Early-stage Private Equity!? And The Story Behind Stage.

Stage wants to do venture investing with a Private Equity mindset. What does that mean, and what are the challenges behind the model?
Krista Morgan - WSL
Profile picture


Today we’re joined by Krista Morgan, a general partner at Stage, an early-stage private equity firm based in Denver, Colorado.

She’s also the co-founder of Aelin.ai, an artificial intelligence platform helping small businesses prepare for loans. She’s currently a board member of Peak Beverage. 

Before she joined Stage, Krista was the founder and CEO of P2Binvestor, a marketplace lender for lines of credit for businesses that can’t get traditional bank financing.

Krista holds a Bachelor of Arts in Economics and Political Science and a Diploma in Liberal Arts. Krista, welcome to the show.

In this interview, we will discuss:

  • How Krista and her co-founder founded Stage
  • Her experiences running a private-equity firm
  • Managing relationships with founders and investors
  • Her approach to funding startups and getting returns

Watch the full interview:


Let us start with Stage. I just read it’s an early-stage private equity firm. What can I understand with early-stage private equity?

We use the term for our strategy of buying relatively early-stage technology companies, post series A and B, and running them with a private equity mindset.

What kind of a stake do you usually acquire in those companies? 

We typically acquire a controlling stake. So we are buying a majority interest in these companies. 50% of companies that receive an A round will never receive a B.

Our average initial check size is $3 million to $5 million, and then we reserve some follow-on capital of up to $7 or $8 million.

If you can buy a technology company at one-time revenue and then get it back on a path of profitable growth, it can be turned at 3, 5, or 7 times revenue.

And so, the multiples can be excellent from an investment stand.

Some private equity investors increase the multiple. What do you have to say about that?

We buy a company at one-time revenue; it’s worth more than that. Because there are, you know, investors, especially in the early stage, I don’t want to accuse them of being lazy, but they are.

If you’re an early-stage investor, you’re looking at so many deals that you have a filter. So you are going to need to dig into a company. For example, let’s assume we are considering buying a company with too much debt to the amount of revenue they have.

Many investors would want to avoid getting into it because of the debt. We have to consider not only the valuation but also the current situation.

And remember, we are buying, we’re deliberately buying companies that have received prior $20 to 30 million investment. Let’s buy that money at a big discount.

If there’s been 20 million invested and we buy the company for $4 million, there’s value created there that we can get. In traditional private equity, you can’t count on the multiples.

From our perspective in traditional private equity active, our entry multiple is very good because of circumstances.

We’re looking for 10 or 20 times revenue multiples. But those crazy tech valuations are not what we’re saying. We’re saying that you take it from one, grow it to 50 % or 100%, and now it’s three times multiple. That’s a good return for us.

That’s not a, we’re not, this is not venture returns, right? We’re not getting 50 x our money, but this is a singles and doubles strategy. So we want, like, it’s about something other than home rents. Let’s make sure we get three to five x on every single investment, and then we’ll be a very, you know, strong performing.

A lot of VCs are guilty of this as they blindly allocate money. Is it right to say that what you’re doing is a bit like distressed venture capital?

Yes, that’s exactly right. Yeah, because only a few people are doing it.

For example, my partner Dan started the stage in 2009, so he’s been doing this for a long time. He has a good track record, which is also how we get us and our deal flow. A lot of our deal flow comes from venture lenders. 

So as venture capital has exploded over the last five years, the lenders are saying that they are not gonna lend not to the fundamentals of the company but to the strength of the cash on their balance sheet that they just got from these VCs.

And so then what happens if the VCs decide they’re not gonna keep investing as a lender? You only have an asset if someone keeps that company going and support the equity so that you can try to return your debt. 

How we entered the market was that we found the companies that have a debt situation where the lender really is pushing.

For there to just be a deal. They’re like, we don’t care about valuations. We want to make sure this company stays in business. And it’s that pressure that is also what’s driving the value and the strategy.

Let’s go back to the single deals because you said you’re usually getting approached by lenders that give the company money based on their already good equity base.

And the current investors, how are they dealing with if you do not even offer them their money back? So they make an 80% loss on their valuation.

Every investor is always unhappy with that. So let me just start there.

