manifest destiny, which is like, "I'm going to go make this thing successful," and sometimes going into something that's not working and helping turn it around, you can actually learn a lot more, you can be given much more responsibility, it can be a significant career accelerant.
Delian Asparouhov:
The equivalent that I have, that is nowhere near as spooky as the decision that you made, joining this company Teespring at a time where the company's basically flatlining or declining for multiple years on end, and got brought in as a rescue crew, and we didn't maybe rescue it nearly as well as you guys did with LendingClub, but at least turned it around and the company's now been profitable three years on end. I'm curious, what made you want to run towards such a sticky situation? You have federal investigators coming in, you have an entire executive team changing in flight. That is a Herculean task to take on. What made you prioritize that opportunity vis-a-vis everything else? Was it like, you were like, "I'm going to learn a lot from this"? Is it that, "If I go to this, I can tackle any legal challenge"? And then do you think most people should be thinking about career decisions in that way, where they should be running towards challenges [inaudible 00:22:32] running towards whatever's the easiest?
Michal Cieplinski:
Interestingly enough, it's exactly... A lot of people in the Valley try to join a rocket ship. I value more joining a shit show. Show me... Because it's easier riding a wave for a variety of reasons than doing the hardest, and honestly speaking, how many people dealt with SEC, DOJ, public company, the CEO... I don't know of many public companies, I think there's three of them in history in the last 25 years, that a CO was ousted by the board. That doesn't happen, let's put it that way. On top of it, very complicated business, a business that recently realized that peer-to-peer lending doesn't work, and as a result it went straight into obtaining its capital from institutionalized sources, which the market responded extremely positively, the stock appreciated 80 or 90% over the past month of LendingClub since they made a decision, no more doing the retail play.
Michal Cieplinski:
So again, I would always think of your life and choices as a perpetual career, and your choices, whether they are easier or not, they will actually define your experiences. And it's not easy at the time, but after that, I can have a conversation with you about this and say, yeah, I survived it. And I'm still living, and I have a semi-healthy psychological life, and all that stuff. But I would not trade it... If you ask me, would I do it again? Yes. Am I going to do it in the future? Yeah. I think you have to be there. I mean Pipe is... I joined just after funding. There was just a concept. So it's not very different than that. It's joining when there's nothing, and massive amounts of uncertainty.
Delian Asparouhov:
Yeah. I think sometimes the thing that people get wrong is they only look for the upside it, and they expect there to be no risk, but what they don't realize is those two things are actually highly correlated. If there's no risk, it means there's much less upside left for you to capture, and so you actually want to be running towards risk, and it's against our human nature to feel comfortable with running towards it. I don't know how many people I could get on this call, and especially GCs, most GCs are culturally bred to be extremely risk averse, your whole goal is to make it so that your company never gets investigated by the SEC. I can't imagine how many GCs in the world are comfortable running towards a SEC, DOJ, joint investigation, CEO fired type company.
Delian Asparouhov:
So I'm curious, if you were to look back at all your law school classmates, what made you the type of GC or type of person that was comfortable running towards that? Were you always more risk taking? Did you have a venture early on that helped you define, hey, risk is where reward is? How did you adopt that mindset?
Michal Cieplinski:
Interestingly... Look, you're putting in the words of risk. I view it as interesting. And for me, it's just interesting. Again, I really could stay in the family business, I could do a majority of other things, I have other non legal operator passions and hobbies, and I could have done this. I am [inaudible 00:26:19] years of living in Israel for me, I count every day as a blessing, and I value every day, and I don't want that day to go for waste. And maybe that's why I don't deem it as a risk, really or risk taking. I just want to make that day interesting.
Delian Asparouhov:
You sound like the Free Solo rock climber, where he has the genetic deficiency that prevents his brain from producing the fear hormone, and so he's standing up on the cliff and he's like, "Ah yes, this next set of moves is interesting," while peering down at the bottom and realizing the SEC and DOJ are waiting to catch him.
