Debt Decisions: Smart Financing for Ecommerce Founders

Alec, thanks for joining me.

0:17 Alec Koenig

Thanks for having me.

0:19 Stephen Brown

So Alec, give us your background in ecommerce. How did you come, what was your journey to founding Settle, which is a solution focused on ecommerce? And maybe you can talk a little bit about your focus.

0:33 Alec Koenig

Yeah, so prior to Settle, I was head of credit at a company called Affirm. You've probably seen it on the checkout of various ecommerce websites.

So I was there from 2015 to 2019. So that kind of gave me my first forte into ecommerce businesses, the challenges they face and how they're using Affirm and other products like that to solve some of those challenges.

0:54 Alec Koenig

After I left Affirm, I started Settle a few months later, really with the view of improving accounts payable experiences for businesses.

And then my forte and my background is all in credit and lending. So I was like, well, instead of just making a better software tool, can I actually combine this with working capital to change the trajectory of these businesses instead of just saving them a few hours a week? So that was the thesis from day one. We started the company in late 19.

1:25 Alec Koenig

Launched in summer of 2020, which turned out to be the start, middle of COVID.

And what we quickly discovered was, as the offline retail channels shut off, everyone came online, and the merchants weren't prepared for it. So they were stocking out of goods left and right. And so by being able to offer working capital in a fairly quick way, we were able to find product market fit very quickly and help a lot of these brands out in getting all the goods that they need to deliver to their customers.

2:01 Stephen Brown

Now you have a history in lending. Weren't you somewhere before Affirm as well?

2:07 Alec Koenig

Yeah, so I started my career at Capital One for six years. Did many different things, from auto loans to personal loans to retail bank accounts.

And then I got really infatuated with startups. So I joined one in LA, which was focused on mortgages. I did that for about a year and a half and then found my way to Affirm.

2:23 Stephen Brown

Why, you know, lending is very difficult for ecommerce businesses. With all of your background in banking and lending, why is that?

2:36 Why lending is hard for ecommerce

Alec Koenig

Well, I think generally the failure rate of small businesses, and by extension ecommerce businesses, is fairly high, especially the smaller scale that you go. So I think that's part of it.

Another part of it, I think, is just how capital intensive the businesses are, namely having to procure inventory way ahead of time of actually selling it. So that makes it very challenging.

3:09 Alec Koenig

And I think another thing is being in, you don't have to be in ecommerce, you can also be in other channels as well, but being in ecommerce, things change very rapidly. So Facebook might change an algorithm, or Apple might change a privacy notification that changes the ability to acquire customers the same way.

So things can rapidly change. And, you know, I don't think ecommerce is [unclear] the other macro things. Things like COVID and tariffs have also definitely played a role. So including the banking crisis when SVB collapsed, I think founders of the last five, six years have lived through a lifetime and just want a little bit of stability here.

3:47 Stephen Brown

So let's talk about Affirm for a second. The founder is, is it Max Levchin? Is that how he pronounces his name?

I've heard his story that he started Affirm partly because he couldn't get lending personally and felt like the whole industry was broken. So he started Affirm as a way to enable people to get credit where they struggle. There's kind of a parallel. You're kind of doing that on the business end, right?

4:13 Alec Koenig

Yeah, for Affirm actually the initial idea was, this was before my time, but the initial idea was to actually just provide better underwriting so they could sell it to other lenders. Because, you know, FICO was what, 50 years old or something. Not saying every lender was just using FICO, but a lot of them were, especially banks and community banks.

4:33 Alec Koenig

So initially they wanted to start out just providing better underwriting using the latest machine learning models, more data. They just felt the industry really hasn't progressed that much.

But the banks were like, well, if you're so great, why don't you just prove it and do it? So that's when they started lending to consumers.

4:56 Alec Koenig

And the real special sauce of Affirm is how they actually distribute to customers. So instead of spending a lot of marketing to find each consumer, they're plugging into these merchants' websites as a distribution point, which makes it very cost effective as a way to acquire customers.

5:12 Stephen Brown

So, yeah. Was that thesis proven right? Like, do they have a better underwriting model?

5:18 Alec Koenig

Oh yeah. When I was there, and I used to work at Capital One before, which is probably one of the more tech forward banks out of the banks. And, you know, the team they built, the talent, the models were just next level. I haven't been there for a while, but I'm fairly confident they're at the frontier of what's possible.

So they just built amazing models that perform much better. They also had the benefits of, you know, FICO.

