Episode 51: Scale capital: A DIY Approach to Raising Growth Capital – Member Case with Josh Miramant

Scaling a boutique professional services firm requires raising capital and not all capital is the same. On this episode, we interview Josh Miramant, Founder and CEO at Blue Orange Digital to learn about the three sources of scale capital.


Sean Magennis [00:00:15] Welcome to the Boutique with Collective 54, a podcast for
founders and leaders of boutique professional services firms. I’ll go with this show is to
help you grow, scale and exit your firm bigger and faster. I’m Sean Magennis Collective 54
Advisory Board member and your host. On this episode, I will make the case that to scale
your firm requires capital and that not all capital is the same. I’ll try to prove this theory by interviewing Josh Miramant, founder and CEO at Blue Orange Digital. Blue Orange is a
data science and machine learning, consulting and development firm. They build modern
data warehousing to support machine learning, and A.I. Blue Orange helps companies integrate these insights to drive data driven decisions. And the decision making. You can find Josh at BlueOrange.digital. Josh, great to  be with you. Welcome.

Josh Miramant [00:01:24] Thanks Sean, it’s great to be here, thanks for having me.

Sean Magennis [00:01:26] Hopefully, I did justice to that explanation of all the great things you do.

Josh Miramant [00:01:30] Or how many buzzwords in our space you couldn’t have nailed it better, Sure.

Sean Magennis [00:01:35] So Josh, let’s start with an overview. So why do firms need
capital when trying to scale is the big question. Scaling usually means entering new
markets, launching new service lines, adding more headcount and many other strategic
initiatives. These things all take money. So can you briefly share with the audience an
example of how you raise capital to scale your firm or how you think about raising capital
to scale firms?

Josh Miramant [00:02:05] Sure. Yeah, so I’ve spent a lot of time thinking about this and
just a little background. I’ve actually started to venture backed companies prior, so I actually came out of SAS product and a large equity reduced background. And this is my first professional services firm, and it’s quite a different beast and in many great ways, like high, high profit generating types of business initiatives that you can use things like cash
flow to reinvest in growth all the way over to, you know, the challenging pieces that they’re very cash hungry and business models. To be honest, they’re going to take a lot of efforts
like investing and resourcing and staffing and having a bench and resource allocation and
all these things that are very, quite expensive and have to be very well forecasted when
you’re thinking about a financial backing. So we’ve taken a pretty holistic approach to our
financial backing for this and not actually luckily enough, I sold my last company and so I was able to fortunately do some self investing. But we quickly wanted to move to more institutional as we’ve grown alongside open up and start with friends and family debt around the world who lived in debt for our organization. And in the early days, I was able to personally back just under a half million dollars of total, personally backed notes through successive order of friends and family. It’s more institutional, the different tiers of risk. And then we’ve even looked at some other side of we came to term. We had discussions with investment banks and private equity firms about potential acquisitions or investments based on equity side. And that starts to move in that movie. The term seats around equity raise and even some interesting partnership model equity raises that we’re even currently talking about. So it’s pretty interesting range of options that we’ve explored in total so far.

Sean Magennis [00:03:54] You know, I love that and your experience is so unique
because you’ve come to me to share with our listeners from the perspective of having, you
know, started to venture backed more tech firms. This is your first professional services
firm, so you bring all of the knowledge there and then you know you’re in this sort of
reinvention mode and yet you’re still leveraging these unique sources of finance. So this is going to be great for our listeners to to get your insights. So Josh, what I thought I’d do is, you know, at the top of the show, I suggested that not all capital is the same. And these days now, and I don’t know if you’re finding this, but certainly I am. That capital is
abundant in the market and there are very, very many different kinds. So I’d like to get your thoughts on what we call a do it yourself approach. I’ll illustrate three types of capital. And yes, I know they’re more so if you want to throw out some others that you’ve got personal experience in, that would be great too. So the first one I’d like your input on is free cash flow from operations. So this comes from increasing revenue, driving down costs, using the spread between those to scale and scaling with free cash flow preserves owner’s
equity does not add a debt service burden to the PNL. What are your thoughts on this,