When working with VCs in such cases, we say, look, you’re not getting your money. You’re gonna get a ride, right? We’re gonna give you an upside in the go-forward business.

They might get a junior preference. So there are many ways you can creatively say to someone, if this goes well, you can get your money back. But right now, you only want to not deal with it anymore. Do you want the company to have a chance? 

And VCs, as a general rule, are very founder friendly. So if you can say to them, look like, let’s give this founder another shot, which is what we’re doing.

To the founder to give you a clean slate and try again with a different mindset, but let’s try again. So, you know, it’s always a discussion, but by the time someone’s coming to talk to us, they’ve often accepted that their investment is not going the way they thought it was.

For everybody involved, it’s either you go with the stage or to zero. Right? Because apparently, nothing else is happening.

Well, there are very few options. Who’s buying even a $3 million tech company that’s burning 4 million a year? You really have to believe in that technology to take that.

Like it’s a lot in all the debt and the complexity. It’s hard to justify doing a deal of that size as a strategic acquirer.

You said acquirer, so who is usually the buyer afterwards. Do you then give the company back, maybe two VC investors again? Or is it always a strategic acquirer?

We focus on strategic acquirers, so we build relationships with other private equity firms and get into their roll-up strategy. 

So we, you know, one of our investments is unlikely to be a platform investment, but we might say, look, do you wanna roll this up? 

Because again, if we can give them a growing company that has had a bunch of R & D invested in it, they have strong technology, but we can sell it to them three or four times revenue.

That’s a much better deal. Then, if we’re value buyers, we can also be value sellers and still give our LPs a great return.

Right. I want to dig deeper into every stage of the bidding. You quickly mentioned deal flow. Please explain. 

More in-depth about how your deal flow process works. Do you collaborate with banks, founders, and VCs? Who are the 80% of people that get you deals?

The 80% are venture banks and technology lenders. In fact, every single deal came from a lender of some kind. I ran a lending company for about seven years, the same as my partner. We have a lot of relationships in the lending space.

So that is the majority of the deal flow. We get direct, so we get founders that will reach out to us directly. That track record really helps get us a first look at deals.

So, lenders, do they also lose part of their investments sometimes or are they usually getting out? 

They’re not usually getting out because they’ve said they’ll take a discount. If it is a $5 million loan, we’ll give you 1 million upfront. We’ll restructure 2 million of debt. Right? So you keep 2 million of senior debt, and then we’ll give you either a junior preference or a warrant.

Our point of the lender is, look, a lot of the times, we’re seeing companies that have more debt than revenue, and it just needs to be healthier. Why does the turnaround if you’re going to leave this company totally overleverage China to service debt they can’t afford?

I don’t wanna say they lose because, at the end of the day, we really focus on returning lenders and their principals. It’s just not all on day one. They have to ride with us to try to get out relatively whole.

So not only the cap table is restructured, but the depth is restructured.

Rare It would, that would be rare. Yes. Correct. That, that is not, that is not common.

Why are lenders more inclined to actually push for sale and restructuring?

We had one deal where they were determined to refrain from taking a write-down. So we had 5 million in debt. We did a 1 million pay down, and they said we must keep all 4 million of debt, and the company couldn’t afford 4 million. So I said, fine, we’ll leave it. But our interest rate has to be 3.

My job in these situations in restructuring is trying to figure out who really needs what. And how do you come up with something that works for everyone?

What I like about it is that you have to get creative because everyone should get what they need at the end of the day.

And that’s how you can actually get everything to the finish line. Otherwise, it falls apart. 

How much of a deal for you are personal relationships? And how much is handling, like the financial modelling or something else that I just completely don’t have on the radar?

That’s a good question. So the first, as we come into a deal, if I just think about the first time we’re getting into a deal, what we’re trying to understand, You know, what is this business?

What makes it special? What did they invest in? Right? How much capital did they get? And where did that capital get invested? And can we see the value? So, for example, can we look at technology and really see something unique about that technology? So the first thing we’re doing, and then also we want to understand why isn’t it usually there isn’t growth, right?

Our question is, why isn’t it growing? Why did the current customers buy the product? What is the current revenue base stable? And then, can we grow revenue if it’s under our management?

Look, here’s the deal that works for us. When you start negotiating, everything is a trade, right? They’re like, well, you’ve offered us 20% go-forward equity. We want 30%. 