5:42 Alec Koenig

This is something that's a little step back. FICO's an over general model. So trying to predict if someone's going to go bad over a 24 month period. So if you're able to fine tune into a segment and just optimize on that, if you're able to predict delinquencies over a shorter time period, which Affirm was, then you're able to also find lift between other models.

6:09 Alec Koenig

So that's what we're trying to do here at Settle as well. We're taking a very industry-focused approach, just going after CPG brands. We do work with other customers, of course, but that's our main focus. And by having a product that's shorter duration, we're also able to model things better that's fine tuned for our customer. So naturally, we're going to be able to outperform banks and other lenders in that fashion.

6:35 Alec Koenig

At Affirm, the underwriting model was definitely the brain of the business. Here, it's the same, including the people that do the underwriting in addition to the models. So that's what really makes the flywheel fly.

6:45 Stephen Brown

Ecommerce business lending, the landscape's really interesting. You get, I feel like the traditional lenders, the banks, the credit unions, for the most part don't like to touch these businesses. And if they do, they don't typically provide enough capital for what their needs are.

And then you get this other, I would argue it's predatory lending, from the merchant cash advances, the Shopify loans, Amazon loans, PayPal loans. They all, to me, they seem really predatory because they don't seem to be doing much underwriting. They're just looking at sales metrics.

7:20 Stephen Brown

And I feel like you guys are in the middle. Definitely not as expensive as MCAs. You're not quite as cheap as a bank, but you guys extend very large lines of credit.

Tell me about that risk. And maybe before I do that, here's one of the classic examples in ecommerce, was Ampla, right? They got out over their skis and they were really focused on ecommerce and went boom.

So how do you guys balance that risk of lending versus making sure you can provide to good companies? And obviously there might be some secret sauce, but tell us what you can, how you are able to do underwriting better than the alternatives.

8:02 How Settle underwrites

Alec Koenig

Yeah, so what I was thinking about, you know, even at the time of starting Settle, how are we going to actually lend to these businesses?

You know, on the consumer side, credit reports are prevalent. There's so much data in them. They're so accurate. So every single consumer lender uses the credit report and the data that that provides.

On the business side, there are business credit reports, but no one really reports to it. So it gives you a very inaccurate picture of a business.

8:29 Stephen Brown

So they're fairly useless.

8:31 Alec Koenig

Yeah, yeah, yeah. So Dun & Bradstreet's usually more so for like, hey, who's the owner of this business? How long have they been in business? But it's not going to tell you this person is delinquent on some payment, AP or loan. Because no one really reports to the credit bureaus.

I think that's a big opportunity for someone to actually create a proper business credit reporting agency. It's going to require all these lenders, including ourselves, to report. But I think that's a big opportunity for someone to tackle if they can. And maybe even do it on the blockchain, who knows.

9:08 Alec Koenig

So when I was thinking about, how am I going to get access to these businesses and how they're performing? Well, okay, I could get their payment processing data to get a view of sales. But now I'm really missing all the costs of the business. Like, what are their margins, or where are they spending on payroll, or where are they spending on marketing? I'm not going to get any of that information.

And then the balance sheet is also important. You know, what's their runway? Do they have other liabilities? How much AP do they have?

9:37 Alec Koenig

So I was thinking, how do I get to this data? And I was like, okay, I've got to get to the P&Ls and balance sheets of these businesses.

So if we build an AP product, naturally I'm going to plug into the QuickBooks, Xero, NetSuite of the world. So I could record all these vendor payments that I would be making for them, into the QuickBooks, and then that would give us access to actually be able to underwrite these businesses better.

9:57 Alec Koenig

So that was a big unlock for us, where if we get a customer to use a product, then they're going to stay connected on the accounting side, which then would allow us to actually underwrite these businesses better.

And I think there's a lot of additional things we could do, additional data we could get. We are connecting customers' bank accounts as well. That'll give us a little bit more recent data. But obviously, accrual accounting, I think you would agree, accrual accounting gives you a better understanding of a business than just a cash basis. So the bank data is cash basis. So we're trying to piece those things together.

10:34 Alec Koenig

And now we're getting into other data sets like inventory management. So we could get SKU level data, instead of just one line on the balance sheet that says, you know, this is how much inventory I have.

10:46 Stephen Brown

[unclear] experience, accrual accounting is much more difficult for these businesses early. And there's a lot of bad accounting. And even those of us who are good at it, it's a struggle, right? Because there's a lot of information that needs to flow to us to do it right.

Which is why we've been fascinated by what you guys have done, tying these things that don't feel like they relate together. And yet when you sit back and say, well, AP, usually the lending is for inventory, you guys are doing a lot of inventory management stuff. It all relates. It all makes sense.