Josh Miramant [00:05:21] And this is this is one of the absolute magic parts about
professional services agencies that you’re able to have a lot of control and a lot. It puts you
in an interesting position. I love that. That’s the name of professional services agency. I
mean, you summarized that I think is absolutely beautiful part about cash flow, which is equity owner equity and not having to dilute too early in your face. And my philosophy on when I entered into professional services, my philosophy was that our profit, our dividend would be the measure of our success and that’s controlled. But I would show how successful we were in the market. And I think that was something that allowed us to think about our growth planning based on our cash flow. And that was truly as we got in and developed more client base and show more market adoption and other support to sell was better. We were able to expand our growth, and I think that was a nice guardrail controlled mechanism. And once we got our sea legs, alexander us and take over 10 million top line this year, we will be able to start thinking about taking on more debt burden. Or now you’re in the other options at the top and a bit about that growth that can control growth to getting that point with a lot of capital reinvestment was incredibly helpful for planning not growing
too quickly. Yes, having some of the scale constraints, but also being very thoughtful with where you’re making a capital investment. One thing I would say that we’ve learned and learned later that became a major challenge for us in the early days because our monthly invoices were pretty modest and so we can afford to cover and a lot of how we’re doing. We are building in our ears. And so you have your cash flow is usually not like a 60 day window we do a month at work. We would bill and have a net 30 payments. And I’ve heard a lot of different firms and colleagues do it differently, but that was a 60 day cycle. If everyone pays on time and the billing.

Sean Magennis [00:07:13] Yes.
Josh Miramant [00:07:13] We have started moving heavily into reducing down that cash
flow cycle, going into lower net 15 or even upfront billing, but offered invoicing on net 30. So you’re really reducing under 30 days and quite candidly with very little pushback and from a cash flow perspective, which we shipped about 80 percent of our current clients, which we have a pretty long client lifecycle in almost every new one onto that very little exclusion and that movement to that shorter revenue cycle is actually massively increased. The amount of cash flow we’ve got, it’s amazing to even grow quicker and have to take on less your interest for equity release or dilution really steps of an option. So it’s, I think, controlling your cash, obviously just goal to get cash in and spend it, not to think about that later and then planning. But I would say even more thoughtful ways of having a discussion
with our client up front. We’re pretty candid. We’re a small boutique and we want to get to
cash flow so we can invest in your team to make sure we have good management. And
they were right alongside us supporting us some tighter cash flow cycle. So love cash flow, obviously reserve equity. So at the end of the day, that’s the cheapest money you’re going to get out there.

Sean Magennis [00:08:22] You know, I love what you’ve said and and everything you’ve
said, you know, I totally agree with one of the interesting things you said, and I don’t want
this to be lost on our listeners is that you were surprised at the ability to get paid up front or
get a shorter payment cycle on your AR. That is fantastic. And I think a lot of owners of
boutique firms don’t have the courage or they fear asking for that. So give me a little bit
more on that as to how you went about it, because I think our listeners, if they if all they do is get from this the shortening of the AR or getting prepayments upfront that will leapfrog
their ability to use free cash flow for other things.

Josh Miramant [00:09:05] Yeah. This is easily I mean, these are the most important thing that’s happened. We’re really growing still double the spirits of their growth was big, and so every dime counts right now. For us, we’re doing multiple types of financing plus because we’re really crazy. We have larger amounts of, you know, resource allocation like unallocated resource between projects, all the things you expect from the management of our company. But the thing that’s amazing was when we tried these conversations. First
off, understanding what’s right for your business, how how is how is it logical for your
clients to pay you appropriately. You want to make sure you consider, but not every
conversation was about what the risk was. Was the company taking for giving us money?
And I think that was important to have that conversation. So our business. We actually had a message that was thinking about how they would consider it. So saying, you know, Hey, we’re going to invoice the upfront, we’re going to keep it at net 30. So we’ll be completing all of the work that we’re offering this revenue for. It’s a really it’s not payment upfront, it’s invoicing upfront and you just align the entertainment to work the most recently completed. And everybody love that it’s we’re asking for payment upfront. Accounting teams freak out. They’re like, Oh, we don’t want to put risk of giving you our cash and not sure how the work would be done. None of that risk was there. It’s like, Hey, if we’re doing such a terrible job on delivery, your cash is still sitting in. The bank knew all the leverage and we stand by our great works. There is zero risk here and you’re just helping us with keeping
control in our cycle. The narrative thinking about what our clients worried about completely changed our messaging. And so the second thing that once we when there was any pushback and we did have a couple of clients, you know, very friendly, say, Oh, we don’t like it, it’s kind of like a retainer site or deposit. We never talked about that, right? We can then say, Hey, let’s get rid of this. It’s no problem. But could you help us out instead of a net 30, which is pretty industry standard let’s do a net 15 or net 10 and like, Oh, of course, that’s no problem. So now we’re is this discussion where we just decreased our AR by
twenty five percent.

Sean Magennis [00:11:03] Twenty five.