Michal Cieplinski:
Yeah, I mean, look, life is... The reality of it is that sometimes the things that I thought that were riskless turn out to be completely buried with enormous amounts of risk, and vice versa. We tend to focus on what we think we know, but actually the amount that we don't know is huge. And we undervalue it in our decisions, because we don't know how to count it. And as a result, I don't know, it may be at my experience after years of doing this, I just ride at this point, and where it takes me, the journey is more important... It's corny, but the reality of it is that the journey is much more important than the end result. I thought, oh, becoming a lawyer, my parents will love... They love me no matter what, and I'm a single child, so I have that concept. Then joining a major law firm, Wall Street stuff, I thought that would be the pinnacle of my career. It really wasn't. It was just a part of... journey. And so on, so forth.
Delian Asparouhov:
Makes sense. I guess would love to now finally talk about Pipe, where you recently joined about seven months ago. I guess you said that you don't like making career decisions or changes until you feel comfortable, so I assume you started to feel comfortable at LendingClub, and then what attracted you to the world of Pipe? And then I have lots of legal and regulatory questions about how Pipe works, and how it's going to come to fruition, but yet again you find yourself at a marketplace company, although this time trading securities rather than trading loans.
Michal Cieplinski:
So interestingly, my story of joining Pipe is as corny as it gets, because it's a story of me getting an email via LinkedIn from Harry Hurst, the CEO of Pipe, I think two or three weeks after they launched, and I walked in at 8:00 PM my house after the day at LendingClub, and told my wife some guy from L.A. is calling me, and that's Harry. For the listeners, Harry's not from L.A., he's British, he's proudly British, and I'm being told to repeat it always, so I am, Harry, repeating it, yes. But I walked in, told my wife I'll be back in 20 minutes, I was back at 1:45 AM. And now the advice to all the married folks, do not walk up your wife in the middle of the night telling them you're leaving equity cushy position at the public company and joining a startup that launched three weeks ago. But that's what I did. I effectively in the morning started the exit process. In the public companies it takes a really, really long time.
Michal Cieplinski:
But what is Pipe? Pipe is a trading platform for recurring revenue streams, contracts, where we have a sell side and a buy side. The sell side are right now the SaaS companies that trade their contracts, but the SaaS is just the beginning. And that's the beauty, that's probably... Delian, a lot of people wonder why there's so much noise about Pipe in the VC community, why is everybody talking about Pipe? Because, Delian, every single thing can be and is moving to a recurring revenue basis. 65%, I'm showing right now my iPhone, 65% of iPhone sales are actually right now on a recurring revenue basis. It's still right now alone, but Apple is moving towards actually offering it on a recurring revenue basis, on 12 and 24 months basis, and then at the end of it, returning their phone, because the components of that phone, for the first time, will be reusable versus recycled.
Michal Cieplinski:
We're starting with SaaS contracts, because it's an obvious... It's a huge marketplace, it's 300 billion only in America, recurring revenue SaaS contracts, highly predictable. This is what the buy side understands. And what is the buy side? Buy sides are the banks, hedge funds, sovereigns, pension plans, that are buying these contracts directly from the sell side. And what Pipe really did, and this is why Pipe is so different than LendingClub, which was a lender, the lending was there since the beginning of civilization. Fundbox was a factoring and lender. What Pipe is, Pipe is defining a category. Pipe is creating a category, which is a recurring revenue asset class. That has never been done, and interestingly enough, this asset class underpins all of the valuation, a majority of the valuation, of any SaaS company listed on public markets.
Michal Cieplinski:
Delian, in your VC investment, you don't invest because the chairs and the desk and the office space. You invest on the basis of recurring revenues and how predictable it is, you model it and figure it out, how much go-to-market, how much market fit there is, et cetera, et cetera. So we have, for the first time, out of the equity, stripped down those contracts, and made them independently tradable. So for the first time, SaaS companies can actually live on the revenues that they have created at the same time, versus waiting 12 months until really they realize the value of their whole contract.
Delian Asparouhov:
So I think one thing that would be valuable, especially as we dive into this, and it's a pretty thorny topic to really understand the nuance of it, but I'd love for you to articulate basically the pros and cons of the various other options that are afforded to... Let's say I'm a SaaS founder, the CEO of a company that's doing 10 million [inaudible 00:33:28], and I want to scale up my organization. My current options are raising venture dollars, which has some pros and cons, raising debt, which has some pros and cons, and then basically asking for my customers to pay annual up front and giving them a discount, which has pros and cons. And then I would say you guys are sort of now that fourth option. Would you mind running through those various options and describing those pros and cons, and why Pipe is the ideal?
