He raised $16M, hit $1M ARR—& failed. Here's what he learned about product-market fit. | David Anderson, Founder of Tandym

David's startup failed. But he had everything going for him: a solid thesis, $16M in funding across 3 rounds, $1.5M in ARR. At a high-level it seemed like everything was going the right way. And yet, it didn't work out.

This is what happens to 95% of startups. On thhis show, we mainly speak with the top 5%-- the ones where things went right and everything worked out. But you tend to learn more from failures than successes.

On this episode, we go deep with David to see what building Tandym was like, why it ultimately didn't work, and what he would do differently the second time around.

Why you should listen:

• Why you should always start with the model that requires the least capital 
• Why you need to be a number one priority for your customers
• Why even hitting $1M ARR doesn't mean you will succeed.
• Why you need to pivot quickly as soon as things are clearly not working.  i

Keywords
product-market fit, startup journey, fundraising, fintech, brand partnerships, business model, sales challenges, urgency in sales, Tandem, lessons learned, startup, fundraising, product strategy, compliance, revenue growth, entrepreneurship, lessons learned, business pivot, mid-market brands, capital management

Timestamps
(00:00:00) Intro
(00:03:30) The Origin of Tandym
(00:09:26) Taking the Leap
(00:11:37) The Business Model
(00:17:22) Developing the Product
(00:21:05) Struggling to Create Urgency
(00:26:50) Raising Rounds & Shifting
(00:35:11) First Signs of Problems
(00:39:01) The Product that we should've launched
(00:42:12) How it All Ended
(00:49:56) Final Thoughts & Advice

Chapters

• 3:30 The Origin of Tandym
• 9:26 Taking the Leap
• 11:37 The Business Model
• 17:22 Developing the Product
• 21:05 Struggling to Create Urgency
• 26:50 Raising Rounds & Shifting
• 35:11 First Signs of Problems
• 39:01 The Product that we should've launched
• 42:12 How it All Ended
• 49:56 Final Thoughts & Advice

Transcript

David Anderson (00:00):

I would start with the most capital-light version of the thing that you're trying to build to really, really confirm you have product market fit. And I think we told ourselves a few times, oh, we've got it, we've got product market fit. And if I'm being really honest with myself, I don't know that we ever fully had that then. And what I would've loved to have more time to do is experiment with different flavors of the product to really figure out what was the thing that was gonna unlock growth in the next step. Before you commit yourselves to, like the growth trajectory that a VC's gonna want to see and everything that comes along with that, both the, the extra cash as well as the expectations, make sure the pathway is clear and has a high probability of success. And if it doesn't, there are off ramps that give you more swings at the plate, so to speak. So hopefully that makes sense. But that's, that's probably the thing I think about the most

Pablo Srugo (00:57):

In the early days, what Zuck did is instead of going after the universities, you know, he started colleges, universities, right? Like, instead of going after the ones that had no competition, he went after the ones that had competition to just make sure that he could win those battles and then would go after everything else, right? And it worked for him. And so, like when I heard that, I'm like, what a smart strategy! But then, you know, there's a flip side of: you try and go after the hard thing first,you run outta money and then you can't do the simple stuff that maybe you could've done that would've gotten you there in the first place. So, there's no playbook, man. Like, there's so many different ways to, this can go wrong and probably only a handful of limited ways that it can go right? And that's what makes startups so hard. 

Welcome to the Product Market Fit Show, brought to you by Mistral, a seed stage firm based in Canada. I'm Pablo Srugo, I'm a founder, turn vc. My goal is to help early stage founders like you find product market fit.

Pablo Srugo (01:50):

David, welcome to the show.

David Anderson (01:53):

Thanks. Excited to be here.

Pablo Srugo (01:55):

So we're doing a bit of a different one. I mean, we usually are kind of talking to founders, either like late stage founders who are like super successful, a hundred million ARR,  unicorn, whatever, about the early days or early stage founders who did something really well, like zero to a million super fast or raised around in like a really tight process. You're like me in the sense that you started a startup, you went through a few fundraising cycles, and ultimately it didn't work out. And I actually think in the show's history, and it's been almost three years now, we've only done one of these type of stories unless you count my own failure story. So I guess maybe two you could say, but there's so much to learn from that. So I really, I wanted to do that again and, and I just, I saw a post made on LinkedIn and so reached out. So anyways, thanks for taking the time to share the story with us.

David Anderson (02:44):

Yeah, no, I'm happy to do it. Obviously it'd be fun to be sharing the growth to a hundred million ARR story, but I'm a big believer that you learn a lot more in failure than you do sometimes from your success. So hopefully hopefully this conversation will be helpful for

Pablo Srugo (02:59):

Well, dude, it's either true or, it helps me sleep at night. Either way. I  believe it. So <laugh>

David Anderson (03:03):

It helps me sleep too, man. So we're on the same boat there.

Pablo Srugo (03:07):

So maybe let's start at the beginning, I mean, high level, like, just tell me a little bit about your background. 'cause , I really wanna get to the meat of it. Like, you know, what mistakes you think you made that led to things not working out or what could have gone differently. Like, so we'll touch on all that, but let's set some context first, maybe tell me a bit about your background and the origin story and ultimately what you know, Tandym is.

David Anderson (03:30):

Yeah, absolutely. So I spent the first 15 years of my career at Capital One doing a whole bunch of different things, but the through line for all of that was consumer lending in some form or fashion. So spent time in the auto finance business. I spent time in car partnerships, which is where Capital One puts their store card and co-brand credit card portfolios. I did some new product development stuff with the BNPL (Buy Now Pay Later) product, but that middle chunk in the card partnership space where I met my two co-founders and also was sort of like the origin story for Tandym. So, so Tandym was designed to be a new take on merchant branded payments. So if you think about legacy store card programs like the Kohl's charge card or the Target red card, all of the major retailers have one of those products, if is

Pablo Srugo (04:22):

The Costco credit card, like that kind of a thing

David Anderson (04:24):

That's a co-brand. But yeah, same, same idea. So it's a financial product that is offered through a brand, typically a retailer. But obviously airline cards are huge. Those also fall into this bucket. Those products create tremendous value for the brands that offer them the customers who adopt them, and then ultimately the issuers as well. So it's a really interesting model in that sense for the brands, they're, they're building a deeper customer relationship. It's a much stickier customer relationship. Oftentimes they're earning a revenue stream out of the financing or  the financial product. And you can go look at, you know, these public companies, 10K, like they are significant revenue streams. I think Target gets a check from their issuer each quarter that's in the neighborhood of like $150 million. So we're not talking about small potatoes, it's like real money.