Josh Miramant [00:11:04] Yeah, yeah. Started that conversation, yeah 20 percent excuse
me, but we started the conversation instead of just being like, Oh, it’s 60, and hopefully
they pay on time, and now I’m scrambling cash three payroll cycles later. And so it’s just
having a conversation with the thinking of the messaging. You’re bringing it out to clients
the way that safety risks their position and ultimately deliver good work and have no
problem with the payments close to cycle. That’s the kind of the cardinal rule here.

Sean Magennis [00:11:30] It’s so smart and it’s so good and you’re both at the same time.
What you’re doing is you’re educating your team to operate on that basis and you’re
educating your client, you know, so it’s a really good and it and if it’s positioned, as you’ve said and messaged, well, it’s a win win for both. And I know that’s a trade statement, but thank you for sharing that because underneath your original comments was were these two very specific tactics which if a boutique firm can do that, it’s going to be golden. So let’s get to number two. So the second aspect is debt. So debt typically would come from a bank, it would come from a private lender. It may not be cheap, but it is reasonable as lenders charge modest rates on loans and it’s also readily available in the two to three times EBITDA range is what we would typically see. What’s your opinion on debt?

Josh Miramant [00:12:23] Yes, I loved it personally, I always like to start with my my best and the worst of often, I love to help you frame this. And there is this spectrum of a
professional service founder. That’s the greed fear spectrum. And I love how he thinks
about this. On the greed side, you’re like, you don’t want to give up your equity. This is the
thing you’re building. That’s the compounding value. And candidly, particularly with when
you’re investing cash flow, investing your earnings back into the business. These are cash machines that take a lot of it, and it’s part of your investment can be tied up pretty heavily in the ownership of a firm. That’s always a concern of the owner of not being too tied into a single having some diversity portfolio, not just a company. Yes. And so I think it’s an interesting on the greed side you want to keep that compounding engine because they can take out your salary and whatever disbursements are going to say that you choose dividend. But being told there is just coming down to the fear side is not making payroll, it’s not being able to hire. It’s not people to grow quick. And I think that’s always this dichotomy that exists that I always take this metric on debt is this wonderful piece that’s kind of, you know, stuffing partially into the equity, I think will get a chance to talk about my thoughts there in a minute.

Sean Magennis [00:13:39] Yes.

Josh Miramant [00:13:40] The debt is a wonderful play.. I think there’s a couple of things to consider. What you’re spending it on is crucial. So I think it’s always focusing on, you know, it’s like, I think that debt should be considered on the opex experience. Never
capex, I think that’s a little later in my rules. There’s other thoughts there, but like on there
is that you can service and keep revenue coming when you’re looking at that. I think
there’s angles of debt being made notes two to three, but I think that’s a reasonable
starting point, depending on personal liquidity or other factors that you have for back up. But I think I also think taking on debt with consideration of a repayment calendar like based on our projections and knowing what worst cases and best cases basis, I’m keeping it modest until you have a pretty confident projection into repayment calendar. And then surely just I think you’re right, like apples pretty cheap right now in general has been more expensive. Some pretty, really very, very favorable interest rates, but very tangibly looking how much that money’s costing you.

Sean Magennis [00:14:37] Yes.

Josh Miramant [00:14:37] And I think that’s a big piece of how much are you are losing
out on future revenue and is that is it smarter to keep cash flow and grow slower or smarter to take that, capture that revenue and turn it into more accountability. And I think
that at the right point that that is absolutely something you should do. We’ve raised our
friends, family around. I took out a line of credit from the traditional bank, a chase our
banking partner in a quarter million on the credit, which was really friendly to, you know,
you have this beautiful, beautiful debt option there because it’s only, you know, only paying
and you’re using it, which is lovely. It’s right at your fingertips. And then we’ve gone and
just goes to another $400000 debt financing round, which is pretty good for our books right now. On a more traditional note and still pretty favorable interest rates and the interest on it is it’s pretty modest you are given us. So it’s it’s a very nice, nice opportunity for us to
have, you know, feel very comfortable on our AR cycle and tied with upfront billing amount
in a really strong cash position, even with this large growth factor, which is so nice to see.
Sean Magennis [00:15:45] And I would assume that you’ve also got some good forward visibility on on contracting that’s coming forward because that that helps you manage your greed fear component that you just spoke to, right?

Josh Miramant [00:15:58] Couldn’t couldn’t be more apt there, and I think honestly, the
amount I would be sensitive to take out as much debt as I have unless we had contracts in place. We have even things that I was sensitive to. I’m not taking extending my my debt financing options until we had a diverse set of contracts that we’re pretty far. I don’t want just one big client, or a couple, a few small ones that are kind of tailing in cycle with low visibility. It was we have we could lose a good chunk of our, you know, any individual client have no impact on our financial stability. That took a while to bill, for sure. Absolutely. Where your point of forecasting and de-risking alone actually was less about being able to service, you know, a few thousand dollars a month of interest, which is not in the percentages are tiny. Yeah, but it’s actually coupled with a repayment schedule and projections against for that with their contracts, we can stick to that calendar. Either way, it just means other future growth constraints, but still better offer market opportunity with clients, which took off.