11:22 Alec Koenig

Yeah, we are a lender, you know, but our whole second side of the business is the software side. And to be honest, that's where 90% of the resources go.

So our view is if we could solve problems on the software side, namely inventory management, order to cash, AP purchasing, then we're going to be able to acquire customers that are much higher scale, even if they're not borrowing from us. But as we get their data, now we're able to provide them offers for credit when they need it.

11:56 Alec Koenig

And as you mentioned, one thing being for us is our APRs, yes, they're higher than banks because we don't have deposits to lend from, but they're always going to be cheaper than these merchant cash advance companies the way we're structured. So that's the kind of middle ground that we're playing in.

12:11 Tariffs, and learning by owning a brand

Stephen Brown

It's been a turbulent year, 2025, with all the tariffs. Are you guys seeing any trends across the data, across the customers, as the year progresses and as tariffs are starting to kick in?

12:27 Alec Koenig

Mostly buying trends. I think a lot of companies, after Trump came into office, acquired more inventory late last year and early this year, assuming tariffs would come into play as he announced them. So they were able to get ahead of it.

And now what we're seeing is customers rejiggering their supply chains to not be fully exposed potentially to one country. I think the more mature companies are able to do this, the less mature companies it's harder. But even with them, we're seeing them renegotiate contracts with their vendors so the brands themselves don't take the burden of it.

13:11 Alec Koenig

So that type of buying behavior we're seeing. And I think, if tariffs are good or bad, that could be debated. But I think the way it's been rolled out, where any day could be a different number, it makes it very hard for these businesses to plan around it. And I feel for them, we feel for them.

You have to pull up further to see where the puck is going, and even then it might change last minute. So it's just very difficult to plan around it. I think customers are taking a very cautious approach.

13:46 Stephen Brown

Yeah. One of the things that we did a couple of years ago is we bought a small direct to consumer brand. My partner here at LedgerGurus, Brittany, who's also my wife, we and a third partner bought a small brand. We wanted a laboratory where we could test solutions, like Settle. We've used that as an opportunity to train and learn and test. And we've really enjoyed it, it's given us an opportunity to kind of put it to work in a real world environment.

14:13 Stephen Brown

But yeah, this whole year, me and my operating partner, the other third partner who runs that business day to day, it's been this roller coaster this year. We're importing from Italy and it's just like, is it going to happen? How much? When?

We just got hit with our first tariff and it sucked. We're like, dang. But we saw it coming, so we've been planning. It's still relatively small, but we were kind of gaming it out. Like, well, what do we do if it's this much? And for a while they were talking about 30% tariffs and we're like, crap, dude, that could be catastrophic to us. Now we see a path forward, but it's still really painful.

14:50 Alec Koenig

It really helps you understand customer pain points versus just reading about it. You're actually experiencing it.

14:56 Stephen Brown

Part of the thesis we had in buying a little business, I told Brittany, was like, I don't have time. We don't have time to operate another business, but because I'm in there, I'm the CFO, our partner is the CEO. He runs it and has a small team to help him. And then Brittany kind of jumps in on special projects, but he and I are talking every week.

15:21 Stephen Brown

And I'll tell you, my understanding has been exponential. We had some theses on issues that we were going to experience, but until you're actually in having to deal with those issues day to day, you don't fully appreciate the pain that somebody's going through. Now I do.

I'm like, man, we're not as large as our customers we're trying to be, but we understand a lot of these. We've experienced the issues of marketing inefficiency, of some supply chain challenges, and now the tariffs.

15:53 Stephen Brown

So it's like, we bought at the wrong time. We should have bought it before COVID. We bought it as everything was peaking and it's been just kind of hard. We've made progress, but it's been really, really hard. It's like, dang, my timing's really poor.

16:08 Alec Koenig

Well, that's a lesson too. And you experiencing that lesson, well, the next time that comes around, you're going to be thinking a lot more about timing and valuations, right?

16:17 Stephen Brown

So, but I think with everything, the thesis was we wanted a laboratory and we've definitely got a laboratory. We not only are learning, we are feeling the pain.

And you know, cash flow is probably one of the biggest things. I appreciated it, but I didn't fully appreciate how big cash flow is an issue for these businesses.

16:41 The cash conversion cycle problem

Stephen Brown

In MBA school, we did a case study on the cash conversion cycle, and it was Dell. You know how they'd done all this supply chain engineering to come up with a negative cash conversion cycle. The other one I hear about a lot recently is Costco. But you have to be really big and really sophisticated to pull that off.