Michal Cieplinski:
[crosstalk 00:33:49] Yeah, let's start from the one that... First, a notion in the business, that annual prepaid contracts work. On average, and it's a data that you guys have and shared across many VCs, and actually SaaS funders, anywhere between 5 and 7% of contracts are actually on an annual basis. It is very, very difficult to run your business on annual pre-paid contracts, so all the money up front for those listening. So not only you have the difficulty of converting your customers, in the B2B it's easier, in the B2C almost impossible, and on top of it you need to offer huge discounts. On average, the least amount of discounts that you offer for annual pre-paid plan is two months. That's 17%. During the last two months, [inaudible 00:34:47] offered 40%. AWS, 33%. The discounts are wild for annual pre-paid.
Michal Cieplinski:
So not only are you dealing with a problem of, can I actually do it? And the data says it's very tough. And two, you need to discount it, and actually by discounting the contract, and that's what at the time when you guys are out and it happens that the company goes public, when the bankers look at the company, then the CFO and the CEO of the company realizes that, if I discount my annual plans, I'm discounting my enterprise value as well, and all of my value of contracts gets lowered by the discount. Even the monthly ones. This is how the public markets will value. And at that point it's too late. It just happens. So that's the first, the annual pre-paid.
Michal Cieplinski:
Then let's start with debt. Not only banks on average do not know how to underwrite recurring revenue business. [inaudible 00:36:02] ... are one of the biggest players. Because of their underwriting standards, they deny 90-95% of applicants, the average line is actually not that big, it's 1.7 million according to the latest statistics, so not only the chances of getting it are slim, the time, it takes three to six months. Venture debt comes with warrants, and we've all seen what warrants mean and how much a lot of companies made. I think SVB invested early in Uber and its stake in warrants was hundreds of millions of dollars. Great job... [inaudible 00:36:56]. But on the other hand it's actually costly. These warrants are extremely expensive for the successful companies, and again, once it happens, once you have that successful company, and then you realize that you've just taken the most expensive cost of capital.
Michal Cieplinski:
And also, APR wise, so the interest, the direct access between the SaaS companies to the capital markets, provides which Pipe has, not undercuts the offers by banks. We are in a different league. We are not in [inaudible 00:37:41] of a difference, we are in several times of a difference. Because you have globally hedge funds competing and diversifying their portfolios, and competing for the scarce U.S. assets that they could never access to. So we're talking about, on average, the differences on the venture debt are two to five times, in terms of the difference in interest rate. It's magnitudes different.
Michal Cieplinski:
Then the final one, which is your favorite, equity. Equity is expensive. Let's put it that way. I think the interesting part is that we are really having right now a group of second, third time founders, that realize that if they haven't raised... And they are public about it, that if they haven't raised so much of dilutive equity early on, they actually would create significantly different exit scenarios for them. On average, founders of SaaS companies exit with low single digits, at the end of a 10, 15 year struggle of building business. Don't get me wrong, great exit, they are happy at the end, but they realize what could have happened if they didn't. And that's the reason why Pipe has backing of so many of SaaS founders that are second time founders, and lived through that realization what they have done wrong, and they know that the education right now, of this first time founders, they know that it's an expensive cost. And Pipe is the [inaudible 00:39:39] version.
Michal Cieplinski:
Don't get me wrong, there's always going to be a place for VC, especially at the very early stage. That's where you have an idea. There's always going to be space for debt, there are things that you need to buy up front, there are merger type of situations, et cetera. There's always going to be a place for it. But Pipe is going to be a dominant player for financing SaaS companies.
Delian Asparouhov:
And then I'd love to just talk through... I imagine the regulatory process for something like this, since you guys are sort of creating a new type of security, and securities laws aren't often discussed in Silicon Valley outside of crypto and the Howey rule, but other than I feel like they're not mentioned too often. So I'd love to understand, obviously you joined when there was basically just some funding and they had just started, what was even the process of going from idea on a whiteboard to actually, I'm assuming, getting lots of regulatory approvals and actually getting this thing live and comfortable with various regulators?
