Why Lyn Alden Says Cash Flow Beats a Pure Bitcoin Treasury

Transcript

You announced last week that you had raised $40 million to launch Orange Juice, a permanent capital holding company that will acquire, improve, and permanently hold cash flowing businesses backed by a Bitcoin treasury. How did you come up with this idea for Orange Juice? And what problem were you trying to solve? >> Yeah, good questions. I mean, first of all, we have a very strong team. It's certainly not just me. Some of the headlines we'll put my name uh on it, but there's this has been a really big team effort. Uh so it's it's the the partners at Ecodes Capital along with um uh Ruben and Adrian uh from from other you know from other ecosystems. Uh and uh you know the idea actually goes back to early 2025. We've been working on this for a while. This isn't just

something we put together here this year. It we we you know it's been it's been a process to figure out the exact structure uh how to bring it to market and all that. Uh and the main uh kind of focus was that um there are a lot of treasury companies out there, Bitcoin treasury companies. Um you know, one of the biggest criticisms against them is that they don't have cash flows. Um you know, for those seeking kind of pure play levered Bitcoin approaches that that you know, that can be a a plus uh in some context. For others, it's a minus. It certainly kind of adds volatility to the upside and downside.

Uh whereas we viewed that if you have a a a stable cash flows like a operating cash flows um that provides a really good foundation that you can then use to build a bitcoin treasury. Uh if anything I mean ever since I saw kind of the first company come to market and add bitcoin to its balance sheet. Um I've been expecting to see you know a variety of other companies want to add some Bitcoin uh as well. Um but it's that they've actually been quite slow to do that. most of the ones that have done it are are kind of more Bitcoin adjacent type of companies or they're springing up specifically to do the strategy.

Whereas I'd actually love to see just boring companies add Bitcoin to their to their balance sheet. Uh and if anything I think value stocks uh that are kind of underperforming in this kind of winner take all market. Uh they kind of slowly become a smaller part of the economy over time. one of the ways they can protect themselves is by owning a truly scarce asset and instead of you know sending all their cash flows out as dividends or as um you know buying back their own shares and stuff, they could be holding um you know this asset. Um and so kind of after years of waiting to see more companies uh bring this to market uh you know a couple of us a bunch of us decided uh let let's go and make this happen. Uh the other reason is that we you know there is a really big

strong demographic force of uh American business owners uh in general are aging. Um many of them are looking to pass on the wealth that they've built. Uh and you know there's there's a variety of options to them. One of the hardest things you can sell is a business uh because of the size and uniqueness of of each one. Uh and the main uh you know option for companies uh in that kind of small to medium size is private equity. Uh and private equity serves a very important spot in the market. It obviously provides liquidity for these businesses that are otherwise quite illquid. Uh you know it could be very hard to find a strategic buyer. Um uh but uh they you know many would say they have a negative reputation and I think at least some of it's welld deserved

which is um you know PE funds generally have like a 10-year life. uh the typical life cycle what they want to do as a business is go in um and then within like a a three to sevenyear period um they generally want to flip it. So they they lever it up they they cut cost pretty aggressively uh they you know they try to find ways to boost the multiple and then they want to either bring it to IPO or otherwise exit that position uh to kind of optimize for that more shortterm um uh gain uh potentially at the expense of that long-term success of that business. Uh studies show that, you know, companies that emerge from PE have a higher than average bankruptcy or financial distress rate. Uh and it's because they're they're kind of in some

ways hollowed out. They they might otherwise have a good business operation, but they've been hollowed out for that kind of short-term flip. Um whereas there are it's rare, but there are other options, permanent capital vehicles that actually want to own that company uh roughly in the format that it's already in. you know, happy to make modifications and and help them where possible bring additional scale, but otherwise keep intact the legacy that they built and not have that kind of four to sevenyear or three to sevenyear uh mandate to to flip and get out of it, which which is totally changes our incentive structure.

