Scott Orn, Lighthouse Capital on Venture Debt

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Video interview with Scott Orn. Scott is a Partner at Lighthouse Capital Partners. Scott is responsible for identifying information technology investment opportunities, performing due diligence, negotiating and monitoring west coast investments. Scott returned to Lighthouse in 2008 as a Senior Associate after completing his MBA at the Kellogg School of Management at Northwestern University. While at Kellogg, Scott interned in R&D Strategy at Becton Dickinson. Scott previously worked as an Associate at Lighthouse from 2002 to 2005, prior to leaving for his MBA. From 1999 to 2002, Scott was an Analyst in mergers and acquisitions at Hambrecht & Quist, (later JPMorgan H&Q). While at Lighthouse, Scott has sponsored investments in the software, internet, IT services, semiconductor and mobile industries. In addition to his MBA from Kellogg, Scott holds a BS in Business Administration from the Haas School of Business at the University of California, Berkeley. Scott is also a CFA Charterholder. Scott is also a Co-founder of Ben’s Friends, a network of online patient support communities for people with rare diseases..

Transcript follows & video above

I note that you guys are really interested in investing in women. I see that your portfolio is bulging at the sides with women. It’s fabulous & I just wondered to start with, what’s the sweet spot that you personally like to invest in?

Our fund’s name is Lighthouse Capital & we have a 10 year fund, just like any other VC fund except we make loans to startups & then take warrants in the company. We end up having a dual return. There are a few other people that do what we do. It’s a little nichey. But I think people agree that we’re one of the better people that do what we do: the venture lending, the venture capital loaning money to startups that way! That’s our business. Our sweet spot is either early, Series A: 3 people & an idea. Ot late stage where there’s some significant revenue maybe $10m or $20m in revenue, company is ramping & things are working & we can really help extend the runway for the company. What we do is we get in there, we loan the money to the company & they can put off fund raising for another 6 months or so, increase the valuation greatly. Then go out to the market & raise an up round. The entrepreneurs love it because it’s less dilutive. The vcs like it because their pro-rata’s on the next round are lower. And we like it because we have the interest return & we also own a little bit of the company.

Is that interest paid back immediately because a lot of these startups are starting very lean obviously?

Yeah totally. It’s a typically a 3 year amortizing loan. It’s like your mortgage, you pay a little bit of interest & little bit of principal every month. There’s typically a 3 to 6 month interest only period & then it starts amortizing. Most of our companies are losing money. Our real source of repayment is the next round of capital that comes in pays us back over time. So its a little bit counter intuitive to most people. So once you get your head wrapped around that, that’s why it’s so important to help the company get to that next milestone. Because the next round of equity comes in & we get paid back & everyone’s happy. Now there’s times where the company doesn’t hit the milestone which is a whole different ball of wax. Which is where we have to work with the entpreneurs, work with the vcs to help them get the company funded.

Well that’s fabulous, thanks that education. So I gather then that basically you give more than just the money?

Yes we help out our companies a lot. We don’t take a board seat. So we’re not as active as a typical vc investor. But we’re always helping introduce them to other management teams, maybe there’s business development deals there. Or helping them with recruiting. Lighthouse has a unique position as we have 100 to 150 companies in our portfolio versus a normal vc fund that might have 20. So we have a really broad reach & we see most of what’s happening in Silicon Valley & Boston & New York. Even though we make not have even taken a position in a company, we’ve seen them, we know who they are. You’d be surprised a lot of companies meet with us, maybe it’s not the right fit but then a year later they’re calling again or we’re calling them & we strike up a business relationship.

I’m fascinated & I wasn’t aware of this. I think obviously a lot of entrepreneurs would be interested in this way of raising capital.

Yes it’s a great follow on way of raising money. Pretty much every good company in the valley has taken venture debt. As I said there’s a couple of other people that do what we do but we’re one of the leaders. We’ve been around for 18 years so we rode out the dotcom bust. We rode out the ’08 ’09 bust so we’re proven.

Great & so tell me about the female entrepreneurs that you’ve invested in. What are some of the companies that are in your portfolio?

As we talked about I have to be kind of careful because we’re a registered investment advisor. But we have a couple of companies that I’ve worked with Serena & Lily a terrific company in Marin. They started off as a baby bedding company & now they’re growing like a weed & they’ve expanded into the living room. They do home accessories, they do linens, they do everything! They’re doing really well. Tiny Prints was a company that had a female cofounder & of course you probably saw they were bought by Shutterfly a while back. Another portfolio company that I’ve worked with & talked with is Sheila Marcelo who is just a terrific entrepreneur. She’s one of the smartest ladies I’ve ever met in my life. She’s very determined, she’s doing great! Those are just a few! We’d probably have about 10 to 15 companies that are started by women in our portfolio.

So you’re obviously very open to women approaching you or female founders. If you’ve seen success in the past then obviously you’re building on that with more female entrepreneurs? Is that right?