For the customers who adopt. If it's a brand that you love and you shop there a lot, it unlocks the best rewards. So typically at least 5% back, there's all sorts of perks. And then finally for the issuer, you're getting to originate lending accounts to customers, but effectively a $0 cost to acquire, which in consumer lending is like the holy grail. So there, it's a really  great business model. It's been around for decades. We saw an opportunity where, you know, the incumbent players who offer these products, they only serve merchants above a certain size. So when I was at Capital One we wouldn't even entertain the idea of adopting a program or launching a new program if the retailer wasn't a multi-billion dollar retailer. That obviously cuts out a very long tail of still exciting.

Pablo Srugo (06:04):

What is that? So is it a lot of work that's behind that? I know the opportunity is obviously not as big, but is there actually a lot of work to setting that up in the first place for Capital One for,

David Anderson (06:13):

For a, for a big bank? Yes. These programs take months to launch with gigantic teams. For all the reasons you would expect. The tech stack is, you know, not quite as nimble as it might need to be. You know, the, the, the hurdle to get the return on the investment is just too far in the future for it to make sense. So that's sort of a problem statement, right? Like there's a bunch of retailers or brands out there who might be a great fit for this product, but don't get serviced today by the incumbents. You combine that with this, these ecosystems that are just massive. So Shopify for example, I think they're like the number three e-commerce retailers. You add up all of the brands on Shopify after like Amazon and eBay. I mean, they're huge. But what those platforms allow for is a very scalable distribution model through technology. So we built plugins for all of the major e-commerce platforms, Shopify, Magento, BigCommerce that effectively made it like installing an app on your phone almost in terms of setting up a new program and launching it. Actually, I've launched a program on airplane wifi before, like super simple. We could do it in basically a matter of a couple of hours.

Pablo Srugo (07:25):

Like self-serve you, you don't need to talk to anybody as a brand. 

David Anderson (07:28):

Our GM motion was sale-led, but we had visions eventually getting to sort of like this product led motion where, you know, you could sign up through basically a flow, but to your point, it's basically plugging in some API keys, configuring some look and feel. And so if you take a step back, what we were trying to do is modernize the merchant experience of launching and adopting one of these programs. And also two, modernizing the end customer experience to include more product types to just be a better digital experience than what you would get from incumbent banks today.

Pablo Srugo (08:03):

In simple terms, it's like the classic long tail, long tail strategy. Like take something that incumbents are doing for the really big guys, simplify the work so you can offer it to the long tail and, you know, add the, you know, the new distribution, like take advantage of all the new stuff and then let them do what the big guys are doing too. And all the win-win win that you mentioned earlier on rewards on new revenue streams cost to acquire for, in this case for you as kind of the issuer or whatever still apply.

David Anderson (08:28):

Yeah,yup.

Pablo Srugo (08:29):

It makes perfect sense, right? I mean, it makes perfect sense.

David Anderson (08:31):

I'm glad to hear the thesis makes sense. So yeah, that was our thesis. We thought, look, it's a business model that we know works. It's massive. There's a huge untapped opportunity in terms of just customers, like merchant customers and we can use technology to scale in a way that an incumbent player can't while delivering a better experience for everyone involved. And so that was, that was effectively the, the origin story for Tandym.

Pablo Srugo (08:59):

When did you start, by the way? What year?

David Anderson (09:01):

It was actually almost three years ago to the month. So it was like October of ‘21 is when I left Capital One and we started the business. So this is

Pablo Srugo (09:08):

Like peak fundraising hype. It

David Anderson (09:10):

Was still frothy for FinTech. It was starting to cool, but we didn't have any issues raising a seed or anything like that. It was, it was pretty quick. Walk

Pablo Srugo (09:20):

Me through that, like, you know, from quitting to raising that first round and setting up, like what was the timelines in the, in the dollar amounts?

David Anderson (09:26):

Our CEO Jen had, had left a little bit earlier than myself and Psy our CTO. 

Pablo Srugo (09:33):

And you were three co-founders ?

David Anderson (09:35):

Correct. Okay. Yep. Correct. And so she had been out in the market sort of floating this idea to see if there was any appetite or if we could get traction. So by the time I left Capital One in September, October, we already had a pre-seed round coming together. I think we, I think we closed on that maybe at the end of 21, if I recall correctly. And I wanna say it was 2 million pre-seed, I think that's right. Somewhere in that neighborhood we had that, that investor appetite at the table pretty quickly which obviously gave me a bunch of confidence leaving <laugh> leaving my cushy corporate job.

Pablo Srugo (10:11):

You know, it's interesting. I'll ask you this question, and 'cause I saw this, especially in that time, like a lot of FinTech innovation, part of it driven by, you know, money being so cheap. And so there's just like all these opportunities. I mean, you remember like the e-commerce lending plays, like, there's just so much stuff that was going on and one of the challenges many of them had is like you raise, you know, decent preseed, $2 million in your case, especially like who's lending that money, right? I mean, a credit card is fundamentally a lending product. Like where is that coming from? 

David Anderson (10:42):

Yeah, and you know, you asked at the very beginning or you sort of framed up, lesson learned, and I think this is probably one of the biggest lessons that I learned. So yes we had a couple of different products that we offered in customers. We started with a credit product. So we started with..  think of it as like a digital credit card. That's effectively what it was. We had a warehouse facility set up to park the loans, but we did need to advance a portion of those loans out of our balance sheet. So with our capital, it's obviously very expensive to do that, especially as a de novo FinTech.

Pablo Srugo (11:17):

Walk me through just the simple stuff there, like for somebody that's in FinTech. So fundamentally, if you sign up a retail, like an e-commerce partner, let's say they start giving up credit cards, consumers start spending with these credit cards and consumers spend, you know, whatever, a thousand dollars this month on a credit card. What's happening behind the scenes?