And we’re like, if you wish to 30%, then we need three and a half X liquidation preference instead of a three x or whatever it is, right?

But the modelling is you have to walk in knowing how our baseline deal will work. And then if they say no, like too much negotiating, we just say, look, we’re out.

Do you have a little value indicator? 

Yeah. Everything is a trade.

We don’t care what your price is. We wanna anchor the deal at our baseline. Here’s our optimal value. We anchor it here and then, then it, so that you’re. You’re not starting. We don’t want something to say. Well, actually, I was hoping you’d jump at 10 million.

A very direct question, do you usually look to keep the old management team, the founder team or do you try, sometimes, or always or never get rid of them?

That has evolved over time. When Dan first started Stage then, he was really taking highly distressed companies because he was trying to build a track record, so you didn’t get a lot of choices, right? 

In this fund, we look to keep the founder and, really, what we’re saying to that founder by partnering with us, we are actually gonna tell you that his job is to focus on market-fit products. Everything else in management, HR, and finance fall on our shoulders.

And so all of a sudden, we’re now partners in this, and you’re more. As a founder, you had to do what you love.

So you, you. Pa past the hurdle of, alright, you can actually do a founder thing, which is like finding a product, finding a market, finding, finding product market fit. But then you get distracted by all the stuff you throw at. 

What we’re trying to find are two things. One, we’re looking for product market fit, like a VC. Like once you get a customer, do they stay for a long time? 

That’s a big thing that we’re looking for. More importantly, the founders must demonstrate some like awareness that they understand their mistakes. 

So sometimes we get to a deal where honestly the culture change of trying to get that founder to say like, I know that if I had done this differentlmightn’tayn’t be here. 

And like ready to own up and do it differently. Sometimes we run into founders who are like, this was all my VC’s fault, so I had nothing to do with it.

If only I’d had the money, I wouldn’t be here. And we often walk from those deals because, honestly, those founders will be a nightmare.

Once you purchase a company, you get an agreement with all the stakeholders. How many people work from your side on this particular company? And then a follow-up question is, how many companies do you take on?

We’re a startup fund, so we do a lot with very few people, and we give people Christmas off so they can recover and then come back. You know, typically on a deal team, I would, so. There are two parts to the deal. There’s the deal legal structuring, core diligence side, and then there’s the operational side.

Because we’re acquiring these companies requiring a majority interest, and often it’s structured as an asset purchase. We must create a new company, get everyone unknown offer letters, get benefits, and get banking set up.

There’s this operational component, so the team is split into two. I run the deal side, and my partner runs the operational side.

The trick to a value strategy is speed because, honestly, if you’re able to say, this is my deal, I’ll close this in five weeks. It’s hard to say no to that like that. And so you ha, you can’t know, and I need six months to close this deal. Like, it’s just not gonna happen.

I heard that you have a core team internally and what you find a good deal, and whether you buy into a company or have eight companies rolling, the same internal team takes care of them.

You don’t know how to go, you don’t go to like the big four consultancies, and you’re like, okay, you know, we stuff you Now of that, you have your team, you have your own operations, and you’re kind of like just outsourcing that too, to yours.

Correct. We hire more people the more companies we bring in, but, and we do, we might work with an outsourcing firm.

We have some contract accountants, so we have contractors that we can come in. But yeah, it’s not as it as it seems. In a way, we’re a high, kind of a hybrid VC and private equity, and it’s like that in our deals, right? 

Big private equity firm, if they did three deals a year, that would be huge.

Yeah. And so, So we’re, we’re, we’re doing more deals than private equity, typically private equity firm, but yes. Fewer than a VC because we have to. Yeah. 

I mean, it’s a different diligence mindset when you have to, like, when you’re gonna own it, and you have to hold all those liabilities and know that’s really what you’re trying to understand.

Most of the diligence is really knowing. Where is your risk? What risk are you buying, and are you comfortable with that risk?

So how has the recent development in the VC space that we can’t put it any other way than just the market completely collapsed or went, gone into a downward spiral?

So it’s really increased deal flow. It’s also raised. I would tell you right now, we can buy, so we look, we’re looking at a company that’s had 50 million invested that, you know, we’re gonna get at a discount. So the volume increases for us, but what that means is that we’re able, it’s, it’s just you can, you can get more value.