Well of course. I should say that it’s really easy, we have no bias. In fact we may have a bias towards women entrepreneurs because our fund was started, one of our cofounders is a woman Gwill York on the East Coast. It’s really easy when one of the smartest voices at the partnership is a female voice. You’re have no bias! And of course one of our other partners Cristy Barnes. So 2 out of 5 partners are women. So we’re miles past any kind of bias & we’re very open to that. I think some of the women entrepreneurs we work with really get that, they appreciate that. As you know in the venture game, every good entrepreneur has a choice, everyone wants to fund the good ones, no one wants to fund the bad ones. So when you find a really good company, they’re going to have options. They get to pick essentially whether it’s their venture loaner or their venture capitalist. So I think having that representation in our partnership really helps, gives us a competitive edge in a sense because they’re willing to pick us. They want to work with us – we get them!

And like venture capitalists, do you need entrepreneurs or startups to be based close to you?

We do & we don’t. Actually I just did this study, it’s funny that you bring this up. I’m doing the math right now. About 50% of our deals are on the west coast predominantly Silicon Valley. But we do Seattle & we do San Diego – there’s a lot of BioTech in San Diego. I personally have 3 or 4 social media or internet companies in LA. So I’m willing to get on a plane. Our East Coast does probably 30% of the deals & that’s predominantly Cambridge & New York. And we actually had a lot of success in the Mid West. One of my best companies came out of Indianapolis, it’s a big success. We have a Clean Tech practice & Clean Tech is kind of interesting in that it’s sprung up all over the country. Our Clean Tech partner Jeff Griffor, I feel bad for him because he’s constantly flying around & misses his family. He’s all over the country, so we’re willing to get on a plane. One of my other partners is J. Hilburn that does custom men’s clothes, they’re in Texas. I go out to visit them. We’ll go where the good deals are. I think most venture capitalists are like that. Everyone says I want to be in driving distance & more convenient & then you meet the entrepreneur & the idea & you get kind of seduced & you’re willing to hop on that plane.

That’s loverly, that’s loverly. And you were speaking earlier that you were raised by a business woman, correct?

Yeah so my Mom, Margaret Orn, she started a company called Elegant Clutter in Danville, CA. It’s a home accessories furniture store & she built that with her partner Gayle up from the ground floor for 25 years. So I always say my Mom’s the best business woman I’ve ever met. For 25 years she built her reputation in the community. She was very successful was able to support her family. I talk about this with a lot of women entrepreneurs, a lot of woman are balancing children & the company they’re running & it’s very difficult. But I have this philosophy that you’re kids get to see their mother grow up as a business woman, take on responsibility, have success, have their own identity – it’s super powerful! I still think about my Mom being on the city council of Danville & being able to go anywhere in the city & people knowing who she is. So it gives the mother a real identity away from the home, which I think is actually a positive because they’re successful in their kid’s eyes! Their kids actually pick up on that. So I talk to Cristy, our Life Sciences partner all the time about that.

Fabulous & thank you so much for being on our side!

Of course, of course. It’s not even a side, this is the point I was trying to make. It’s smart business, it’s a way to live your life. I was fortunate that my Mom was a business woman so it doesn’t seem different or unique or anything like that to me. It’s people doing what they love to do! The key to our business is funding people who love what they do!

Wonderful & hopefully more people will come to you now after this interview. It’s certainly got me enthusiastic & passionate & I’ll definitely refer people on if I hear that they need what you’re providing. Thanks so much Scott for your time today.

My pleasure, thank you so much.

Lighthouse provides venture debt financing to leading Information Technology, Life Sciences and Cleantech companies. Lighthouse loans extend a company’s runway, allowing entrepreneurs to hit milestones that might otherwise be out of reach. In exchange, Lighthouse receives interest payments and equity warrants from the portfolio companies. Lighthouse has been in business for 18 years and is currently investing its 6th fund, a $270M pool of capital.

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Pemo Theodore

Pemo Theodore is a Media Publisher and a great people connector. She was Founder Silicon Valley TV which served the San Francisco Bay Area for 10 years! She has produced Silicon Valley Events for Investors & Startups for 10 years. Pemo loves to video interview venture capitalists & founders to engage the human behind the success stories.. She has been Executive Producer of FinTech Silicon Valley for 6 years, organizing twice monthly FinTech talks & panels in San Francisco & Palo Alto and audio podcasts. She believes in learning through a great discussion with experts in the domains. Pemo has a talent to bring the right people together and is an incredible networker. Pemo's events have been seen as supporting Venture Capitalists & Angels in sourcing great deal flow from startups who attend her events. Many founders have received funding through meeting investors at her events. Her favored medium is audio & visual media and she has built up a great body of work of videos of panels & interviews and podcasts in Silicon Valley startup ecosystem. She has lived & worked in Canada, Australia, New Zealand, Ireland, London, Northern Ireland & Silicon Valley. Bio

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