16:56 Stephen Brown

When you're small, I just don't see a way to have a negative cash conversion cycle. Most of the time, for us, from the time we start an order and have to put an initial payment down, it's usually two, sometimes three months longer before the product gets to our warehouse. And then it takes a couple more months to sell through that inventory.

17:20 Stephen Brown

And I look, this is something I've been looking at a lot more closely with our customers. What is that cash conversion cycle? Which most people forget. If they've learned it once, they never want to learn it again, because it's a really gnarly calculation.

But it's basically the measurement of, how long is your cash stuck in inventory? How long is your cash stuck between sale and receiving? And then on a positive note, how long before you pay your bills?

17:40 Stephen Brown

And for most of these brands, it's all inventory. The calculation, days inventory outstanding, tends to be at least 90 days. In some cases 180, depending on how quickly you're able to move product.

And to me, that's just, you have to solve that problem with lending, unless you have a ridiculously profitable business and aren't growing much. Because mathematically, there's a point where you can grow faster than your ability to fund inventory purchases.

18:08 Stephen Brown

And this is the curse, right? It's like, man, I'm growing so quickly. It's like, I need more money. Wait, how? Even if you're profitable, I don't have enough. I'm profitable, but I'm growing faster than my profit supports inventory.

And it's this vicious cycle that I don't think people fully appreciate when they get into a product-based business, is that cash is the key issue.

18:29 Stephen Brown

I came from software. I think enterprise software receivables could be an issue back in the day. And services. We don't have cash issues. The bigger issue we have is just, it's people, right? Capacity.

Always, it's a Goldilocks challenge. You either have too much capacity or not enough, and you're always trying to just do just the right amount of work so you don't burn out people, but that you also have enough work to cover your labor costs. So every business has its challenges, but consumer products, it's cash flow. It is such a big issue.

19:02 Alec Koenig

That was the initial pitch of Settle. Just let's get you a negative cash conversion cycle.

And for most of our companies, we continue growing with them. So as they're scaling, we're increasing how much we're giving them so they can just continue scaling and reach that profitability.

19:24 How to be lending ready

Alec Koenig

Five and a half, almost six, yeah, coming up on that.

19:28 Stephen Brown

I see a lot of large sellers that don't have savviness around maybe lendability. What are some of the top things that a consumer product business should be thinking about in terms of being lending ready?

19:44 Alec Koenig

The biggest thing I think is, which we see all the time, is I think you should get access to financing when you actually don't need it and start using it.

Because a lot of times we see, you know, a company has a lot of cash, they're burning, burning, burning, they're getting to a very low point, they're like, okay, I need financing to continue on. And it's like, well, you're going to run out of money. You should have came to us nine months ago or six months ago. And now you have so little asset, like solo cash runway or asset base, to actually make the numbers work for us.

20:16 Alec Koenig

So that's one thing we see very often, but generally [unclear].

20:22 Stephen Brown

I've heard the old adage, banks will only lend to you when you don't need it, but when you do need it, they won't. Why is that? Is it just a risk equation?

20:29 Alec Koenig

Just a risk equation. The way generally lending works is, say this number is way too high, but just to paint the picture, let's say there's a 10% chance you're going to default. So one could say, hey, 9 out of 10, that's great. 9 out of 10 times, you're going to be successful.

But for a lender or a bank, if you're going to lose 10% of your money, you're going to have to charge like a crazy high APR to make this actually make sense. So, you know, let's say 10% is over a year. So effectively 10% APR is lost. So you're going to have to charge high 20s, low 30s to make this make sense.

21:08 Alec Koenig

And if you're trying to get a cost of capital from a bank that's 9, 10, 11, 12%, it's like, there's no margin here. This is never going to work. I can't lend to you.

And I think that's why the merchant cash advance companies exist, because they're actually able to charge you 40, 50, 60% APRs to take on a higher loss rate.

21:30 Stephen Brown

So is it having the cash basically show into the institution, hey, they can hit some stumbles, but they'll have some cushion to adjust. I'm not going to lose them outright.

21:36 Alec Koenig

It's just an asset. The same way inventory is an asset, cash is also an asset.

And generally what I think if you're a customer, you want to make sure, there are a couple of ratios here. There's a current ratio, there's a quick ratio. A lot of these banks use them, other lenders too, I'm sure. And generally the way you want to run your business is have those ratios above one.

21:58 Alec Koenig

So, current ratio being your current assets divided by your current liabilities. So current liabilities, liabilities due in less than a year. So you want your inventory, your cash, your AR to be more than your liabilities on that front.