Sean Magennis [00:17:00] You know, brilliant and you’ve also hit on a couple of additional
key things like client quality. So ability of the client to pay, which is which is critical.
Diversification of your client group so you’re not anchored, you know you don’t or you don’t have all your eggs in one basket and you know you’ve got and then you’ve got your
backlog in the quality of your contracting. So fantastic. I mean, this is exactly what we want
listeners to really get a handle on because when using a debt instrument, all those factors should be in place and you need to be able to feel comfortable, go to sleep at night. You know that you’re not going to wake up one morning and not be able to service the debt, right?

Josh Miramant [00:17:40] Yeah. So just a note to I think that in the early days and I’m
getting some questions that are on, but be honest fortunate enough to have some pretty
decent sized loans, personal back. And I think that’s a best. I think what is also very
exciting when we can move beyond me not being having a personal back loans, that was
great money. And that’s that with this, where certainly takes a lot more to build a business
to that point. But I do think that was a healthy risk appetite that I was willing to a smaller
scale to then show repeated receivables and show a consistent client base. But that
transition from I would certainly say that if you’re if the debt is where you’re looking to go
as you’re building a company up to 100 employees in which our top line, but the size that we’re building on, I certainly get meaningful amounts of money or large enough lots, some money just on the business alone until we got a little bigger. And then it became something where that was because of the combination of cash flow and this just being not as much of covering the percentage of our, our our MR. And it’s interesting how that became a really good solution on the company’s books.

Sean Magennis [00:18:44] I love that and you know, it works right in the early stages. You
take the the personal guarantee in the middle I saw you don’t need to do it. You know,
there’s an there’s an appropriate time to take on personal risk and then there’s a time, as
you’ve just illustrated, where the company can take on that risk on the balance sheet. So
let’s flip to the third aspect, which is equity partners. So this is when an investor puts cash
in exchange for a piece of the business and then the owner’s stake is diluted as a result.
What do you think about equity for a boutique professional services firm?

Josh Miramant [00:19:24] Yes, I got a little more sensitive when it comes to equity with a
company like a professional services firm, and I’m first off, as I mentioned of my
background. I think equity raises are really important. I think it’s just when and what you’re looking to build your firm. I think those are two questions that you need to understand here. So I at the core of what we’re just Sure my thinking around that. So unlike a SAS product, where you just think high multipliers, the high multiples and valuation of the expectation, if you are successful and strategy 10 50, whatever X your thinking about right, you know you’re going to get your projection on a professional services depending on a little variability of your space. And you’re and what how much tech work or how much automation is inside of the way that you do what you do, when is or what the product is understood, what you’re building know you’re looking at 2.5 to 4.5 range multiplier. There’s a rough number is going to be different for every one of your listeners here. But that’s kind of where our sector fell, our cutting edge buzzword tech stocks, or a little bit more depending on how strong your sales team and all these factors are not getting the details.

Sean Magennis [00:20:29] Yes.

Josh Miramant [00:20:30] So it’s interesting to think about when you look at those
multiples, what are you looking to build? You’re really looking to scale a business. You
need a lot more money. You need to invest in bigger sales organizations, but that comes
with once you make to the next stage. Like, I always look at our objective and goals as a
company is to move into that 25 to 30 million top line revenue company as we scale out.
And I look at that is what my investment team talks about is the platform layer of a
professional services agency off their terms. I like it. Yeah, I like it’s a first. If you’re looking
to scale, it’s like when you become a platform that things like taking on, you know, equity,
an equity raise and acquiring other companies you can actually absorb into you if you are
as an option, that would be not typically a lot of business selling you to other firms, which
I’ve actually done some other interesting areas around equity partnership equity, which is an interesting area that we’ve been talking about with a few of our partners lately. Yes,
very compelling because it actually reduces some of the equity dilution or started talking
on my own or dilution along with the and while still getting pretty good terms, some capital. But the biggest factor is you are trading control, and it’s usually in a very good way. If you’ve got a good partner and you take on a good relationship with the firm because that’s expertize precisely are all the things that come with a high or higher opportunity in addition to cash. So lots of good. But that control factor is important when you start thinking about what you’re looking to execute. So I think that equity when a founder and how I feel about it, when a founder feels really confident in their business model and can sell it well and they should know how much equity they’re going to give up for capital.

