475. Non-Dilutive Capital That’s More Flexible Than Debt
aired [03.24.2025]
Host: Nick Moran
Guests: Vince Hsieh, Partner at Cypress Growth Capital
Key Insights
Royalty-Based Investing as a Hybrid Model: Cypress Growth Capital’s royalty-based financing blends equity’s patience and guidance with debt’s non-dilutive, capped-cost benefits, ideal for emerging growth companies.
Emerging Growth Stage Focus: Targets companies with $3M to $20M in revenue, an underserved niche between bootstrap/seed and growth equity, enabling founders to delay equity rounds and retain control.
Low Loss Ratio with Royalty Payments: Monthly royalties tied to cash collections ensure a return floor, resulting in no zero-return deals across 60+ investments.
Ruthless Prioritization for Scaling: Scaling successfully demands focusing on a few key priorities, a lesson from Facebook’s growth that Vince applies to portfolio companies.
AI and Hardware Opportunities: AI reduces business-building costs, while hardware-enabled software offers sticky, defensible investment prospects.
1. From Operator to Investor: Vince Hsieh’s Unique Lens
Vince Hsieh’s 16 years as an entrepreneur—co-founding Atlas RFID (acquired by Hexagon) and Geoforce (exited to LLR Partners)—shape his role at Cypress Growth Capital, where he joined as a Partner in 2022. His prior eight years in management consulting, aiding private equity firms with distressed assets, honed his operational expertise. This dual perspective fuels his empathy for founders and sharpens his ability to assess businesses swiftly, cutting through noise to focus on what matters.
Spent 8 years in consulting, restructuring underperforming companies.
Co-founded two SaaS firms, scaling Geoforce with Cypress as an early investor.
Empathy from his operator days helps him connect with and guide entrepreneurs.
Quote: “Everything in life probably works better when there’s some empathy involved.”
2. Royalty-Based Financing: Bridging the Funding Gap
Cypress targets the “emerging growth stage”—companies with $3M to $20M in revenue, often in non-coastal hubs like Dallas or Nashville. Its royalty-based model offers a hybrid of equity and debt: patient capital with a capped return, repaid via monthly royalties tied to cash collections until a set multiple (1.5x to 2x) is reached. This bridge helps capital-efficient firms grow without dilution, delaying pricier equity rounds.
Focuses on firms between bootstrap/seed and growth equity, typically $5M-$15M in revenue.
Non-dilutive capital accelerates growth in go-to-market and product, not working capital.
Payoff often aligns with exits (2-4 years), not organic 5-10 year repayments.
Quote: “It combines the best of equity and the best of debt.”
“It combines the best of equity and the best of debt.”
3. Cost Savings and Flexibility: Why Royalty Wins
Royalty-based financing outshines equity and debt for fast-growing firms. A $5M equity raise could cost $50M in dilution if equity value grows 10x; Cypress’s 2x payback caps at $10M, saving $40M. Unlike debt, it skips fixed payments and guarantees, offering flexibility. Monthly royalties and a small warrant ensure returns, with no zero-loss deals in 15 years.
Cheaper than equity for high-growth firms, preserving shareholder value.
More flexible than debt, with no fixed terms or personal guarantees.
Low loss ratio due to cash-tied royalties, bolstered by warrants for upside.
Quote: “It’s significantly cheaper than equity if you’re growing rapidly.”
“It’s significantly cheaper than equity if you’re growing rapidly.”
4. Scaling Smart: The Power of Ruthless Focus
Vince stresses ruthless prioritization for scaling from $5M to $20M in revenue. Founders must zero in on product, channels, geographies, and team, sidelining distractions. He cites an early Facebook employee’s lesson: even with vast resources, the company prioritized ruthlessly to grow from millions to billions, a principle vital for resource-tight startups.
Scaling is a team sport requiring focus on a few key areas.
Facebook’s growth from 80 to 8,000 employees relied on ruthless prioritization.
Resource-constrained firms must stick to high-impact lanes.
Quote: “Even at Facebook, with seemingly unlimited resources, we had to prioritize.”
5. AI and Hardware: Untapped Tech Frontiers
AI’s cost-lowering effect lets startups bootstrap or raise less, favoring Cypress’s model. It also powers tech-enabled services, like AI tools for pharma marketing or medical records. Meanwhile, hardware-enabled software (e.g., IoT, GPS) is overlooked but compelling—hard to build, yet sticky and defensible once installed, especially in sectors like oil and gas.
AI shrinks round sizes, boosting capital efficiency in non-coastal markets.