And the same way with quick ratio, which is now let me take out the inventory and just look at AR and cash. And generally you want that to be greater than your current liabilities as well.

22:21 Alec Koenig

And whenever you go below that one, it's really signaling that either you're going to have to turn profitable to build this back up, or you're going to have to raise capital to be in a much safer position. And now, are banks or someone else going to be able to underwrite your ability to raise money from venture capitalists or angels? Like that's a difficult thing to do.

22:44 Alec Koenig

So I think if I was a brand, that's what I would be trying to do. Just like, okay, I've got to structure this business, which is very difficult, but in a way where I always have this cushion.

Because you know, you could have one inventory run go bad. Your warehouse could go down for whatever reason, because it's a third party. Or marketing just went off the rails for a minute before they were able to fix it.

23:14 Alec Koenig

And you don't want to be in such a position. And again, you know, nine out of ten times you're probably going to be fine, but with the 10% loss rate it's very challenging for anybody to lend to you.

23:24 Stephen Brown

All right, so number one, get lending before you need it. And I think this is a great explanation of why. It's like, the banks need to, and the lenders need to, have a lower risk option when they're lending or else they're going to be up a creek.

What else?

23:40 Alec Koenig

I think reporting is very important. So getting your accounting books in an accrual fashion, accurate, updated monthly on a timely basis, good hygiene. Not only to actually understand what the hell is going on in your business, but then also to provide this to either lenders or venture capitalists or investors, whatever it is. I think that's a very crucial point.

24:02 Alec Koenig

Many times we see customers come with messy books as well. You know, maybe they're just not updating inventory and it's like, do you even know what's going on in your business? They probably do, but they're just not showing that they do.

24:19 Stephen Brown

I'll tell you this, having worked with these businesses for years, I'd say most businesses have a pretty good grasp of their profit and loss statements. And they can articulate the various elements of that.

I don't feel like people have a good grasp of their balance sheets, because it's a little bit more of a foreign concept. And I just don't think people do the work to learn what that means. Which really frustrates me, because I'm like, we're doing a lot of hard work to create accurate information, but too often I see business owners who aren't putting in the time to understand their balance sheets. And I think that's a huge mistake.

25:01 Contribution margin, marketing, and what's next for Settle

Alec Koenig

And I think another one, which is very important, I think, is to make sure you have positive contribution margins. Because every dollar you put in, you want to make sure that's actually generating money. I generally like to see contribution margins 15% or higher.

25:13 Stephen Brown

Let's define contribution margin, because I think different people might have different definitions. What's your definition of contribution margin for ecommerce?

25:20 Alec Koenig

Yeah, so revenue, and let's take away the COGS, so the cost of the goods, which then would also include shipping costs, warehousing costs, marketing costs to actually find that customer, refunds of course. So taking all those things into account. So really the variable costs in the business. Things like payroll, okay, leave that out.

25:50 Stephen Brown

I agree with your definition. I've seen a debate in the industry over the years. Is contribution margin before or after marketing expenses, or at very minimum advertising expenses?

And my view is you should look at least the advertising expenses as part of that cost of sale. Because on an online sale, are you going to have that sale if you didn't spend on advertising? That's how I tend to look at contribution margin, like you're saying.

26:18 Alec Koenig

[unclear] marketing costs. Now maybe you could split it up by channel here if you want to get a little bit more accurate. Let's say you're omnichannel, you're doing some marketing for Sephora, or you're just doing online and you do marketing online. But I think all your marketing costs have to be included in that.

26:36 Alec Koenig

Now maybe, and this is just more so less from an accounting perspective but more so from understanding your business perspective, let's say you do some marketing push and maybe you want to amortize those costs over three months. But I think just so you understand that you're not underwater, I think you have to include all the costs. That's what I would argue.

26:55 Stephen Brown

I think that's a fair argument. I like to go that distance as well.

Marketing in my mind, in almost any business, but particularly in ecommerce, is a black hole. It can just suck every dollar out of your wallet if you let it. And this is something that I talk to with my customers. I'm like, hey, you've got to be careful. Marketing people will always ask you for more money, as they should.

27:19 Stephen Brown

I'm sure your marketing people are always saying, I need more money. Because there's an infinite amount of marketing opportunities. Versus, you know, an engineering group, or let's say a product development team on an ecommerce business, right? There's only so much, it's hard to deploy another million dollars in product development really quickly.

Whereas marketing, I can burn through a million dollars tomorrow, right? I could put billboards up, I could put advertising in every channel known to man and make a million dollars evaporate tomorrow.