David Anderson (11:37):

Yeah, it's a very complex business model from a mechanical sense. So what, you need a couple of ingredients. First you need a sponsor bank. So Celtic was the sponsor bank that we worked with. They were great partners. They were also not the cheapest. So there's a huge fixed cost component there. Not only from a dollars perspective to have a sponsor bank, but also you need a compliance function. You need to actually be doing it. We were effectively regulated just like any other bank is now, the regulator was not the Fed or the OCC that, you know, that's ingredient number one. You need that sponsor. So there's

Pablo Srugo (12:14):Overhead plus a fee you're paying to this bank for them to sponsor you. Okay.

David Anderson (12:18):

Correct. 'cause They're effectively the true lender in this, in this model. And so Pablo Srugo shows up at Home Field Apparel, which is one of our partner brands. You wanna buy some like college gear, you originate an account, we do the underwriting. So that's part of the Capital One background comes into play there. But we had to design our own credit policy. Once we approve you and give you a credit line, you make the purchase, Celtic funds that loan. So we settle with the merchant every day. So we're, we're sending a CH out every day to the merchant. A couple of days later we buy the loan from Celtic. So there's then a cash transfer from us to Celtic to effectively acquire the receivable. We then take that receivable and we park it in our warehouse facility. Now, in an ideal world, you could park the entire receivable there. But in reality the way this works is there's typically what's called an advance rate. And so let's say your advance rate is 90% the warehouse facility is gonna fund 90% of the loan. You need to fund 10% of the loan, and that's your capital. 

Pablo Srugo (13:22):

And so, who's funding that warehouse? That warehouse facility is like private investors or some other institution?

David Anderson (13:26):

Yeah, so there's a bunch of private credit funds out there that do this, you know, there's, there's big ones like Triple Point and I think Victory Park. I don't know I'm forgetting some of the names, but we worked with a small one out of L.A and they, they affect, they're sort of almost like a VC in the sense that they've got LPs that they cool money and they, they effectively are in a debt financing line of business. 

Pablo Srugo (13:52):

And why doesn't the bank wanna hold that, that loan?

David Anderson (13:56):

Some banks do Celtic I think, I don't know if they're unique or not, but their model is they don't hold any of the assets for any of their partner programs. But some banks like Cross River, which is another big sponsor bank they do have a capability where they do for some of their partners extend a debt line as well. So it just depends on the sponsor bank.

Pablo Srugo (14:17):

So as you're, as you're setting this up.. the other thing is, is on the, on the credit card side, like, you know, normally it's like Visa or MasterCard. How did you, how did you set that up?

David Anderson (14:26):

Yeah, and so that was part of our innovation. We did not write any legacy payment rails at all. So we were in effect, we were building our own sort of store card network at the end of the day. Because from a customer experience standpoint, I mentioned home field, right? That apparel company, let's say you originate an account at home Field, if you go shop at another Tandym brands, we don't re-originate you, you can just use your phone number, use your same account to make a transaction at that, that second or third or fourth brand. So there's no Visa, no MasterCard, we just connect directly to the merchant directly to their e-commerce experience, which is how we were able to effectively run the payment, so to speak. And then we sell directly with a merchant each day, as I mentioned.

Pablo Srugo (15:12):

And what, what's the reason for that? Like why not do it like a co-branded Visa card or MasterCard or whatever?

David Anderson (15:17):

Yeah, I mean a couple of reasons. So number one the economics that you can unlock when you sort of break away from the legacy infrastructure is pretty compelling. So we could offer processing to our brand customers at really, really low rates. Our headline rate at the end was 1% transaction fee, which you compare that to a Visa MasterCard product that merchants pay, you know, three plus if you're on Stripe, maybe you're on Worldpay or somebody like that and get a better rate. But our cost of processing was much lower. And a big reason for that was because we cut out all of those players in the traditional value chain and we just went directly to the merchant. The second thing, like you can unlock so much experience innovation , when you break away from the legacy rail.

So just to give you an example, with every transaction that we processed, we got SKU level data from the cart. So I knew exactly what shirt you bought, I knew the size I had product images. And this allows you to do a bunch of really interesting and unique things. You can start to underwrite with this data. You can build visual receipts in your servicing experience. These are all things that I remember when I was at Capital One. We talk about these things of like, man, that would be great if, but there's no way to actually unlock that ability with traditional payment rails because the data is just not there. So those are some of the reasons. There was also a credit risk reason. You can only use our products at our brands which was a way to sort of mitigate people opening one of these cards and then going and using it at like Best Buy or Walmart or Target or something like that, which obviously there's just a very different risk profile there in terms of what the customers do.

Pablo Srugo (17:06):

So after it raises pre-seed round, you all start working on this, you're developing a product, like what, what parts start working well and what parts not so much, like what's the adoption like? What about like the, you know, the financing piece of it, like what's, what's good and what's a problem?

David Anderson (17:21):

Yeah, so we spent the first half of 2022 building everything and setting it up. It's a fairly lengthy process to get formal approval from your sponsor bank to actually start making loans. I mentioned there's a bunch of compliance overhead, and that's part of where that comes in. But we launched the platform in sort of mid 2022. And I mean,when we launched we had brands. We immediately had customers, merchant customers and we started to see customer adoption from their end users. And the early reads were really compelling. We were seeing between 5 and 10% of a brand's checkout moving to our product, which to to set context like PayPal captures maybe 15 to 20% of a brand's checkout. So, and obviously PayPal is everywhere and has great brand awareness. And so we were seeing pretty exciting adoption. And the reason for that was because we were merchant branded.

