Linus Eriksson Noren and Resat Ozutok, Co-founders of TechCredit Partners: TechCredit Partners helps founders raise debt to scale faster

0:00Linus Eriksson Noren:Hello and welcome back to Scaling Europe show. I'm Seb Johnson. Today on the show we've got Resat and Linus. Resat and Linus are behind Tech Credit Partners. What is it? For those who don't know, don't know Tech Credit Partners, don't know what the great work that you're doing in the industry is. Tell me, take it away.

0:16Resat Ozutok:Sure. Thanks for having us, Seb. So at TechGrid Partners, we help founders to use Dex to basically optimize their capital structure, avoid unnecessary dilution, scale, and create shareholder value, essentially. We're a London-based firm, and we specialize in raising debt capital for tech and tech-enabled companies, with Europe as the core market. and in the last three years we raised about a billion of dollars of capital for our clients across plus 20 countries and I guess the market in itself is really really taking off that's why we started this firm European sort of venture debt hit almost 6 billion euros in the first quarter alone and on track to go for around sort of an 18 percent growth this year compared to last year so it's it's reaching you know um founders earlier and earlier than it than it used to and when founders need capital and don't want to sell more of a company that they have to do that's

1:20Linus Eriksson Noren:that's actually a well-known job and so is that the primaries i guess for people who don't know you know equity is always what we see the headlines around fundraisers or whatever why would a founder turn to debt

1:36Resat Ozutok:good question i mean i think that this there's a lot of different reasons you know why a founder would would turn to to to debt um i think almost every single business have something that is you know debt fundable what do i mean with that that could be you know working capital it could be assets or capex it could be recurring contracts it could be you know um a difficult sort of cap table you know situation or dynamic that might need some sort of some resolvements or some you know runway that needs to potentially be extended so that the company can hit you know whatever milestone it wants to to hit before potentially raising their next sort of price price rounds.

2:22Resat Ozutok:There's a lot of different use cases for it. And I would say there's almost one type of use case, if not many, for every single company and for every single situation. And I think in today's day and age where equity is increasingly interested in kind of more capex-heavy business models that previously was a bit unsexy, but today is sort of seen as a a moat uh think like you know energy or infrastructure type solutions think you know roll-ups or think like you know deep tech businesses that require a lot of a lot of capital before you sort of can can commercialize and given this you know debt becomes an increasingly important topic for a lot of founders earlier on in the in the journey but yeah there's there's a lot of different you know reasons why why a founder would go and and look at that and

3:20Linus Eriksson Noren:And you've mentioned that we're seeing this sort of boom in European debt and that part of the reason is the shift towards deep tech and other types of companies that require more capital or typically more capital intensive businesses. Can you maybe talk about the types of businesses that you're working with who are leveraging debt to push their business forward?

3:41Resat Ozutok:Yeah, absolutely. Rasa, maybe you want to take it or should I continue?

3:45Linus Eriksson Noren:Yeah, no, of course. I mean, I can continue. maybe I can give you a bit more context also touching base on why not maybe back in the day lots of businesses were not really taking that or why not 2021 but now and also use it as a segue to maybe talk about the clients that we work with I would say what we're seeing is I mean it all comes down to a few major points first of all it's what kind of companies are being started and where the second one is where the equity was investing back then versus now I mean there were not really many capex-savvy businesses backed by VCs as Linus said they were maybe a bit unsexy not so much desired but now they have a bit of a moat the third one is probably the dynamics of the market where speed also being much more important today and finally eventually the development of the debt capital markets I mean to maybe explain them in a bit more detail again in 2021 back in the day it was maybe only B2B science companies or subscription businesses that have access to some some um error based facilities or or so or maybe they were the only ones seen a blendable or or fundable by by the lenders but now as the equity is getting more excited about i would say energy hardware robotics roll-ups and any of these potentially capital intensive businesses this is then where um this kind of the the lenders get excited because it's almost their bread and butter, right?

5:37Linus Eriksson Noren:Which used to be maybe only available at the corporate level or maybe some hold-core level, is now also available at the venture level, which is scaling even much more faster. And where there is, again, some hard assets, contracts, acquisitions that a lender can actually lend against, then that becomes much more available earlier in the journey. and as more of these companies raise equity, they naturally pull debt alongside it. And I mean, to give an example, sometimes this can even be at pre-revenue stage. And I would say in all the industries that we just counted, we do have clients and projects that we worked with or currently working with.

6:23Linus Eriksson Noren:And how does the business know that it's ready for debt? I imagine we're seeing an equity, companies raising pre-revenue, pre-everything, just because they're from deep mind or whatever. In debt, it's very different. I guess a founder has to get to a certain stage to be even ready or available to start discussions about raising debt. What does that look like for a founder?

6:45Resat Ozutok:Yeah, good question, Seb. I mean, I would say that it obviously differs a little bit from, you know, situation to situation and from business model to business model and from, you know, cap table to cap table. Maybe taking a step back, you know, like the simplest, you know, version or, sorry, take a step back. Like the simplest version is that equity, you know, you sell a piece of the company and for that, you know, you're borrowing to pay it back while, you know, you're keeping your ownership. But I think the most kind of useful difference here in the kind of, in the processes, in the thinking is that, you know, equity and credit investors, they think very differently and they look at different things.