27:48 Stephen Brown

And I think where marketing drives sales in a lot of cases with ecommerce, it's really tempting to just put more money at it, put more money at it, but not really look at that ROI. And you're like, it's so important. And you're like, look at all this cool creative and brand awareness. And it's like, cool. How's it moving the revenue? And this is a challenge in every business, but I think it's a particular challenge in ecommerce and consumer products.

28:14 Alec Koenig

Yeah, and I think the most successful businesses have cracked the nut on marketing more so than anything. Product is required. Supply chain helps optimize things. But the ones that have really scaled, which I think everybody wants to scale, have really cracked the marketing side of it.

There are ways where the product kind of does the marketing. It's just so good. But generally speaking, not every product will be so good, because then [unclear] what is good.

28:44 Stephen Brown

I talk about brand marketing occasionally with people and I'm like, does anybody in this world not know who Coca-Cola is? Right? But how much do they spend on every big sporting event? Like literally, there must be an ROI because they do it, and maybe it's reminding people to drink Coke, but you would think by now nobody needs to be reminded to drink Coke, and yet they spend a lot of money on Coke. But I'm sure there's a calculus to it. That company is not dumb, they're very savvy.

29:09 Alec Koenig

My favorite example is Visa, MasterCard. It's like marketing. It's like, who chooses a credit card if it's Visa or MasterCard? Nobody. What is going on here? But there's some purpose to it.

29:21 Stephen Brown

Yeah, brand marketing is one of the easiest things to just waste money on. And yet it still gets done. And I'm sure there are some marketing PhDs out there that could articulate why.

But anybody who comes to me, and I've been at companies, bigger tech companies, where we talk about brand marketing, and it's just like, anybody that can explain a direct ROI, I'm sorry, I think you're all crap. Because it's very difficult to attribute.

29:45 Stephen Brown

Whereas I think in the world of ecommerce, you can a lot of times say, hey, I know I'm spending this much on Meta and this is how much revenue I'm generating. There's a torrent of attribution tools out there.

And this is kind of one of the things, I think the bigger thing though, is just like, you've got to be watching it like a hawk. Because what we've seen over the years, like the beginning of last year, I don't know if you guys were impacted, but we saw in the brand we owned, there seemed to be like a Meta algorithm misstep and everybody's efficiency dove for a month or two. And everybody was talking about it.

30:21 Stephen Brown

I even had a friend who had some connections at Meta and they're like, what he was hearing is they made a change and they weren't sure what broke it. And so they had to fix it. But this is the reality of a lot of this marketing.

30:31 Alec Koenig

No, they won't. No.

30:35 Stephen Brown

Now, if the algorithm goes wonky. The other thing I've seen is seasonal performance.

Anytime I talk to somebody and they throw a sales and marketing plan in front of me and it shows like a flat return on ad spend, I'm like, come on. Like there are seasons that are really efficient and there are seasons that are not. And you have to be thoughtful about that.

30:56 Stephen Brown

Understanding that your performance is going to vary based on seasonality of just consumers as well as your business and your product.

31:04 Alec Koenig

And if you haven't really thought through that, months leading up to the election, ads are getting expensive because everyone's bidding it up for the politics.

31:12 Stephen Brown

And January, right? They might be cheap, but they're not going to perform well, because everybody's doing that, I forget what they call it, but no spend January and that stuff. You can advertise, but you're not going to get a lot of conversion. Your conversion is going to be lower.

And then versus, you know, holidays are a mixed bag. There's competition, but there's also high, high consumption. So understanding those nuances, I think is key to success.

31:33 Alec Koenig

Yeah, one thing we don't look at, but I'm always very curious about, is if we knew, let's say, what agency they're using, would that be a predictor of success potentially? I'm not sure directionally, but the magnitude of that, I'm not sure.

31:50 Stephen Brown

There are some out there that I feel like have a better reputation. But I don't know if I were to craft, I'm trying to think, what would I add if I had the perfect underwriting algorithm?

I don't have the experience with lending you have, but I have a lot of experience with data analytics. And yeah, what would I add? I'll have to think about that. Maybe I'll come up with something. The problem is you've got to have something that's easy to measure.

32:18 Stephen Brown

From my experience in financials, I would probably, it is somewhat, especially if you had a direct connection to the books, you can actually tease out the quality of financials to a certain degree. That's something that I would probably do, is you guys have a model for that.

32:35 Alec Koenig

That's good, because not all books are equal.