So like the amount of value, you can extract. From a really, a company that would not like this company we’re looking at, they wouldn’t have, they would not have talked to us a year ago. They just had other options. But now, in addition to the closed venture market, you’ve also got the m and needs that are basically completed.

No one wants to do any strategic deals. So you have all these companies that were like, oh, we’ll just soft land into a strategic, those deals don’t happen. So, it’s really that these founders are being hit from all sides. So we’re, and I’m only expecting it to get worse cuz what you’ve seen a lot of this year is people saying, let’s wait and see.

And now, as we turn 23, I predict it’s, it’s gonna be not, let’s wait and see. It’s gonna be like, no, we don’t have the dry powder for you. No. You know, I know VCs are sitting. Billions. Billions of dry powder. But do all those LPs want them to start calling that capital? I don’t think so. Right. So like that, it is one thing to have dry powder.

It’s another thing to actually call it and start investing it when all the LPs are very nervous and see their overall portfolios going down. So it’s a, I I’m, I don’t wanna say I’m, I’m a, I mean, I have an, I have a degree in economics, so like, I find economic changes very, you know, interesting.

And I think it’s, I think this next year is, I, I’m very curious to see how things shake out, but I, I think people think it’s gonna be like Covid where it’s another kind of v, and I don’t think it’s gonna be a v I, I think we’re gonna be seeing a real. A real shift and venture have to come back, right?

They’ve gotta go back and invest. It’s just, it’s gonna look different, and I think it’s gonna be more focused on the early stage. And those middle-ground series A, B, and C companies will need help raising capital. The barrier to getting any kind of capital there is gonna be higher.

What skills should one develop to succeed in your field?

I was a FinTech founder, and now I’m a partner at a private equity firm. So I have no background in private equity. When I talk to other private equity people, we don’t necessarily speak the same language. And the key to being early stages is this is not. It really is a hybrid model.

You have to have a mindset of at least growth, right? If we buy companies cheaply, they don’t grow and gain any value, which isn’t a good strategy. So you have to have this growth mindset, but then you also have to have a mindset of, you know, cost efficiency deal. You have to, you know, you have to, like, deal structuring.

And they’ve seen because growing a company from zero to 10 million is a very different skillset from 10 to 20 and 20 plus. So I, if. In this early stage model, it’s hard if you have yet to work in a company. It’s just hard because you don’t. You just don’t know what it’s like to be on the ground.

And so, it takes more work to give advice to founders. 

Financial modellers, like my associate, did not come out of a startup. He worked in corporate. He has an MBA in finance, and he’s doing a CFA. It’s taking him to a place where he can coach a CEO.

That’s gonna take a lot longer because he just has to see more, right? He has to be around for a long.

Which skills are the more important ones? Understand, no matter who it is, but the hard skills that you mentioned, financial modelling, see, see if a charter holder, those things, those are, those are hard skills, right?

What I do think is, I think this category is gonna grow because I think we’ve seen a lot of money more, more venture dollars in 2021 than, like, you know, double the amount of early-stage venture dollars. Then in 2020 and over 2019, All that money, all that investment. The worst thing that could happen is that it all gets wasted, and all those companies go to zero.

There will be more people coming in and saying, let’s create some that, that money has value. Let’s retain that value versus just letting it waste away. Why would we do that?

If you have anything that you want to get out there, get to our audience. This is, this is the time.

I love to hear from people you know. I’m on LinkedIn and pretty active, so please, feel free to if you see a deal. There you go. That’s, that’s all. Always good. Or if you’re thinking about a deal, I’ll give you my opinion.

Awesome. I’ll link to your profile, Stage, fund, website, and show notes. And without that. Krista, thank you so much. It’s been amazing, and you have a lovely day. 

Thank you for having me. 

Profile picture
About the author


The Wall Street Lab Podcast

Welcome to the Wall Street Lab!

The Wall Street Lab is the podcast that explores the world of finance from an insider’s perspective. Hosted by-weekly by Andreas von Hirschhausen, CFA, you’ll get perspectives from some of the most renowned professionals in the world of M&A, Venture Capital, Private Equity, and Asset Management.

The Wall Street Lab is the partner podcast of Fintalent.io.