Michal Cieplinski:
I think it's similar to what I've done at Fundbox, and many other companies that I advise. I create a path. And that path is sometimes windy, and takes you through many positions, and many different products, to that Nirvana, which in our case is securitizations. But right now we're moving real contracts, real assets, so think of it, it's no different from eBay. You're moving a contract with revenues attached to it with coupons from the sell side to a buy side, and we are the central ledger, we have a [inaudible 00:41:28] opinion that moves from the sell side to the buy side. But we're building our regulated body, and as we're moving next year to securitizing these assets.
Delian Asparouhov:
Makes sense. And then I'd love to understand [inaudible 00:41:46] so this is sort of your first time, you obviously had operating roles with other things beyond just the GC, but this is your first time really being a COO. What have been some of the things you've had to take on at Pipe that maybe weren't aspects of your role at either LendingClub or at Fundbox?
Michal Cieplinski:
I don't know, maybe I never had an official title, but I was always very, very involved, and I thought probably majority about the business, and used my legal expertise to further the business. I think at Pipe, the difference is that I joined very early from the very beginning, 80 to 90% of my role is an operator, with the remainder being the legal. And together with Harry, Josh, and Zain, the other co-founders, we run the business but Harry and I run the business operations and investor relations. So I think raising the rounds, raising the buy side, and buy side interest onto the platform, a variety of hiring, HR functions, living and starting the company, because for those listening, we started the company February 25th. If you look at the schedule, I don't know where the listeners are based, but March 3rd was the lockdown in California. So there couldn't be a better time of launching a new business and going out of stealth.
Michal Cieplinski:
So that's when we launched. So I think for us it was learning how to operate during the pandemic. Interestingly enough, up until last week, we haven't met a single investor. We raised all the money over Zoom. Except for David Sacks, I know David Sacks from my Fundbox times and [inaudible 00:44:00] so I met him before. But all the other ones, we met for the first time via Zoom, they invested on the basis of Zoom. So yes, it's possible to raise tens of millions of dollars at very good valuation within very complicated business, because it's not an easy business to explain to VCs. Because fintech, A, only few businesses really invest and understand fintech, that's A. Two, you're trying to explain a new category. Naturally people go try to find comparisons to something that exists, and both Harry and I always have to pull people back and say, "It's not a loan, we don't touch the assets. It's not this, we don't do that." So it's always explaining that it's a trading platform for these contracts. And getting people comfortable with this new concept, that is the big challenge right now as an operator.
Delian Asparouhov:
Makes a ton of sense. I guess you've gone through many financings now, both the three or four that you did at Fundbox, I'm sure also just running a public company basically feels like a financing every quarter whenever you're on earnings calls, but I guess who do you think... Pipe is obviously a marketplace or a platform for a SaaS getting traded round, and then one could argue the whole VC ecosystem is startup equity getting traded round. Who do you think this benefits, the world of Zoom now having been through so many financings, and now doing some Zoom funding things? Is it the buy side, i.e. the VCs that benefit from this Zoom stuff the most? Sell side, i.e. founders, because they can just talk to a lot more VCs, be much more efficient with their time? Or do you think it's just making the whole market more liquid and that's great for everybody?
Michal Cieplinski:
I actually will... It's the last one, I think. In the prior to COVID time, you and I would have to meet in person, several times, go for a coffee, drinks, dinner, et cetera. That would be several meetings with you, then the whole partnership, et cetera, et cetera. All of this process has massively accelerated. There are days when I have 17 to... Yesterday was actually the top, 22 meetings, one after another. Half of them are with investors, and full presentations of the company. We're able to immediately present companies to investors in Japan, the Gulf, Europe, and throughout the U.S., in a scale that has never been done. I think it massively accelerated for the VC side an ability to source investments from all over the world, and from the founders' side, I would have never met not half, probably 90%, of the investors that we met, because simply I need to run the business.