>> So, yeah, I would love to ask you two follow-on questions, but we're going to start with one. Um, so when you were describing the types of companies that you would be looking to buy, you described them as boring. So do you have in mind what types of companies you're looking at? >> Yeah, good question. So uh basically because we a lot of us come from a venture capital background in in the company. So we are uh partners at Egoth Capital. So we for example invest in Bitcoin growth companies uh tech companies, you know, fintech companies. Uh but the types of companies we're looking to buy with orange juice are generally speaking companies that are outside of the space entirely. Uh things that often have a a physical real world presence um you know that are kind of AI

resistant uh you know the kind of the classic PE examples like HVAC businesses for example that's it's almost a meme at this point that you know you leave Wall Street and go and you roll up a bunch of HVAC um but that's not really far off. uh you know at at when we start out we are uh industry agnostic meaning we're not we're not targeting any specific industry uh instead kind of in the early stages we're interested in founders that specifically fall under a certain size category uh and that have an interest in uh preserving the business that they built they optionally can even continue working at it um even as they want some liquidity uh you know maybe they want to keep their employees together they want to keep kind of the soul of the company alive uh they think it's better in those

types of hands. Um, uh, and generally speaking, early founders are probably going to be interested in Bitcoin in some way. So, they're going to be founders that just happen to also be Bitcoiners. Uh, because, you know, uh, early on in the strategy, um, you know, we intend to buy companies with a combination of cash and some equity in our own, uh, entity. Uh, and that, you know, that could be variable to the to the business seller. Um and so generally speaking uh you know there we we're looking for founders that kind of buy into the thesis as we see it which is that cash flows in Bitcoin is a good combination. Uh generally speaking as we get as we you know hopefully make a series of successful acquisitions um we will then have uh you know an industry set that we can maybe more lean into and

find synergies between. Uh and at that point we're you know at that point we're probably less targeting business owners that necessarily care about Bitcoin. uh and you know we're more in that kind of uh traditional PE type of of category um uh because we you know at that point we we will hopefully have a track record of uh successful implementations but early on the profile is generally speaking uh small business owners that that you know have a business that most likely has nothing to do with Bitcoin but on the side they're they're bullish on Bitcoin and they like the asset and they they're looking for liquidity and they're looking to keep their company intact.

And why is it that you've decided to not go with uh VCbacked type startups but instead the more boring ones >> uh specifically for cash flow? So VC backed startups are rarely profitable. Uh you know in some rare circumstances they can be uh but generally speaking they're more growth oriented. Uh you know uh you know many businesses start without venture capital. Uh they generally have you know somewhat of a slower growth profile quicker time to profits. Um but venture capu backed companies are generally really going for something bigger. Uh whereas uh and that's not really something you want to f a Bitcoin treasury kind of um you know uh is a competing force with that. Uh instead we're looking for companies that

uh are generally on this you know they're they're the mature phase of their life cycle. Uh meaning that you know we see them as AI resistant. You know they're not really going anywhere but they're not in some massive growth um area. uh and they can be bought at low multiples meaning that with a fairly small amount of capital you can get a substantial amount of cash flows uh that if if selected well are are very durable and long lasting uh and then that can be a very strong foundation to accumulate Bitcoin because the company's not often the type that benefits from aggressive reinvestment of those cash flows uh in some circumstances it might but in generally speaking these are companies that are already established they're spitting off cash uh and uh you know in a traditional value stock setting uh you

know private company or even you know a publicly traded example which we're not going after initially but it just as a value stock in general there's only a handful of things they can do with that excess capital. They can give it back to the owners either in terms of private distributions or for a public company dividends. They can buy back their own shares if they're public. Um they if their balance sheet has issues they can they can you know put more money toward their balance sheet. If they already have a clean balance sheet that's off the table. So a lot of it is just distributing capital outside of the company. uh and we view that accumulating bitcoin is one of the valuable things that you can do with that. In addition, when you have um solid uh operating cash flows, uh you can put moderate amounts of leverage on

that uh with the interest expense uh that's fully covered by the operational cash flows. For example, you can have interest expense equal to say onethird of operational cash flows. Uh so that you know it would it would take a twothirds fall in operational cash flows to get to a point where you're not really covering interest expense anymore. Um so you can you can conservatively lever these businesses and then unlike a traditional kind of PE exit where these companies are highly leveraged uh these companies would be attached to the parent company that has a lot of bitcoin on the balance sheet. So it would be a company that has more assets than liabilities while at the same time having operational cash flows that uh you know fully fulfill the interest expense multiple times over. Uh and so that's a very different model

than if we were to go out and buy venturebacked companies which which would be very high multiple and generally profit uh you know nonprofitable companies that are just it's a completely different category which by the way we're still focusing on Ego Death Capital. It's just it's just a very differentiated uh type of strategy. >> Super fascinating. All right. So in a moment we're going to talk more about the Bitcoin Treasury, but first we'll take a quick word from the sponsors who make the show possible. If you hold crypto on your phone, your biggest vulnerability isn't your wallet, it's your carrier. AT&T, Verizon, and T-Mobile have been breached again and again, and SIM swaps are still one of the easiest ways for attackers to drain accounts. That's where Cape comes in.