7:26Resat Ozutok:And given this, you naturally sort of have to prepare quite different approaches and materials for the two types of processes. How you pitch a lender would look very different to what it looks like in an equity process. I'd also say that the lender universe is also generally a bit more complex to navigate in Europe. You have hundreds of different lenders providing capital to technology companies, funds, banks, family offices, alternative lenders. And then the kind of underwriting approaches and structures will differ quite broadly as well, depending on kind of who you speak to and sort of that sort of pricing.

8:06Resat Ozutok:But so there is a kind of like a boiler paint answer in terms of these other specific sort of milestones or criteria that you need to meet. It really depends on what is your business model, where are you at, and what are you looking to do with the capital, and how sort of predictable is that investment that you're going to do from a cash flow perspective. Yeah, I wish there was a kind of a more simple answer in terms of as long as you raise a Series A or as long as you have like X amount of revenues or whatever, you normally have some options available to you in the market. I think it's more about like when there is a very kind of clear business case and you can make predictable investments that generate cash flows or that accrues some value, that's typically when you can access debt.

8:59Resat Ozutok:And then going back to the point that I said before, then it's all about understanding how lenders think and making sure that you're preparing yourself for that process accordingly so that you can hit them with the right messages, with the right KPI so they'll be looking with and run the process in an optimal way given the nature of the parties that you're speaking with.

9:20Linus Eriksson Noren:And do you find yourself working with one industry more than others? Because you're right, like hardware, deep tech, very caps, intensive, we're seeing a lot of AI while that company's coming out of Europe. Are there industries where you're carving out a specialism or is it more just helping founders in any industry who needs it?

9:40Resat Ozutok:Yeah, I mean, we're open to working with all kinds of business models. And, you know, I think as Rasha said before, like we worked with B2B sales businesses, consumer companies, media, telco, deep tech, space tech, robotics, et cetera, companies. And the list kind of goes on. I think where we've been, you know, very, very active is on the AI roll-up side of things. You've obviously had, you know, quite a few of this sort of tech stories in Europe on the channel before. We've been fortunate to work with some of those. And I think that's probably a function of there's a lot of these kind of companies, you know, popping up in Europe, of course.

10:24Resat Ozutok:But secondly, like there's a very strong use case for debt. And these, you know, models all rely on that. And probably, you know, the majority of these AI enabled rollups for them, that will account for at least 50 % of the capital structure at some point of the journey. So, you know, we've done different types of property management, you know, AI-enabled roll-ups. We've done MSPs. We have done, you know, software. We have done kind of some more traditional, you know, business services, models, etc. So I would say that's probably where we've spent a good amount of time.

11:03Linus Eriksson Noren:And what advice would you give to a founder who's maybe thinking about raising debt alongside an equity round on how to balance the structure? You know, you mentioned that maybe at least 50 % could be debt. How do you know when it should be 50 % or 20 % or 80 %? And how should founders be thinking about that?

11:22Resat Ozutok:Yeah. I would say that, you know, you need to do, you know, in order to take on that, you really need to understand, you know, the potential, you know, risks in the business models, both, you know, the obvious ones, as well as the kind of the potential sort of black swan events. And I would say, you know, when you're early stage, fast growing companies, I think it's generally better to start with fairly moderate amounts of debt in the capital structure and then, you know, allow you to then kind of lever up and scale, I guess, debt proportion in the capital structure as the business model continues to prove itself.

12:02Resat Ozutok:So my kind of concrete advice to founders would be, you know, do a lot of detailed modeling and scenario analysis to kind of understand how potential swings in the trading or in the kind of financial performance actually would impact the debt. And then, you know, think a lot about what structures that actually works for you and what you're really trying to optimize for. I think a lot of founders or people thinking about that, you know, they start thinking about the interest rate kind of being the most important part of the kind of of the deal. later down the line once you're kind of you know looking at three five or ten sort of term sheets next to each other and you start to sort of model this out i think you quite quickly realize that it becomes more about the structure and then you know at the kind of very end of the process it sort of becomes you know like uh a relationship piece and you know you want to ensure yourself that you're working with a party that you know can be a strategic asset to you in your journey and really help you to scale and really be there for you if something potentially would go wrong down the line or if you need more kind of capital from them.

13:24Linus Eriksson Noren:And I guess maybe take me back a bit in time. We're seeing this explosion of demand. This is an interesting time to do it given the types of companies that Europe is building being more capital intensive. Why did you two decide that this was a type of institution you

13:41Resat Ozutok:wanted to build yeah great question i mean both russia and i we we come from uh you know the the advisory space he was a he was a morgan stanley so you know he really knows what kind of tier one advisory looks like i used to work for kind of more boutique advisory firms um and this was i was gonna say up until sort of 2019 when i then joined you know an early stage technology company, we wanted to raise some debt for that business in 2022 when the equity market was starting to become a little bit tougher. The first thought I had is, wow, we should have thought about diversifying our capital structure and getting debt on earlier in the process or sort of earlier in the journey, not needing to kind of do it last resort.