Sean Magennis [00:22:09] Exactly.

Josh Miramant [00:22:09] We did a full two term sheet equity raise and I didn’t feel
comfortable evolution at the time. And their general terms, I think, appropriately valued our company. But it just the dilution meant was more of a control consideration on one side. And candidly, if it was done now, I think it might be below a margin where my control factor would be given up. So it’s a little bit to the founders feel like we’re looking to scale quite large and leaving up 50 percent of our equity right now. So when we’re being raised too much dilution down the road, but it can get a little bigger, have more receivables, are
valued more competition or have more staff, the value of the company starts giving you
competitive options. It’s a little individual, but I love equity. I just think that’s fine time and
the goals are crucial to be considered.

Sean Magennis [00:22:52] I love that. So the time and the goals crucial for consideration.
This is excellent, Josh.. Really. So I can’t think of a more important, high stakes strategic
decision for our listeners to get right. As we’ve gone through these three, there are others.
So this takes us to the end of this episode. And by the way, we’re going to have plenty of
opportunities to discuss this, particularly in Collective 54 going forward. So this has been
extraordinarily valuable. As is customary, we end each show with a tool. We do so
because this allows a listener to apply the lessons to his or her firm. Our preferred tool is a checklist. Our style of checklist is a yes no questionnaire. We aim to keep it simple by
asking only 10 questions. So in this instance, if you answer yes to eight or more of these
questions. All three of these capital sources are available to you if you want to. If you
answer no to questions one to three don’t pursue funding scale with free cash flow if you
answer no to four to nine, don’t rely on debt. And if you answer no to question 10, don’t
take on an equity partner. Josh as graciously agreed to be our peer example today. So,
Josh, I’ll just ask you these 10 questions give us simple yes or no.

Sean Magennis [00:24:08] And here we go. So number one, are you generating enough
free cash flow to fund scale?

Josh Miramant [00:24:17] Yes.

Sean Magennis [00:24:19] Number two, do you know where to deploy this extra free cash

Josh Miramant [00:24:25] Oh, yes.

Sean Magennis [00:24:26] I love it. Number three, are you willing to go without today for
scale tomorrow?

Josh Miramant [00:24:34] Yes.

Sean Magennis [00:24:36] Number four, have you been in business for at least five

Josh Miramant [00:24:41] Yes, we have.

Sean Magennis [00:24:42] Number five, are you generating stable EBITDA every year?

Josh Miramant [00:24:51] Beside COVID, yes.

Sean Magennis [00:24:52] OK. Oh, that’s good, I mean that listen, that’s that’s real, right? You’re being honest.

Josh Miramant [00:24:55] It’s exciting years.

Sean Magennis [00:24:57] Exciting years. Number six, would two to three times EBITA be enough to fund scaling your firm?

Josh Miramant [00:25:04] Yes.

Sean Magennis [00:25:05] Yeah. Number seven, cam your PNL handle the debt service
burden of a loan?

Josh Miramant [00:25:11] Yes.

Sean Magennis [00:25:12] Number eight, are you willing to personally guarantee a loan?

Josh Miramant [00:25:18] Yes.

Sean Magennis [00:25:18] Yeah. You’ve done it,

Josh Miramant [00:25:20] Done it in the trenches on that one.

Sean Magennis [00:25:21] Absolutely. Number nine, do you have enough personal assets to secure the loan if open to a guarantee?

Josh Miramant [00:25:29] Yes.

Sean Magennis [00:25:30] And No. 10. Are you willing to dilute your ownership, take for
the right equity partner?

Josh Miramant [00:25:37] Yes.

Sean Magennis [00:25:38] Outstanding, so in summary, it takes money to make money,
scaling a boutique takes money. There are different funding sources, each with their own
pros and cons. All can work well, which is best for you is highly situational. And Josh,
you’ve said that. So take your time, listeners to consider this very important strategic
decision. Josh, a huge thank you today for sharing all of the real life examples. I love your enthusiasm. I love the fact that you’re in Manhattan. I could hear the traffic, which we
haven’t heard a lot in the last six months. It’s brilliant and makes me feel as if we’re in the
real world.

And for our listeners, if you enjoyed the show and want to learn more, pick up a copy of the book The Boutique How to Start, Scale and Sell a Professional Services Firm.
Written by Collector 54 founder Greg Alexander.

And for more expert support, check out Collective 54, the first mastermind community for founders and leaders of boutique professional services firms.

Collective 54 will help you grow, scale and exit your firm bigger and faster.

Go to Collective54.com to learn more.

Thank you for listening.