Michal Cieplinski:
So you were always limited to, okay, I can drive to Sand Hill, I can drive to San Francisco, I can do stuff around here, because at the end, I was running the business. And that's the whole funding [inaudible 00:47:30] there's always this dilemma of how much do I spend time raising versus running the business? Both of them are equally important, and in the end you need to run the business. So today I had a call with folks in New York, Charlotte, we had one European investor, and two San Francisco based investors. Even if I had a private jet, I wouldn't be able to do that.
Delian Asparouhov:
Maybe that's coming soon.
Michal Cieplinski:
No, look, it's not about that. Folks that get to this business for money or glory are rarely successful. Startups are tough. Startups are hard, and you need to be... Interestingly, David Weiden from Khosla explained that real founders of startups are like cockroaches, never die. And it's not pretty, but the reality of it is that you have every single thing in the world stacked against you. The fact that you get funding, that's really irrelevant when it comes to building a... Everything single thing is stacked... You have incumbents, you have quick follow-ups, you have changing market terms, customer perceptions, and you are building something from scratch. It's just difficult. And as a result, it takes a certain breed of people, I don't know probably borderline insane, to do that, over and over again.
Delian Asparouhov:
Yeah, I've never been one... Even though, whether it's the incubation that I've been running or the companies in my portfolio, to me if anything the fundraisers are more like you're signing up for another tour of duty. You can say, "Yes, I've signed up for it, but I don't feel particular joy around that." It's just, okay, time to get back to the grind, basically. So I don't feel much elation around those.
Michal Cieplinski:
Fundraising is patting yourself on the... What I call it, I don't know, it might be a European, pat yourself on the back. It's a marker that you set against yourself, and continuously you need to get to that. It's not where you are today, it's where you need to get to. And so whenever I see this [inaudible 00:50:00] fundraise and people are saying, "Oh, now I'm at a one billion company," no you're not. You now need to work to be at that company. And hopefully people right now understand it.
Delian Asparouhov:
So I assume there are lots of... You've obviously built up a ton of legal experience across a wide variety of areas, from all of your work, but I'm sure there are still sometimes areas that Pipe has to dive into that you don't feel like you have expertise on. How do you think about when to bring external counsel and external resources into problems that you're solving, versus handling yourself? And then, how do you think about interviewing that external counsel, in particular if it's a topic that you don't feel like you understand super well yourself? How do you know that the person you're talking to is A+ around what they're doing?
Michal Cieplinski:
Look, let's start with this. You need to be deeply aware of not what you know, but rather what you don't know, and study it, really. Look, we're talking today, I don't know if you guys are invested in Robinhood, but today is December 17th that we're talking, and Robinhood just paid $65 million fines to the FCC. That's very painful, to anybody, that's not small amounts of money. This is what happens if you didn't study entirely the space that you're entering into, and how regulated that space is. Fintech is naturally regulated, U.S. regulators are more aggressive than regulators in Europe. You have huge incumbents that are not interested in anything but your failure, so you have to just understand that. And I seek advisors, I seek... In Europe, we call it consiglieres. That's whom I seek in terms of my outside counsel. I went through a lot. The ones that I no longer use probably provided me with a whole thesis on a simple answer.
Michal Cieplinski:
Interestingly, I trained in London, under the late Clive Stanbrook. Clive was a Queen's Counsel, a member of the House of Lords, and a very, very prominent barrister, which is the litigator in Britain. And he started his training with me, and I keep repeating, and people that worked underneath me probably remember this phrase that I repeated pretty much every single day. Well, the story goes, he always repeated, there was this famous philosopher that said, "I did not have much time, so I wrote you a long letter." This is where the long thesis comes in, versus three bullet points. It takes inherently longer to do those three bullet points, but what I'm searching is for those three bullet points, not for the whole thesis that goes from the left to the side and to the middle, and at the end I don't know what that advice is. So search for advisors that are your advisors, and advising is not showing you how smart you are. If you are a partner at a major law firm, you're smart. I don't need to be proven that. What I need is business advice.
Delian Asparouhov:
Yeah, translate it into simple terms, not trying to show off expertise.
