How interest rates will affect BNPL startups
And interview with Roshan Patel, CEO of Walnut
Below is my conversation with Roshan Patel.
Roshan is a super-talented founder who recently raised a massive $110m Series A for his company, Walnut a BNPL startup in consumer healthcare. He works with his team of 30 folks out of NYC. I met Roshan in one of the first On Deck cohorts back in 2019 when we shared a bunk bed in a castle in Philadelphia (true story, for another time). He’s a good friend, and I’m excited to share this conversation with y’all.
Some highlights from this chat:
Walnut is a lending business, which means they are directly affected by all the interest rate hikes.
Roshan raised the Series A through May this year- well into the downturn for growth and tech stocks. Despite this, he was able to pull off a great raise.
Decreased valuations for Affirm and Klarna have resulted in less buzz about BNPL, so Walnut really has to prove the fundamentals of their business.
Let’s start with something simple. What does Walnut do?
Walnut increases access to healthcare for patients by making it more affordable. The way we do that is enabling patients to pay for any medical expense over time in monthly installments with no fees and no interest. This alleviates the financial burden of healthcare for patients without increasing the cost, while also helping healthcare providers capture more revenue. That's what we do at a high level.
What's your role, and what do you spend most of your days doing?
I’m CEO and co-founder of Walnut. I spend most of my days now doing sales and product. Most of my day is like meetings talking to customers, both our healthcare provider customers, as well as patients, our end users. That's probably about half of my day. I think the other half is more just like general company running stuff. Things like hiring, finance, budgeting, fundraising, investor relations, culture, just generic company, building stuff.
If you had to say what percentage of your time you split across sales product and administrative stuff, how would you split it up?
I'd say it's like 50% sales, 25% product, and then 25% percent administrative stuff.
What are the north star metrics for the business? When Walnut has a town hall or when you bring everyone together, what are the core metrics that you discuss?
Yeah, we have three core metrics and this is somewhat unique to us as we're a lending company. We think about GMV or gross merchandise volume, which is the dollars that we've lent out. We think about yield, which is the percentage of every dollar that we make in revenue. We also think about our default rate. It's the percentage of every dollar that we lose to our borrowers defaulting. Those three numbers together can give us our actual profit.
Are there any other secondary metrics that your team looks at?
Yeah, we definitely look at our like number of customers that sign up every quarter, number of patients that we serve, and the retention rate of providers. Those are kind of secondary metrics. But we tend to just focus on GMV as our number one north star metric. The more dollars that we're processing, the more we're growing.
You had a significant series A announcement that came out a few months ago. Can you talk about that fundraising process, how much you raised, and what those conversations were like?
Yeah, totally. We raised a $110 million Series A, this May (2022). The fundraise happened over the course of about three months in the spring. We raised 10 million in equity, and one hundred million in debt. I think the market started to shift sentiment in the spring. In our seed round about a year ago, (spring 2021) everything was about mission, vision, and story. There was not much discussion of traction.
That didn't really work this time. The discussions were more focused on our numbers and specifically the actual margin we're making on every loan. It was a focus area I wasn't originally expecting. I originally went in trying to pitch our GMV and showing how many providers were signing up, but VCs have really started to care more about what the unit economics look like.
And other things, like how the metrics have been getting better over time. Also something I didn't expect was, is our sales organization able to be profitable? Do we justify our CAC?
If you're paying a sales rep, let’s say $85k, are they able to actually generate that much in business every year? I wasn't really expecting those types of questions until our series B or series C. So it was just interesting. It felt like the difficulty got turned up pretty high, but I mean, I think at the end of the day, like we have a really solid business, so were able to handle those questions.
The whole process got me thinking more about the long-term success of our business instead of just how we are doing at the moment.
Can you also unpack what it means to raise debt? What was that process like and how was it distinct from raising the equity capital?
Yeah, we raised debt to fund the loans that we make. It's a bit unique to our business. This is not like venture debt or like a bridge loan. The process is a lot different than raising equity. It's a lot more in depth. They actually really do pick apart every single thing in your business. Even the legal diligence is much more thorough than what VCs would do. The universe of debt funds out there is fairly small. There are a dozen that do this kind of thing. You don't really have many shots on goal. You have to be pretty buttoned up from the outset. On the flip side, they don't care as much about your vision or ability to become a billion dollar company. They just wanna know if they give you X dollars in debt, whether or not you give it back with interest?
Can you talk more about the process? How do you approach these lenders? And is it reassuring to the venture investors that someone else has validated the lending model?