32:38 Stephen Brown

There's a lot of challenges. Okay, so that's one thing. All right, I'll keep thinking. What would I do? What's my secret that I can sell to Settle, my secret [unclear]?

But there's so much data out there. This is what ticks me off about the MCAs. I feel like they're lazy. All they do is they're looking at sales data and charging a lot of money to offset the risk. They could understand more in a somewhat automatic fashion, but they choose not to. And I just don't understand why they don't.

33:12 Alec Koenig

Well, it's also adding more friction, right? So it's like, if you're adding friction but this person isn't, are you going to see a conversion rate and lose deals potentially to this person, even if they don't understand the cost of the financing?

It's a tricky one. Because even for us, you know, hey, I could probably ask you 20 data connections, but at some point you're going to be like, okay, this is getting ridiculous. And then they won't apply. And then we don't even have a business. So, you know, we try to make it as painless as possible as well.

33:46 Alec Koenig

But luckily, you know, we're kind of looking at data that's a little bit more encompassing. But we're going to miss out on stuff.

[unclear] subscription businesses, I would honestly love to see cohort views. We don't have that data. So that's an opportunity for us going forward, to figure that one out.

34:03 Stephen Brown

Well, and it's really interesting on this note of friction. This is what I tell people when they come talking to me about lending options. I'm like, okay, here's the rule of thumb. The easier money is to get, the more expensive it's going to be. The harder it is, typically the lower cost lending.

34:17 Stephen Brown

As a general rule of thumb, I know it's not perfect, but I'm kind of shocked sometimes when people aren't willing to do some work to get cheaper lending. Because it takes some work, but it's not like impossible. They're just not willing to do it. And then they're just like, I need the money now.

You know, some of it's just a sense of urgency, they haven't planned ahead. But it's just like, yeah, take the time, fill out the forms, submit the financials, have the conversations. And if you don't get approved, learn, figure out where you went wrong and make those adjustments. But I see a lot of people that they just go with the fast money.

34:48 Alec Koenig

Yeah, there's some, you know, I understand it, because a lot of these brands are not that many people. They want to focus on product and marketing.

But I generally agree with you, and I think that's the opportunity of technology. That's why I think a lot of fintech companies exist like ours, where we're going to get the exact same data as the bank gets, probably even better, more, and it's only going to take you two minutes to connect, or a minute to connect. So by transforming all this data into our machine learning models and dashboard views, we're making it very painless for our customers.

35:21 Alec Koenig

We even actually see this with customers that will leave us to go to a bank, allured by a cheaper interest rate. But then they'll come back nine months later, because they're like, not only are there a bunch of these hidden fees and other costs of doing business with them, but the reporting burden was insane. Like we're spending hours and hours and hours a week just providing reporting to them. With Settle it's all connected through a technology connection that the bank doesn't have, and we're not spending any time on that.

35:49 Alec Koenig

So looking at the cost of the labor from that perspective and opportunity costs, even if we're charging a higher APR because, hey, we don't have these deposits to lend off of, the customer's saving money with us anyways.

But that's what I think the promise of technology is. We're not going to be the last ones. There'll be other ones as well where they're going to make this as painless, as frictionless as possible for customers. And then I think that would also spur a lot of companies to sell technology to banks to make it more painless for them, which is also an opportunity.

36:19 Stephen Brown

I think, so here's my idea as you're talking, I think it is in marketing, and I think there's enough data there, you could get access to it. I think marketing is a huge predictor for the success of a business. So if I were to suggest the next level of underwriting, not sure what I'd look for, but all that data and ad campaigns, what's that?

36:39 Alec Koenig

That's what we need from you. Don't just say marketing.

36:41 Stephen Brown

No, we can.

36:44 Alec Koenig

We have connections to Facebook, Amazon, Google. We could plug those in. But the other question is, what would we do with it? So Stephen, that's your job from here on out.

36:51 Stephen Brown

I've got to develop the algorithm. I do think marketing efficiency, if somebody is demonstrating a history of marketing efficiency, could be a good predictor for the health of that business. Because I would argue that the profitability of a consumer products business, an ecommerce business specifically, is made or broken on marketing efficiency. There are other things that can trip you up, but I think your marketing efficiency is a huge predictor of profitability.

37:20 Stephen Brown

And I think you see this even in public companies, where when companies are doing poorly, they're either jacking up marketing because efficiency has gone awry, or starting to discount goods, which is effectively a marketing technique, to sell through inventory, which leads to a death spiral of its own. So I think the public companies can teach a lot for these private companies.