Michal Cieplinski:
It's not an ego... Don't show me how smart you are, it's not valuable to me. I assume you're smart. That's why I called you in the first place. It's kind of like the same with interviewing. I see people interviewing by going through their CV. Well, you should have done it before. Don't ask people, "So tell me about your experience." Read the damn CV. Ask the things that are not in the CV. Ask them what type of a human they are. Interestingly enough, so I'm going to disclose it, so hopefully some people don't listen to it, one question I ask to every new recruit that we interview, is the following. I ask them to pause and turn off their Zoom and mute themselves, and think for three to five minutes about their hobby or passion, and then after three to five minutes they have another three to five minutes to teach me the basics of it. So the test is, I want to know who you are as a human, and two, have you actually listened to my instruction? I'm not asking you to tell me about your hobby. I'm asking you to teach me the basics of it. And that third one there is, can you be concise?
Delian Asparouhov:
I like that. I like that a lot.
Michal Cieplinski:
Trust me, I would start how to... Because of religious reasons, I don't eat shrimp or pork. I was taught how to grill shrimp, how to do so many pork dishes. So for the ones that listen, can you all teach me something that would be a little bit more useful for me? But I was taught about passion of golf and how... And I don't golf. For me, the one sport is my football, which is soccer here in America. So I was taught the passions and hobbies and really details and got interested in golf. I got interested in a lot of things by people... People taught me their travel reward schemes that they run. It's really interesting. You learn about what drives that person, but I'm also learning how that person can describe to me something that's core one of their identities, which is their passions or hobbies.
Delian Asparouhov:
So it sounds like you do advise a wide variety of startups, and I'm curious, if maybe let's say you weren't at Pipe, or you were advising that had a similar level of financial services and regulatory complexity, and you were advising the CEO on how to interview a GC or when to hire a GC, how do you help CEOs identify somebody who could be a phenomenal corporate counsel and partner to them, versus somebody who's just maybe really good at being an external counselor and great at being at a law firm, versus actually understanding what it's like to be on the inside? How do you disentangle or help people assess between the two?
Michal Cieplinski:
So first, how fast you should hire. Interestingly, Eyal Shinar, the CEO at Fundbox told me that... And I joined I think a year after funding in Israel of the company, he said, "I hired you six to twelve months too late." When it comes to regulated space, hire GC as early as possible. It will help you avoid huge problems later on. YOu're just acquiring a debt that you don't realize that you're acquiring, and then issues that you may be having later on with regulators. So the faster you hire a GC, the better. It's different story with SaaS companies and other companies, but that's not my field, so there you can hire later, because you can rely on outside counsel.
Michal Cieplinski:
When it comes to whom to hire, find a lawyer, or throughout your network, seek either in-house or an outside counsel that folks recommended to you as a business partner, and ask them to help you interview. Because you have to understand, you are the CEO, and especially first time CEOs or newly minted founders, lawyers tend to be well spoken, quite impressive with their knowledge, et cetera, et cetera. That is their knowledge part. Whether they can work in startup environments, it's a whole different ball game, and completely not correlated. Some of the smartest lawyers can't work in-house, and vice versa. I don't think I was a great law firm lawyer. I honestly think I still am surprised to the partners at Schulte Roth that hired me there, because I'm more of an operator, and I find gray areas, versus providing advice. And as a result, it makes me a great in-house lawyer and operator, versus an in-house lawyer. So advice would be, which very few actually do, but whenever folks like you and other folks ask me, "How can I hire a general counsel?" Have somebody that you would like to work with, or heard that is great partner for the business, help you interview.
Delian Asparouhov:
Cool. So I'll make sure that all the listeners, if they're hiring GCs, know exactly where to reach out so that they can rope you into the interview processes. Cool. Michal, thanks so much for coming onto the podcast today, really appreciated the conversation.
Michal Cieplinski:
Thanks for having me, I hope that the listeners enjoyed it and it wasn't too much of my personality out there. But I'm comfortable with who I am, and hence I live my life.
Delian Asparouhov:
Thanks for listening, everyone. If you'd like to support the podcast, please sign up for a paid Substack subscription, which we use to pay for transcripts, mics, and other improvements. If you have any comments or feedback on what kinds of questions I should ask, who should come on the show, or anything else, please do let me know. Have a great rest of your day.