14:30Resat Ozutok:And then secondly, when we were kind of navigating the markets and different options and temperatures and whatnot, I realized kind of how complex the landscape actually is. And I think there's, to some extent, a lack of a advisor who focus on this market that kind of hold themselves up to really high quality of standard. And to put it simply, there's going to be more and more technology companies that want to potentially take on debt earlier on. You know what we've talked about with the business models that are sort of increasingly popular. and yeah we just saw an opportunity to basically come in and build a great institution to help founders navigate that space which is going to be increasingly complex but it's also going to be increasingly important for founders to to think about the debt piece on end up one uh maybe i

15:20Linus Eriksson Noren:mean two cents to add on my side because i mean this was linus coming coming up with the idea three years ago initially um i i mean i actually wanted to do something else you know spend some time in sf while linus went ahead and started to be with the company and i was after the vc money then spent a lot of time and looking into to roll ups i need to roll up trying to really find the the the place uh where i have the right to win i mean as part of it i i actually then then realized that you know that there's a huge uh succession issue in europe or western world and there's a silver tsunami of founders retiring with no succession plan.

16:02Linus Eriksson Noren:And at the same time, everybody's talking about AI making companies much more effective, margins expanding, which then, you know, from different angles, I came to the same point that, you know, if that service is going to be much more available and if then acquisitions are going to be used as a go-to-market, then that is going to be one of the most key instruments in this capitalist stack. And I went back to Linus and said, hey, look, I think we should do this together, and I believe in this. And this is going to become very instrumental in the whole transformation of the economy. Tell us a bit about how, I guess, maybe you win the market.

16:45Linus Eriksson Noren:Because in equity, it's all about value-add investors are sort of like fighting, competing for spaces on the cap table. what does the i guess the broader debt ecosystem look like in europe and then how are you thinking about standing out making your mark kind of winning in this space yeah i mean i can talk a little bit about the european debt space and and i and then we can dive into how how we're going to win and but basically what we realize in europe is that i mean europe has been fragmented for years and people you know criticized Europe for for being a bit conservative but on the debt side of things it's it's a little bit actually different because in there have been hundreds of years of of economy being built by large families corporates and banks and and naturally there is actually a lot of money available capital available for a lot of stable durable businesses where there is certain and good or strong returns, right?

17:50Linus Eriksson Noren:So with that, actually, for good businesses, there's a lot of capital available in Europe. We are seeing private credit funds, family offices, banks, regional, national banks, and having capital available. And especially in the recent years, there has been a huge amount of capital raised by different types of credit funds, which offer far more flexible solutions to the founders out there. And with that, interestingly, even banks, which used to be very risk-averse with early-stage startups, they are now lending it at an earlier stage. So a good business gets real competition for its debt in Europe.

18:30Linus Eriksson Noren:That's what I can say. And for founders, I think they have far more capital available to themselves than they probably think. So, I mean, they don't need to really fly to the valley to fund their growth. And if the economics work, then there is a deep and hungry debt market on their doorsteps, which then allows them to build faster. yeah for example i mean just to give you more context the average deal sizes have jumped to about 90 million euros um up from 36 last year in european private credit market that's huge

19:13Resat Ozutok:yeah yeah um and then maybe uh touching upon the the second part of your of your questions i'd like with regards to how we're how we're planning on you standing out in this market i think first of So all this is not like a winner takes it all market, right? There's always going to be a quite sort of fragmented landscape. I mean, what we're really interested in is, you know, working with the absolute best founders who, you know, understands the power of that and really want to use it as a strategic tool. There's, you know, a few different things I think we practically do to stand out. And, you know, that's the fact that we're a relatively smaller lean team.

19:54Resat Ozutok:So, you know, we can be very, very, very nimble and fast in the kind of in the processes that we run. Secondly, we're specifically focused on this part of the market ride, meaning that we're trying to build really, really deep expertise and insights and networks in the debt technology space or, you know, within the part of the debt capital markets that wants to fund, you know, technology companies. and then thirdly it would be you know thinking about this services business as a technology business as well and you know probably using the same sort of you know tools and methodologies and principles as you know our clients do when they're building out the businesses in terms of making sure that we're using the latest technologies to you know really amplify ourselves in order to provide the best possible synopsis that we can.

20:51Linus Eriksson Noren:Well, great. Well, look, it's probably the best time in the world or certainly in Europe to be doing what you're doing. I know a lot of the founders that I'm speaking to constantly are turning to debt to try and retain some control of their cap table to make sure they've got the biggest slice of pie that they could be left with and the time is right. The way the market is moving. It's just more deep tech, more captain-tested businesses, which is exactly the type of business you want to be working with. So it's an amazing time to be doing what we're both doing. So look, thank you very much for joining me.

21:21Linus Eriksson Noren:It's been great to chat and let's stay in touch.

21:24Resat Ozutok:Thanks all the time.

21:25Linus Eriksson Noren:Thanks for having us here.