37:38 Stephen Brown

Let me kind of just ask you some specifics about Settle. You guys are more than a lending company. You said you started with accounts payable. But did you start there with the intent to do lending? What was the roadmap? You launched at the same time, okay.

37:53 Alec Koenig

And so the AP product then was very bare bones, not up to snuff. But over the years, we spent a lot of resources in building a really best in class AP solution, which we stand on. And we're continuing.

38:05 Stephen Brown

I will second that. We've used a lot of AP. You guys have a solid product. It's very awesome.

38:11 Alec Koenig

And we're going to continue improving it, continue innovating, so it's only going to get better. But yeah, we started with lending and AP at the same time.

38:18 Stephen Brown

And since then you've expanded. You guys got into kind of product catalogs, procurement, the purchase orders, and now you guys have gone full on into inventory management. Which, like I said, when we first bumped into you guys, we're like, well, that's kind of a weird combo. And then as we kind of stepped back and thought about it, we were like, this is actually really brilliant, because it's all related, right?

38:46 Stephen Brown

It's kind of all around inventory. And obviously there are other issues that a consumer products business and ecommerce business is dealing with. But I think fundamentally inventory, cash flow, paying for said inventory is all related. And I think you guys have wrapped things together in a unique way.

39:00 Alec Koenig

[unclear] benefit to the customer is, because we have this lending revenue, we can make the software very cheap. And software companies that don't have that aren't in that kind of place. So I think we're always going to be able to provide savings and more affordability to our customers because of that.

39:14 Stephen Brown

Where do you guys see yourselves going? I mean, you guys continue to kind of, I think this central focus around the challenges of inventory in a consumer products business, to me, feels like the core of what Settle is attacking.

But as you guys think about the future, and maybe not just your future, I'd love to get your thoughts on the future of ecommerce in general. You started in the heydays, we started a few years before you. So we started in 2014.

39:50 Stephen Brown

We started specializing in ecommerce, we kind of decided to focus on ecommerce starting about 2017. So we saw that rise and it just was growth and growth and growth, and then COVID hit and it was just like hyper growth. And then since then it's been, I still think there's opportunity, but it's been hard.

What do you think the future of ecommerce is from your perspective?

40:09 Alec Koenig

I think it gets to 50% of all sales. I think it's just inevitable. I have no doubt.

40:17 Stephen Brown

China. [unclear] lives in that? Because you could argue it's all on Amazon. It's all on walmart.com. Where do you think the third party seller is in the future?

40:29 Alec Koenig

I think they exist. I think, you know, if you kind of look at Shopify as a stock relative to Amazon, Shopify has performed better. And I think there's a reason for that. And I think that's going to continue and exist. They're going to be able to acquire customers directly. They'll also be selling on all those channels at some point in their maturity.

40:55 Alec Koenig

But I don't think that goes away by any means. Everyone is telling their own story and providing value.

So I think that exists. And yeah, I think generally we go from, what is it, like 22% of all sales to 50%, just like it is in China. I think Gen Z and younger generations who are more prevalent to shopping online, I think that's just going to continue. And I think the delivery of goods to customers is only going to accelerate. So it will be even more convenient for all these customers. I don't see the third party sellers ever going away.

41:29 Stephen Brown

And how do you guys see Settle evolving as the market continues to evolve?

41:35 Alec Koenig

Faster, cheaper, bigger. And I think the next forte for us is what we're starting on right now. It's the order to cash and then AR. That's the missing piece for a lot of these businesses, especially when they start selling in B2B channels, which is just required. So I'm very excited about that. It's been planned since day one and we're finally getting to it. So I am ecstatic.

41:59 Alec Koenig

And then, I'm sure we'll find another expansion area, but I think fine tuning all those modules effectively into something that's one very cohesive thing that works together, and you don't have to spend a lot of time reconciling between different systems, is the dream.

And just like everybody else, working on AI, so are we. It's the right thing to do. We could provide a lot of value to our customers given the pipes that we've built, the data that we have. So creating AI agents that these brands could hire to make their lives easier and more efficient and do more with less, I think that continues. And I think you'll probably see 10 years from now, a lot of these businesses are probably run by one or two people. And the cost structure just goes down and down for these businesses.

42:51 Stephen Brown

Awesome. Well, thanks for joining me today, Alec. This was an awesome conversation. If somebody wanted to connect with you or with Settle, what's the best way to do so?

42:59 Alec Koenig

LinkedIn, Twitter, email, [email protected]. You could also just reach out to our team members. They're fantastic. But yeah, anyone you want to reach me, please do.

43:08 Stephen Brown

Okay, thank you.

43:10 Alec Koenig

Thank you.