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back to my conversation with Lynn. So, as you already started discussing, there will be this Bitcoin treasury and that is um seemingly in a way like on the surface part of a trend that we've seen this last few years, you know, this uh explosion in digital asset companies. Um but you know, most of them are vehicles specifically to acquire Bitcoin and obviously Orange Juice is taking a different approach. So, explain um you know, how your Bitcoin data will function. you said I guess it stays with the with the parent company but I'd love to hear more of the details about you know how what the relationship is with the portfolio companies.

>> Yeah the main relationship is that you know although all the companies will be subsidiaries of of the parent company the treasury will itself be held at at the parent company level. Uh and what that does is it gives us optionality. So if you have a pure play DAT for example, uh the primary goal every every month or every quarter is is to pretty much only accumulate more of that of that coin per per share. Uh where and that the challenge with that is it can be a quite a pro-yclical approach. Uh you know when when when bitcoins or or other you know for for some of the other types of DAS whenever the coin is really high generally speaking the MNAB is going to be high the market at the end is going to be high. They're selling more shares or otherwise raising capital to buy more

of that coin. And often when there's a bare market, it gets harder uh to buy that. Um whereas when you have uh kind of more than one direction that you can go in, it gives you some counteryclical optionality. Uh and what I mean by that is you know if you have a set of cash flowing businesses uh and you're you know you have you're accumulating that that cash flow you're putting some of it into Bitcoin at any given time you have a handful of options for what you can do if the inbound pipeline of businesses looking to sell uh that meet your target at the multiples you're looking for. If that's a very strong pipeline at the moment you can lean into buying more businesses. Uh especially if Bitcoin for example just went up 10x uh maybe it's it's very enthusiastic at the moment. uh

and you know that that you know that's a very pro-yclo environment. Maybe it's better to lean into those businesses with a strong with a strong inbound pipeline. On the other hand, it could you could you know a year or two later you could find yourself with with Bitcoin in a pretty deep bare market at the bottom according to most valuation metrics or most sentiment metrics that are available. Uh coins that have rotated away from fast money towards strongly held hands. uh and that might be a time where you actually wanted to put more cash flows into accumulating a bitcoin uh in that in that kind of when it's cheap when it's kind of out of favor. Uh and so there's a handful of options. Uh and the companies, you know, as long again as long as the operational cash flows are managed well. Uh it's not

a company that has to perpetually issue new securities. Uh you know, it has the option to raise capital. Uh but the cash flows themselves provide a continuous sort of just new capital that comes in and can be put toward either new businesses or bitcoin. Um you know leverage can be used judiciously at times. Other times uh deleveraging can can be a tactic that makes sense in certain environments. And so it gives the company just a handful directions that it can go in uh that is is very kind of execution dependent. So the the better that the that the partners and and management is at you know executing properly and doing it in that kind of counteryclical uh cautious way uh it's a it's a differentiated strategy compared to what what else is out there. I you

know I've been on record I've been a you know I've been a strategy shareholder since August 2020 when they started strategy. Um, but I'm on the record that the the long tale of other pure play DATs or or treasury companies. Uh, you know, I think it's a very crowded space. There's only there's only, you know, liquidity begets liquidity. Uh, so I think the large ones have a role to play. Um, and and there are different markets out there. There's Japan, there's Brazil, there's European markets, there's a number of kind of big liquid markets. Uh but if you're not one of the top pure play DATs in those markets, those treasury companies in those markets, um you know, I think the much bigger opportunity is just that other companies, whether it's public traded companies now, uh or or it's our strategy that's you know, uh you know,

accumulating private companies and intends to go public eventually, uh to take these just totally non- Bitcoin businesses that have cash flows and just put it into a Bitcoin treasury. Is just another thing you can do with your capital besides, uh you know, the other things you can do with retained earnings. You just caught a piece of Unchained. I'm host Laura Shinn and the full conversation is in the description below. We go live every Monday and Thursday. Subscribe so you never miss it.