We were not trying to create a new consumer facing brand. We were trying to build off of the equity of our brand partners. So if you're shopping again, I'll use Homefield as the example. You, you obviously like Homefield, you're there. If you see Homefield apparel or Homefield Pay products, you're much more likely to adopt that than some FinTech you've never heard of with some weird logo you've never seen before. And I think that was playing through in the customer adoption. So sort of get to like the tail end of 2022, we're signing up brands. I'd say like the, the pace of growth on the brand side was slower than we anticipated. So what we did launch with brands, our ability to, to win new brand customers was much more challenging than what we thought it was going to be. our initial thesis was, let's go after, I'll call it SMB. Everyone has a different definition of what SMB is, but for us it was e-commerce brands doing, call it 10 million in, in total revenue. So, you know, they're meaningfully sized, but they're not big, they're not huge. Our, our thought process was

Pablo Srugo (19:25):

and By the way, just like, like if you're an e-commerce brand doing 10 million, how many employees is that? You probably have 10, 20 employees or, or a lot more

David Anderson (19:34):

Maybe. Yeah, it's still a pretty small operation. So typically, like the founder is the founder slash CEO is in the weeds making day-to-day decisions. Not a very big organization. Small and scrappy, I think is the way to describe it. our thesis was, we can sign, you know, these brands up really fast, like the sales cycles are gonna be pretty short. What we found was that was not the case. We certainly had one call close but they were the exception to the rule. Most of the brands that we would win, it would take, you know, three months to, to get to a, a signed contract sometimes as long as six months and did not know this before. But e-commerce is one of the, I think, most challenging spaces to sell into because there's such a proliferation of SaaS products out there with a lot of venture. And keep in mind, 2022, there's still a lot of venture money behind these companies like reaching your target customer, your target buyer, very challenging. Like you're not sending out some cold email and getting great response. You really have to go and grind out, like building some relationships, like getting in front of your target buyer. We just didn't really have a full appreciation for that when we started, but we learned that pretty quickly, not towards, you know, the end of 22.

Pablo Srugo (20:55):

What about actually converted? 'cause you said like even if you got in front of 'em, it would take like three months instead, did this cost them anything? Like what was the reason for not moving on this for a brand?

David Anderson (21:04):

Yeah, and I think this is another probably lesson learned . It took us a minute to really dig into, like, what is the feedback we're getting in our sales cycle. Oftentimes what we hear from a brand is, this is really cool, I love it, but not right now. And when you hear not right now you gotta dig deeper to figure out what the actual hangup is. Our pricing structure was very approachable. Again, I mentioned 1% processing fee, which is a net save on anything else in the checkout. We started with a small multi subscription fee, which we, you know, we pretty much always waived, but it was like 300 bucks. So from an outlay perspective, the brand doesn't really have to invest anything upfront. Which, you know, may also have been part of the reason why we actually didn't sign brands. It's like, wait a second, if this doesn't cost anything, certainly it doesn't drive any value. And so I think that was potentially a bit of a challenge too. But yeah, oftentimes we hear from a brand like, yeah, this is great and I wanna do it, but talk to me in Q1. Talk to me in Q2. Talk to me in Q3.

Pablo Srugo (22:14):

Man, this is, I mean, this is funny you mentioned this like, well, I, you know, I've spoken a lot about this and, and we've gone, there's like, when we, we started Gym track version one was about like, you know, really big vision track everything you do in the gym, et cetera, et cetera. Just too hard to build. And then when we pivoted to gym track V2, it was this like, good sounding idea on paper of helping gym operators not waste so much money on equipment spend. Like you go to your big gym and they have like 300 treadmills or like whatever. And if you honestly start digging in and say, why did you buy, you know, 40 of these machines and not 20, there's no good answer. And these are like 10, 15,000 machines. So the idea was like, well, if you put these sensors, you look at usage, you can help them make more optimal spend.

And everybody would say, oh man, this is a great idea. Like a dashboard where I could see like by brand, by this type, that type makes so much sense. And they'd be like, cool, like, pay me, you know, the third of what you pay for one machine, you know what I mean? Like nothing. And it's like, oh yeah, yeah. Like, come back next year. Come back next quarter. Right? And, and it's a deadly thing when you start hearing next quarter, next year, you know, too often to me it signals that for whatever reason, it's just not the top burning problem in that customer's mind. And I wonder if for you, like what they were looking at was, okay, maybe this will make me like a little bit more money, but I'm worried about either making a lot more money or like keeping my business afloat. Like something, you know, that's just a lot more hair-on-fire type.

David Anderson (23:41):

Totally. Yeah. We struggled to create urgency and I don't keep in mind too, like the product we were selling, brands never been offered this product before. So there was a lot of demand generation that we were doing like education through our sales process as opposed to demand capture. So I don't know, just make it up, right? Like there's a bunch of these products out there that are, are basically doing a post-purchase checkout experience, right? Where like here you see a confirmation page and they're presenting products at other brands to you that's like an immediate revenue unlock. And there's like a bunch of people out there selling that. It's like, oh yeah, I know exactly what that thing is. I definitely want that. For us, it was like, wait a second, what are branded payments? Like, why do I care about this? I already have a loyalty program. Like, what are you guys talking about? And so I think we struggled to create urgency, and then when you combine that with the fact that there was a lot of education in our sales process, it was a very tough hill to climb with those SMBs.

Pablo Srugo (24:39):

And then if you do the math, like they take an SMB doing 10 million in top line, and let's say that they could get you 5% of that, or let's say 10% going through this co-branded offer. So now it's a million dollars. What's their take of that million? What's the new revenue to them?

David Anderson (24:58):

Yeah. And so you're doing the math that we started to pretty quickly do which, and I'll talk about where we shifted our GTM strategy, but the absolute dollar unlock for brands of this size just wasn't that exciting. Because you start to haircut, all right, we see a million dollars on our product a year, we're saving two points on processing fees, we are driving revenue uplift. And that number was pretty meaningful, but it was harder for a brand to believe that even with case studies that we would, we would generate. So like let's say you throw that out, if you're the brand making the decision, well, two points on my processing. If it's a million bucks, like that's not that exciting. Like I can't even fund another headcount with that, right? So if my math is right, that's like 20 grand. 

Pablo Srugo (25:47):

So it's 20 grand. Yeah,

David Anderson (25:47):

It's not,

Pablo Srugo (25:48):

It's not nothing though. It's not nothing. You know what I mean? Especially for these low margin businesses, they're probably doing what, 10, 20% best case net, net margin. So it's not, not nothing at all, but it's not necessarily the thing that's gonna force you, as you said, urgency to do this like right now versus it a bit when all these other problems die down a little bit and have more time.

David Anderson (26:06):

It's not nothing, but it's also not like jump outta your chair exciting. And I think to create that urgency, you either need a great emotional hook or you need a great like, economics business case hook. And where we found success with early brands, it was founder-led brands, oftentimes, like the name of the brand was the name of the founder. And for the founder, it was an emotional- oh, this is really cool. Like I get my own payment method with my name on it. So they weren't even really excited about the revenue upside or the cost savings, though those things did come, they were almost more excited about the cache of being able to say, I've got my own payment product.

