00:25:24 · Guillaume Moubeche, Martino Cadoni
[00:25:24] S1: And How do you how do you hedge yourself? Because obviously, like, the the rate is not something you decide as a company. It's like, it's totally outside of your control. Obviously, you can look at the macro and try to predict a little bit where it's going, but it's it's very hard. So how how do you hedge yourself as a company? [00:25:42] S0: So the the key is you need to divert... Differentiate your revenue streams. And for example, that's something that Revolut has done fantastically well. Right? Because as a fintech, as a bank, you have interest revenue, which is highly dependent on interest. And then you have fee revenue, which is like fees, subscription revenue. And for example, Revolut has done a fantastic job because if you look at the revenue mix, it's highly differentiated across fees, interest, and other things. So it doesn't matter what's happening in the macro environment. They are better prepared than others because they are so well diversified that they're gonna take advantage of any type of situation. Right? And they can navigate uncertainty in a much better than others. And so... And then also on the products, depending on the type of lending you you have, you can also take advantage of the very high interest rates. [00:26:49] S1: Okay. And how how would you do it? Like, the interest rates are, like, super high. Like, how do you take advantage? [00:26:56] S0: Well, I mean, you you can target, like like, shorter term lending where people are more, you know, open potentially to have higher interest rate.
00:26:56 · Martino Cadoni, Guillaume Moubeche
[00:26:56] S0: Well, I mean, you you can target, like like, shorter term lending where people are more, you know, open potentially to have higher interest rate. [00:27:10] S1: Okay. And when the when the valuation of Klarna, like, was... Went from, like, 45 to, I think, like, 15, like, how exactly do you do you manage, like, your investors? Because, you know, I think it happened to to a lot of startup as as per... I mean, scale up, especially in that era where, you know, like they had to do kind of a down round, etcetera, etcetera. But internally, like, how do you have like these discussions with the board? Like, are investor protected with with, I don't know, like, preference share or like kind of like, how how do you make it work for everyone basically? [00:27:49] S0: So what I would say, it really depends. Right? And and that was one of the strengths of Klarna. Right? Klarna never raised preferential shares or... Never issued preferential shares. And this is another thing that I think people don't really know about fintech and banking. Right? If you are a bank, like a regulated bank, right, and you are subject to capital requirements, which means that you need to put aside a lot of equity to comply with some banking ratios. Like, I'm not gonna go into the details, but there are ratios you need to meet in order to be able to keep operating as a bank. Right? [00:28:36] S1: And So basically, you need to have, like, some cash available for, like, certain reason. Let's say, like, because you're a bank, so you need to operate and have, like, certain cash on your balance sheet.
00:28:47 · Martino Cadoni
[00:28:47] S0: Yeah. For prudential, this comes to Basel regulation to prudential rules where... Because you are responsible for the money from from the public, you need to have equity against your your assets in order to meet these requirements. What these rules say is that if you have preferential equity, so equity which is linked to preference shares, you cannot account fully for this equity against the criteria. So if a company like Revolut raises 1,000,000,000, for example, and that 1,000,000,000 is common shares, then the full 1,000,000,000 can be used to comply with the rules. So all good, everyone happy. Right? But if the 1,000,000,000 is subject to... Is a true preferential shares, then actually that that 1,000,000,000 does not count to comply with the rules. So it's kind of useless. So it's great you raise 1,000,000,000, but it cannot be used to comply with the regulation, and therefore, it loses a lot of value. And that's why you had cases like, for example, Klarna never issued a preferential share. So with that common share, which is great from a regulation point of view. And and then you have cases like Revolut that at the early stage, they issued some preference shares. But then when they became they regulated, they decided that, hey. We cannot do this anymore, and they issue only common shares. Right? And and then as you grow and become public, you can have a mix of the two because you have so much equity that, you know, you can optimize. Right? Because, obviously, common share is more expensive. Because that's another thing people do not realize that happens and had happened during the the bubbles. Right? There is imagine you have two companies that are identical in tech. One issues only common shares, and one gives you the opportunity to buy preference shares. Which one of the two do you think is gonna have higher valuation?
00:31:14 · Guillaume Moubeche, Martino Cadoni
[00:31:14] S1: Yeah. The one with the preferreds. [00:31:16] S0: Exactly. So you had a lot of companies which they were raising at, they became unicorn, but they have a very high preference share thresholds. And then what happens is when the market turn upside down because of their preference thresholds, they became what we call zombie con. They are stuck. Right? Because they cannot raise at any valuation similar to the last round. They have these preference shared thresholds, which now put them in a corner. Right? While if you issued common share, yes, it was... You couldn't raise a so high valuation back then, but you are free now. You don't have this preference threshold, you know, behind you. Right? [00:32:04] S1: So your advice, like, for founder would be to to never raise preferred and always
00:32:09 · Martino Cadoni
[00:32:09] S0: No. Off common or No. I I think it depends. Right? So prefer... And you never know. But, obviously, prefer is cheaper cost of capital. If if you have a strong foundation as a company and you don't raise... You avoid raising too high valuation, you can be smart that you can better... Slightly better predict the trajectory, and and prefer is great if you minimize the risk of down round. Right? But if you go too far with the prefer, then you can be in a tricky situation as it happened for many companies in the last few years. Right? So I don't think there is a one size fits all type of rule. You need to optimize between dilution and other considerations. But I think that some people, yeah, went too far with the preference shares. And then they say, I would rather raise at 1,000,000,000 with high preference thresholds than not raise at 600,000,000 because of the... You wanna become a unicorn. There are other type of incentives there, but I think a lot of companies underestimate how bad can get if you raise a two high valuation with too high of a preference threshold. And I think, actually, that's another big learning from working with public companies is how do you manage downside scenario. Right? Because I think in tech, which is great. I love it. I'm a positive person by nature. There is always this extreme positive attitude, which is amazing. But I think a lot of people, they don't know. They haven't seen how to manage downside scenarios. So sometimes they take risk a bit blindsided without understanding what that means. Right? I think deciding between common and preference is one of the things that, in some case, preference makes makes sense. But I think people should think deep before making the decision rather than just go for it. Right?
00:34:24 · Guillaume Moubeche
[00:34:24] S1: And and when you have like a a down round and and it's only common shares, like, does that work from a board perspective? Like, does the board has to approve the down round or is it something that the the founder can decide? Like, I'm guessing it depends on the on the shareholder agreement, but how exactly is is that is that is something like this decided internally? Because as you said, like, it's super important to manage your downsides, and I assume that when you invested in a company at a super high valuation with common shares, and they decide to to do like a down run, it means that you're losing money. So like, how exactly do you do you balance that that negotiation with the the shareholders?