I think it does help the equity investors get more comfortable and similarly the debt investors are more comfortable when we've raised a series a, so it helps both sides. I think the process of raising debt is not very transparent and there's not much information online. Like you can just Google, like how to raise a seed round or something. There's a million articles, but not the case with debt.
Even just finding out who offers debt is really hard and you really just have to talk to people and, they say, “Hey, I know a guy who runs a fund and you just get into it that way.” It's still a ‘who you know’, type of industry.
The way it's structured is also a lot more complicated. They'll typically set up separate SPVs and have co-ownership of the loans that you're originating so that if the company somehow goes under, they can still have some assets in the case of a default event.
Most founders are indirectly impacted by interest rates, but your business could be far more directly impacted. Is there a big shift in the lending environment?
Yeah, absolutely. I think our business is really closely tied to the macro environment.
For us, customer demand tends to go up in a recession because people have less money to spend on things like healthcare. They have a real need for what we're offering.
But also, default rates go up in a recession, especially for subprime borrowers and interest rates change. Our debt facility is tied to LIBOR. That has an effect on our costs. So it can get very complicated. It's hard to juggle all of these different levers in a market downturn.
You also raised in May, which was well into the downturn for a lot of growth stocks. What was it like fundraising and what do you expect the fundraising climate to look like for you the next time you try to raise?
The BNPL space was really attractive in the past couple of years.
But in this market downturn, Klarna and Affirm got crushed.
So, the sentiment just shifted pretty negatively towards BNPL and lending as a whole, even though we’re in a different market.
I don't know what the sentiment will be when we raise again. I think in this series A, VCs started asking “Well, what are you building outside of the lending product? What's after that?” Or they were asking “How does this fit into a bigger vision”
Earlier it was assumed that a BNPL business could become a hundred billion dollar company. With this market downturn, that's no longer the case.
So have you significantly changed the plan for the business as a result?
Not in the short term. But, we’ve definitely started to think about how we can capture more dollars flowing through healthcare besides BNPL. We haven't really taken any concrete steps towards that, but we are starting to think about how our product today fits into a bigger piece of the healthcare payments puzzle, which it's a very large, messy puzzle.
We talked about the north star metrics earlier. Have those metrics changed as a result of the external pressure from VCs?
We haven't changed the way we're running a business, just because the market sentiment is different. Those three core metrics were the same three that we started with.
But, one metric that we're trying to pay more attention to is retention rate of our customers. I think that may be more of a function of what we need for series B than the changing VC landscape or market.
If you're a venture backed company, you may be dependent on venture funding for the next few years, unless there's some path to profitability. How do you grapple with what's hot or interesting to VCs versus the idea you originally set out to build?
Yeah, I think that's a really tough question. I don't know what the exact answer is, but as a CEO, I have to maximize our chances of raising our next round. If I steer the company in a direction that doesn't have great prospects of raising a series B that's not ultimately going to help the company. You definitely have to factor in what VCs are interested in and what's getting funded at what multiples, but at the same time, like you can't be jumping towards whatever's hot at the moment. You're not going to end up really building an enduring, sustainable business. It’s a real trade off.
Are you thinking about the ‘default alive metrics’ more often? Have you changed the way you think about your burn multiple or cash flow?
Every startup has started to pay more attention to it. We just raised our round, so were budgeting for 24 months runway and the prudent thing to do is make sure you extend that as much as possible.
We haven't cut spending at all, but we're being more conservative in how we're adding spend. Just slowing our hiring rate. For a company that has just raised a Series A, it doesn't really make sense to make cuts.
We have so much runway at the moment, but yeah, things like burn multiple are great to keep track of your business. I always know our runway off the top of my head. We're fortunate enough not to have to stress about it, but it's something we've definitely paid more attention to because of the market.
So there's no cuts to be made today, but maybe growth could come slower? Is it fair to say you will be more focused on getting the most out of the people on your current team?
It really comes down to risk tolerance. We could absolutely increase our hiring and reduce our runway, but we’d have to be pretty sure we can raise your next round in 12 to 18 months.
We’re taking a more conservative approach where we give ourselves three to four years to show the metrics we need for a series B. That will involve a slower hiring process and less aggressive spend across the board. But, I think we'll maximize our chance of raising a series B by proving we can weather a downturn, which is an important signal too.
Last question, what's the biggest challenge your team faces this year?
It’s transitioning from building a product to building a company. We’re a pretty lean team. We were just around 10 people at the beginning of the year and now we're at almost 30. I used to spend my days doing a lot of different things, but now I have to rely on my team to help me.
Our main goal as a company will be to continue to gain market share. Healthcare is so large and there are hundreds of thousands of doctors out there. We’re working with just a few hundred today, so there's a large opportunity ahead.