Pablo Srugo (26:44):

And you raised, like you raised a $2 million pre-seed, but then when did you raise? you raised another round as well, right? A bigger one.

David Anderson (26:50):

We raised a- … we call it  a seed.  You know, this terminology is very flexible. But we raised an $8 million seed at the beginning of 22. So pretty quickly after the pre-seed I wanna say it closed in like Q2 of 2022.

Pablo Srugo (27:05):

That's, I mean, that's meaningful money. What was that based on? Was that based on you establishing kind of those, those key partnerships and, and having the product ready to go?

David Anderson (27:11):

Yeah, and we moved really fast too, so our product execution Psy our CTO really, I think deserves a lot of the credit for this. Our product execution was fantastic. Our sponsor bank told us that we were the fastest program to go through their onboarding and compliance review process. I think we did it in like 120 days or something. I mean, from a dead start to in market product, it was really fast. And you know, at that point too, like there's no data in the business you're still selling definitely a vision. And you know, we're talking about some really exciting numbers and like some growth projections. And so we were able to raise a pretty exciting seat around based on that.

Pablo Srugo (27:51):

Well, I mean, indeed, for what it's worth, I mean, you guys are experts in the space, which is like a kind of niche-ish type of space. You're executing exceptionally fast, you're in like a very great macro environment. The thesis makes perfect sense. Like there's a lot of things going for you. And then, okay, so then you raise, you know, $8 million in early 22. And so you, you're talking to me about the first, let's say go to market problem on SMBs. What did you end up shifting to?

David Anderson (28:19):

So we ended up shifting to focus more on I'll call it mid-market or enterprise Shopify brands. Not just Shopify, but predominantly Shopify. So think of that as like big eight figure or nine figure brands. And there are a couple of reasons for that. So number one that we were finding the sales cycles were roughly equivalent. So the three to six months was still true for those bigger brands. So obviously you'd much rather spend that time and win a brand that's 10x the size of, you know, the $10 million brands.

Pablo Srugo (28:50):

And this is when, by the way, just timeline wise, at this point,

David Anderson (28:52):

This is probably roughly early ‘23. I think we were, I think candidly we were too slow to make this shift. I think we should have made these shifts faster. 

Pablo Srugo (29:02):

What do you think stopped you from, from making it faster?

David Anderson (29:05):

That's a good question. I think we, we, we kept telling ourselves, let's give it one more month. Let's give it one more month, let's get some more data. And I think keep in mind too two of our three co-founders, myself included, came from more corporate backgrounds, right? So like that founder DNA, which I think over time I sort of replaced my corporate DNA with like…. get in the weeds, let's shorten the learning cycles. Let's not be afraid to change course really quickly. I don't think we were all the way there yet to be, if I'm being really honest with myself, I, I don't think we were quick enough to make some of those calls and like dig really deep into the problem.

Pablo Srugo (29:51):

I think that's such it, but it's also, for what it's worth, it's just so hard to give up something that you've thought about and put work behind. There's that sunk cost element. And I see it all the time. Like I said, it's like, you know, it, it's very rare. In fact, I don't think I've met anybody who wishes they took more time to pivot. You know what I mean? Like, I, I meet a lot of people like you like “I wish I pivoted earlier.”It's just so hard to do that. But when you see those signs, it's almost like in hindsight you're like, how did I not see that? But when you're in it, in the weeds doing it, it's so easy to just say, ah, a little bit more, a little bit more. I think it could work. And, and for what it's worth, like there's that difference between like you're told to be persistent, right? Resilient, and so like that tells you don't quit, you know, and it feels like quitting anyways. A lot, a lot of things kind of going on there.

David Anderson (30:38):

No, you're totally right. And then keep in mind too, the signals we're getting from prospects are generally positive, right? Like, oh yeah, I love it. Like, let's talk again in, you know, four weeks, let's talk again in two months. Like whatever. And I think you have to chase-  you can't let those opportunities die. You still gotta chase those things down, but I think you gotta figure out a way to sort of de-risk those things coming to the table, right? And I, I don't think we probably read those tea leaves fast enough in, in hindsight,

Pablo Srugo (31:09):

By the way, do you remember when you're making this kind of change in, in 2023, like where you might've been, like revenue wise?

David Anderson (31:16):

We were still, I mean, seven a million, so we're still early on the revenue, but

Pablo Srugo (31:19):

Like hundreds of thousands in revenue. Like there was, there was some

David Anderson (31:22):

Yeah, yeah, yeah, yeah. So yeah, we, so the sales cycle for bigger brands was about the same. The other thing that we were finding was the dollar value we could unlock. Like suddenly it's not that 20 k we talked about. It's like a number that's actually more exciting for the brand, which it's a lot easier to sell on that <laugh>. And I think I think that was very helpful when we sort of finally made that full shift to go more up market. You also too, like if you start to win some of those bigger brands that become more like your lighthouse logos, where it's like, oh yeah, I know, I know Portland leather goods, like, you know, I've shopped there or other brands look up to those brands in their space. And so I think all of that sort of pushed us towards that bigger, that bigger fish.

Pablo Srugo (32:08):

And did that start working?

David Anderson (32:10):

We did start to see more success there. We would still sign smaller brands, but we were much more like, you come to us, we don't go hunt for you. But yeah, we did start to see some traction with those, those bigger brands.

Pablo Srugo (32:22):

Remind me again, like you did 2 million, and 8 million raise. Did you end up raising more money after that?

David Anderson (32:26):

We did. We raised one more round. We raised a bridge round in the winter, the FinTech winter of like, call it early ‘23,

Pablo Srugo (32:35):

Just as you're doing this kind of this go to market pivot.

David Anderson (32:38):

Yeah. Yeah. So I think maybe like the summer-ish of 23, we raised, I think it was six from insiders. 

Pablo Srugo (32:45):

So 16, 16 million raised total.

David Anderson (32:47):

Correct.

Pablo Srugo (32:49):

And when you do this, this go to market, you're starting to see, you know, more traction. I mean, maybe just on that, like what does that revenue ramp start to look like, you know, maybe like at a high level do you cross a million at some point? Like what, when do you cross a million?

David Anderson (33:05):

Yeah. the business gets to a million in ARR probably like, honestly Q1 ish of 24, Q2 ish of 24. So the revenue ramp takes a while. I think, again, like our pace at signing new brands was not what we wanted to be. We actually signed some really big brands that we had to kick off the platform because just the quality of the customers coming through, we've seen a ton of like credit risk and fraud risk. And so that was a bit of a setback. But yeah, so, you know, we hit, we hit a million in that 24 time period.

Pablo Srugo (33:41):

And are you still dealing with some of the issues on the backend, on the, on the lending side, on the capital front?

David Anderson (33:46):

Yeah. I mean it's still, it's still very expensive for us to originate these receivables. Our model was really predicated on getting to meaningful scale quickly because the way this ecosystem of like private credit works is once your portfolio gets to a certain size, call it like 10 to 15 million in, in book book size you can get better terms. So your advance rate goes up, which means you fund less off your balance sheet.

Pablo Srugo (34:17):

So instead of that 90%, maybe it's 95 or this sort of thing,

David Anderson (34:20):

Right? Carry goes down. So when you park those receivables at the credit funds, not only are you funding a portion off your balance sheet, but you're also paying an interest rate to the private credit fund. That's a great business to be in, by the way.

Pablo Srugo (34:34):

yeah! sounds like it!

David Anderson (34:35):

Heads you lose, Tails I win or something like that, but yeah. You get a better interest rate and you get better advance. And so again, our model was, our expectation was we were gonna sign new brands really fast, grow the program really fast, and be able to unlock better terms, which brings our unit costs down, which makes us closer to profitability, all those sorts of things. It was just taking a really long time to get that flywheel going.

Pablo Srugo (35:05):

When do the first signs of existential type problems start to come up?

David Anderson (35:10):

 I'd say like towards the end of 23. We, you know, we did run into some compliance issues with our, our sponsor bank, and it was less anything that we were doing and more one of our vendor partners there was a system issue that they had which caused us to misstate you know, the interest fees that a customer had accrued. So we rectified it, we made it right for the customer. You know, we worked really closely with our sponsor bank to do that, but the impact of that was diverting focus away from growth opportunities. We had to re-divert a decent chunk of our engineering team to go solve these problems. And so that was probably the first sort of existential threat to the business and just, it sort of disrupts everything when you have one of these things pop up. I think one of the challenges is like, how do you fight those fires but keep most of the team focused on the main thing? But for us, we really had to nail that otherwise we were at risk of just not being able to originate new accounts.

Pablo Srugo (36:18):

How many employees were you at peak?

David Anderson (36:21):

Around 20 maybe just right under 20. And I'd say two thirds of that was like product engineering tech. The other third was everything else. And so, and everything else for us was there's customer service, there's compliance, there's the credit side of that. Like it's a pretty big estate in terms of 

Pablo Srugo (36:40):

Yeah  I mean, but twenties, like if you're manageable, you know, I'm pleasantly surprised I'd say that like it could have been a lot harder. I mean, you could have hired a lot, a lot more people with the cap. Yeah.

David Anderson (36:49):

But we kept getting feedback, like when we'd go test the market, so for our bridge, we did explore some external investment. Obviously for our series A, we were out in the market, people would just look at us and say, you guys are burning way too much money. Our monthly, yeah, our monthly burn was around half a million, but 

Pablo Srugo (37:09):

Oh wow, okay. couldn't have been – how much of that was people versus the other stuff.

David Anderson (37:13):

Yeah, exactly. So maybe less than a half was people. 

Pablo Srugo (37:19)

That makes sense. Yeah. 

David Anderson (37:20)

Yeah. And so we'd had these conversations, whether it was with our board or with other-

Pablo Srugo (37:24):

So the other stuff is what is it cash burn but not actual gap burn or like what? it's cashed or?

David Anderson (37:31):

it's  cash burn. I mean I don't think this is oversharing, but  our monthly fee to our sponsor bank was six figures. So that right there is a big chunk. And that's not a, that's not unusual. I mean, that's sort of what these things cost, but if you're going to get into that business, you have to have either immediate scale or a very certain path to immediate scale because you just can't support that cost basis on a subscale business. So we had some fairly big

Pablo Srugo (38:04):

The advances, at least, even though they might be material, you, you expect to get back at some point, right? Right.

David Anderson (38:08):

Yeah, exactly. And so, and that was part of our cash burn too. But we did sort of ramp down credit originations in 24 to try and preserve capital. But we'd have conversations with our board or with external investors and you know, the question would be, well, how do you guys reduce burn? Like, can you, can you, can you get really lean? It's like, yeah, we could, we could fire half the team, but that only extends runway by like a month and a half. Like the bigger thing here is all this fixed cost that is just weighing down the business. And so that, that sort of takes me to like another lesson learned, proving your model with a more capital light strategy first, if there's a more capital consumptive thing you want to do, the smarter thing for us would've been to launch our pay by bank product first, which had great adoption was incredibly capital light. And then once we had enough merchants on the platform, what is that? 

Pablo Srugo (39:00):

What's that? What's that product?

David Anderson (39:01):

Yeah, so it's, it's an account to account product. So customers would connect their bank account through plaid and adopt the, the program at the brands, the, the rewards program at the brands unlock all the same benefits and the merchant's paying the same 1% processing fee. And so it's a way for customers to participate who either don't want to open a line of credit or wouldn't get approved for a line of credit. And I think towards the end, half of our originations were, were these, we call it debit, but these papers. 

Pablo Srugo (39:29):

So there's no more lending in that you're taking money outta someone's bank and I mean, you're just doing the payment processing.

David Anderson (39:35):

Effectively. There, there's some float risk for us because we would settle with the merchant same day, - 

Pablo Srugo (39:41):

and then take

David Anderson (39:42):

Yeah, but we were, I mean obviously we're using plaid to ensure the customer had available funds in their account to cover the transaction.

Pablo Srugo (39:48):

I mean, that's instead of like, they could have paid debit or something like that,

David Anderson (39:52):

Exactly Yeah.

Pablo Srugo (39:52):

Okay.

David Anderson (39:53):

But, if we have launched that product first, built up a merchant base and then launched credit, I mean, number one, the 10 million that we raised through the beginning of 22 would've lasted us for like, I don't know, three years, four years. Like the runway calculation is just way different because you don't have all this fixed cost overhead of everything you need to run a lending business.

Pablo Srugo (40:17):

Did you guys think, is that something you thought about at the time and decided not to do, or it just came up later as an idea? 

David Anderson (40:22):

We always for better or for worse, we had strong conviction to launch the credit product first. The credit product in our mind was it, it is a much bigger revenue driver. We also, and this is maybe a little naive, we're like, it's the most complex product to build, so let's do it first, and if anything, it can become a bit of a moat for us. So maybe a little bit of first time founder naivete, but yeah, we never even thought about launching Pay by bank first.

Pablo Srugo (40:51):

It's funny, I mean there's so much like, you know, we talk about survivorship bias and like sometimes I was just listening to the, the acquired episode on Meta the other day, and one of the things they talked about was how in the early days what Zuck did is instead of going after the universities, you know, he started colleges, universities, right? Like instead of going after the ones that had no competition, he went after the ones that had competition to just make sure that he could win those battles and then would go after everything else, right? And it worked for him. And so like when I heard that, I'm like, “what a smart strategy!” But then, you know, there's a flip side of you try and go after the hard thing first you run outta money and then you can't do the simple stuff that maybe you could've done that would've gotten you there in the first place. So they're like, there's no playbook, man. Like, there's so many different ways this can go wrong and probably only a handful of limited ways that it can go, right? And like, that's what makes startups so hard.

David Anderson (41:40):

Yeah, yeah. you're right, there's not a playbook. And I think the other thing too is I don't know if people I'm sure people admit this to themselves, but even in most successful businesses in the world, you have to be lucky. Like, it doesn't matter if you have the best product. Like there still is an element of luck involved. And I mean, look, you can make your own luck. You can manufacture those sort of scenarios, but you still kind of have to catch lightning in a bottle, I think. And you know, I think, I think that's a piece of it as well.

Pablo Srugo (42:12):

So how did things ultimately fail? Like how did things actually end at the end of the day?

David Anderson (42:18):

Yeah, so we were out raising sort of at the end of Q1 or like Q2 of 24 to raise our series A. We had a really big enterprise client that we've been talking to for a few months and you know, we cleared c-suite approvals, like we're headed towards the finish line with 'em. And so the thought process was, you know, KPIs in our business look generally pretty good. Obviously you always want them to be better, but there's like, there's a story there. 

Pablo Srugo (42:48):

You're doing like a million and a half at this point or so.

David Anderson (42:50):

It's around a million. Yeah. The revenue traction was not where we wanted it to be to be really clear. But we have this big enterprise client that's about to come onto the platform that is going to like seven x our revenue. Okay. In the beginning of 25. And we felt like, you know, we need capital and we think this is a story we can sell. So we're out in the market. And it's funny, man, like we had a lot of conversations with great VCs and we'd hear, like, love the business, but we wanna see more traction, we want to see more customers we wanna see. So it was almost a version of what we would hear from prospective clients. 

Pablo Srugo (43:32):

Yes,

David Anderson (43:33):

Yes. Which I respect. And I think the other thing we ran into is like we were a lending business and there's just not a lot of VCs that really in, in 2024 in particular

Pablo Srugo (43:45):

Had a macro for Lending?

David Anderson (43:47):

Hundred, we wanted to invest in a book business. And so of course we tried to construct a story that was less focused on lending, which I actually think did a disservice to ourselves, but it was a challenging market for us. And we were not successful in bringing external money in any meaningful amount to the table. We got really close with a few, and then ultimately for one reason or another, it just wasn't a right fit for them. They walked away concurrently. We're of course talking to our, our board, our, our existing investors and they, they offered up a term sheet for a good portion of the allocation. So we were raising between 12 and 15. They wrote a term sheet for 10 with the idea that we would fill out the remaining two to five. And so, you know, we thought we had a path there, and even if we weren't successful in raising that two to five immediately with, with the 10, we felt like, look, let's get this big enterprise client launched in Q1 of 25 and maybe close out the rest of the round or something like that.

David Anderson (44:47):

So that was the plan that ultimately fell apart at the very end. But yeah, I think to sort of use less words, we were not as successful fundraising as we should have been as founders,

Pablo Srugo (45:03):

But how, how does that, how does that fall apart? I mean, that seems like a done deal when it's insider and it's not, you know, it's not like they said, we'll do 2 million of the 15, like we'll do 10 of the 15 or the 12. 

David Anderson (45:14):

I mean, I think that's a good question for the investors who walked away. I've not gotten the straight answer on that one. And I don't think I probably ever will. So I, I don't know, like we, we got all the way through confirmatory due diligence, like it was moving to the finish line funding docs went out, I signed the funding docs and I think they, they got cold feet. And look again, I respect their decision to not deploy capital. That's their right. I do. I wish they had taken a different approach and told us earlier because, you know, time is the greatest resource you have as a founder. And we could have either, I think there are other levers we could have pulled, including, including strategic sale which is a lot easier to do when the business is operating and there's some, some money lots in the bank versus current state, which is not operating and no money in the bank.

Pablo Srugo (46:11):

Yeah. Like you have to wind it down ultimately, right?

David Anderson (46:13):

Yeah, yeah. You know, it is what it is. I hate that saying, but it's so true here. And you, you take your lumps and as we talked about at the very beginning, you learn a lot more I think sometimes from failures. And I, I don't even really consider it a failure. I mean, by definition the business failed, but we learned a lot. We built a product that works, the business works. I think someone will come along and crack this nut. So hopefully we've laid some, some good groundwork for some

Pablo Srugo (46:43):

Of, well, I think that's the, I mean that's what makes this story I think so fascinating and also important. It's not like it's one thing when you, you know, you have an idea, you kinda give it a crack, maybe raise it a couple hundred thousand dollars, things never go anywhere. You know, you close up shop, you, you, you like, you know, give some money back to investors or you don't, whatever. I mean, there's not that much, you know, of a story there. It's like, yeah, the idea never worked. Like in your case, it's like you were able to raise a lot of money, partner with all the right people in the, in the industry, like the partner banks, like all these things that are actually so hard, like, I think so easy to take for granted, but each one of those, I'm sure when you accomplish them, was a huge win 'cause There's probably 10 other potential sponsor banks that said no to you guys, right? Like the warehouse lender said no to you guys. Like, this stuff is not easy. And then to actually have, you know, the actual transactions million plus in revenue, there's something real there. And it, you know, and this is like, the thing is, man, as a first time founder, I remember, and I know because I talked to so many, you sometimes feel like if you can get X, you're good. You know, like if you can raise a million dollars, you're good. If you can get a million in revenue, you're good. And like, what I always try to remind myself and others is like, you're never good. you're not.  like until you sell this thing or some of your thing, or maybe you become so casual, profitable, like you're just never good because the company that raised a bunch of money, failed to get the 10 is not good.

The one that got the 10 to raise a bunch of money but couldn't get the 50 is not good. Like, there's so many ways the thinking go wrong. And, you know, it's a little like, I don't make people paranoid, but that, I think the flip side is the ones who thrive and survive. Like that's the sort of mindset they tend to have, like being a founder is just, it is, you know, it's exceptionally hard. And the reality is there's so many ways that things can fail. If you ever like to lose track of that it probably will, unfortunately.

David Anderson (48:33):

Yeah. Yeah. you gotta love the grind, man. You,, and you have to stay, you have to stay paranoid and, and nervous about those things because as soon as you think it's, it's set or it's easy or the next step is guaranteed that, that's when you trip up. You know, I, I think, I don't know that we ever got that complacent, but we certainly thought like, oh, you know, we just, we just closed this round. Like, we're set, we we're, we're good for now. But to your point you gotta always be looking at like two steps ahead, three steps ahead, and being really thoughtful about how you create option value and different pathways to get there. 'cause By the end, we have one path, and if that path got closed off, it was game over and eventually it did get closed off. And I, I so wish that we'd been more thoughtful about creating additional pathways, but if I rewind, it's like we had some of those conversations, like, this is a distraction. Like,let's not explore this other. So it's like, how do you balance those things?

Pablo Srugo (49:28):

There's no perfect answer, man.

David Anderson (49:29):

There isn't, there's no playbook.

Pablo Srugo (49:30):

So maybe I'll, you know, we'll end it there. Like, maybe my, my last question honestly is, you know, you talked about one, we talked about a bunch of lessons learned, but like, one big thing you had was, I wish we did this more like light MVP type play instead of going for the big thing, is there something else that you would tell yourself or other people? Or maybe like if you think to yourself, oh, if I were to ever start another startup again, I would definitely not do it this way, or I would definitely do it that way. Like, any of those kind of thoughts in your head? 

David Anderson (49:56):

I would start with the most capital light version of the thing that you're trying to build to really, really confirm you have product market fit. And I think we told ourselves a few times, oh, we've got it, we've got product market fit. And if I'm being really honest with myself, I don't know that we ever fully had that thing. And what I would've loved to have more time to do is experiment with different flavors of the products to really figure out what was the thing that was gonna unlock growth in the next step. And so maybe it's just more of a, a restatement of what you were, you were saying, but like, to me that's like the number one thing that I'll, I'll walk away from this with, is before you commit yourselves to like the growth trajectory that a VC's gonna want to see, and everything that comes along with that, both the, the extra cash as well as like the expectations. Make sure the pathway is clear and has a high probability of success. And if it doesn't, that there are off ramps that give you more swings at the plate, so to speak. So hopefully that makes sense. But that's probably the thing I think about the most.

Pablo Srugo (51:01):

Do you regret starting it?

David Anderson (51:03):

Hell no. Absolutely not. If you had told me three years ago that this would be the outcome, I think I still would've left my cushy corporate job to do this. I'm entrepreneurial by nature. Like I love this stuff, I love building stuff. And I learned so much the last three years that I just wouldn't have got, I wouldn't have gotten those experiences any other way.  I certainly wish I made some different decisions along the way, but I don't regret for a second. Starting, I think as a founder, you know, the odds are stacked against you like 90% or something like that of startups fail. Of course you don't start a business thinking you're gonna be one of those 90%, but in the back of your head, you know, like that's a possibility. And it's funny 'cause I'll, I'll hop on calls with people now and they're like, I'm so sorry to hear what happened and like, I appreciate it, but like, I'm not losing sleep over it at this point. I mean, I've made my peace with this sort of what, what's happened and like, I'm just thankful for the experience. It was a ton of fun. Yeah,

Pablo Srugo (51:58):

I love that answer. I mean, I'll tell you like, I mean, starting a startup was by far the fastest learning curve I've ever been on. And I mean, when it doesn't work out, it's a huge punch to the face, but the the flip side of it is, and given the stats, like 90% plus of stars fail, like we definitely have to stop, you know, being overly surprised, like when they do, you know, that's kind of what the task me.

David Anderson (52:19):

I'll say one other thing too, which is I think a lot of times founders of startups that don't make it they really manage the narrative around it. And I, I respect people who want to do that, but I also think it's valuable for founders to have these types of conversations about things like, why didn't it work? And I just feel like more sharing of those stories I think could be really beneficial. 

Pablo Srugo (52:45):

Man, I have to, I have to say I probably well over half of exits or effectively wind downs, like now that I'm in the game, I can say that pretty, pretty like confidently those things you see like X acquires X and you know, whatever, and then the, the team comes goes in like, man, most of the time nobody made any money on that. And that was just like the last, the last draw in a way to kind of save more than anything the narrative, like you said. Yeah.

David Anderson (53:12):

Yeah. And again, I respect why people want to do that, but I also think there's real power in sort of owning your story and not being afraid to say like, yeah, I did that thing and it didn't work, and here's why. So I love that you're doing this in terms of having people that are open to sharing that because I just think hopefully it's valuable for your audience. I know if I was, if I was listening, I would find value in that. So

Pablo Srugo (53:37):

I'm a hundred percent sure it will be. Well, David, thanks for joining us, man.

David Anderson (53:41):

Absolutely. Pablo Srugo, it was fun.

Pablo Srugo (53:43):

I just gave you content that you liked so much. You actually listened to the end. And guess what? You didn't pay a single dollar. Not only that, I didn't even put any ads in your face, so you just got a bunch of content for free. And now that I've delivered that value, I'm asking for something in return. Open your app, open Apple Podcasts, open Spotify, open, whatever app you use to listen to this and hit that follow button. It's actually gonna help you because it's gonna help you make sure you don't miss out on the next episode, which you like so much that you listen to the whole thing.