How I used loans, grants, angel investors and accelerators to finance my first $500k for my business.

If you’re a startup founder, you know the toils of capitalizing company growth. In the tech space, we’re often led to believe that the golden path to that growth is that of venture capital.

But with the imbalance of access to venture investment, identifying alternative financing vehicles has become more important, and these vehicles have become a more frequently used path to startup resourcing.

We talked with Dr Roshawnna Novellus, Founder & CEO of EnrichHER, an ecosystem of entrepreneurs and capital providers supporting the growth of women-led companies. Some of the topics we hit were:

Founders + Funders NYC - November 8th

One day of startup and portfolio growth for founders and investors.

  • How to think more broadly about raising capital for your business.
  • What funding vehicles you can consider (and the ins and outs of several of them).
  • Whether or not pitch competitions are worth it.
  • How to look at things if you have a low-scale or lifestyle business.

Recording:

Transcript:

[After CEO introductions, 3:20]

Roshawnna, can you tell us a little about yourself and your company, as its very relevant to our conversation today?

Thank you so much for having me on this call. I’ll start by giving everyone a little information about myself and what I do.

I’m CEO and Founder of EnrichHER, which is a platform that helps women-led businesses grow their companies through our lending platform and through our network.

How did I get here? It started about ten years ago, when I decided to leave my corporate career as a counterterrorism expert and devote my skill set to helping people with finance. I strongly believe that people can live life in their best joy and their best self, if they make financial decisions specifically in alignment with their goals. So I went off to get my yoga certification in Thailand to make sure I was centered before I went off on this quest. If you follow me anywhere, you’ll see a lot of references to being a yogi, but I won’t go too deep into that!

When I came back to the US, to Atlanta specifically, I decided to focus on researching entrepreneurial ecosystems and why there was so much discrepancy around the number of amazing women-led businesses that were starting and the lack of capital that was going towards those women-led businesses.

I learned a lot of things, like there’s a lack of inclusion on who gets to attend things like pitch competitions, accelerator programs and different events that support founders. I also learned that there’s a lack of inclusion on what’s a worthy business a lot. Lastly, I saw that most programs that do exist that focus on entrepreneurs are focused solely on high-growth companies, and while those are fantastic, they’re not what most of us lead and run. I really wanted to figure out how I could use my skill sets and background to help women-led businesses regardless of industry find financing for their companies. That brought me to EnrichHER, which again is a lending platform for women-led businesses.

Some of the responses to this next question may seem obvious for some people, but in a world where some people are pushed toward different funding vehicles such as venture capital, why should certain business owners think about using different ways of financing their companies, thinking more broadly about what types of capital they have access to and how it will impact their company.

Right now it’s really sexy in the media to be a venture-backed company. Those companies get all the press it seems, even though they’re such a small number of companies that qualify for that particular source of capital. And that source of capital is actually the most expensive source of capital, because not only to you have to give up a percentage ownership in your company, but you have a lot of other ways where you have to give up control, whether it be adding board members or doing activities that you wouldn’t otherwise have to do if you hadn’t taken that form of financing. Or having people who aren’t in alignment with your true mission for your company being able to vote against you as the founder in terms of your company direction. There are a lot of considerations you have to weigh when thinking about bringing in a VC as an investor.

In addition, you have to make decisions in alignment with what a VC would want to see. Kate, you and I were recently talking about how investors want to see that constant month-over-month growth, whereas if you wanted to do a research study or customer analysis and take a break from selling product for a month or two because you wanted to really dive into something you wanted to test for your business, that might not go well, as it might not yield those consistent growth rates that investors are looking for.

So when you get VC capital, it can be great because you don’t have to immediately pay it back, but it comes with a lot of things you really have to consider.

In terms of grant-based capital, that’s the absolute best, as you don’t usually have to worry about paying it back. There are some caveats for some grants, for instance sometimes if you have a government grant there are certain restrictions, or you have to deal with reporting requirements, and if you don’t do certain things, you might have to repay. But if you can get unrestricted grant for your business, that’s really the easiest way to get started.

That’s what I did to start my business, I applied to different educational programs geared towards startups that were social impact. I was accepted to two of them that gave me grant funding that I didn’t have to repay and it really gave me the foundation to kick off my company.

The third pathway you could consider is what we offer through EnrichHER – lending capital. With lending capital, you do have to repay the principal with interest based on the amount you take on as debt with the institutions. The good part about it is that you know exactly how much you’re going to repay. So if you have a loan at 10%, you can calculate what that means over whatever term, and put that in your business budget. In contrast to equity-based financing where you might end up paying $100,000 a year if your company grows 10x – which is what you want, you want your company to grow – but you might not know exactly how much you have to distribute to that investor depending on what the valuation ends up being once you exit that investment situation

All of these considerations can happen at various points of your business, and I’d love to share what I did at certain points of my business.

Great. Before we dive into that, you’ve used a certain set of alternative financing vehicles yourself. For the audience, what are some of the other ones that could also be considered, things like crowdfunding?

Crowdfunding is really great. I did a lot of crowdfunding before I started this business. In high school, when I decided I wanted to go to college for free, I did my own offline crowdfunding experiment. I wrote letters to over 200 organizations across the country, and told them my story, what I wanted to achieve, by background and my commitment to using funds in a good way. I promised I would get good grades and achieve these great things. By launching that process I was able to raise over $600,000 that I didn’t have to pay back and it paid in-full my entire college education, my four degrees. So I knew the power of the crowdfunding approach from a really age.

Roshawnna, I just need to stop you for a second and tell you that’s amazing. Ok continue.

[Laugher]. So I did that when I was 15. I was really hard core, I’d studied debt, I’d studied money. My mother made me learn the Rule of 72. For those of you who don’t know, when you look at the interest rate for a loan that you’re taking out and have to repay, you divide the APR by 72 to figure out how long it would take you to double that money. So I understood how expensive education was by doing these exercises, and I said, “Hey, I’m going to get free money to pay for my education.” And I did that.

I mentioned before there are different programs that will give you grant-based dollars, whether they be programs that you’d have to go for specific classes. Another thing you can consider is revenue-based loans. Revenue-based loans are really cool, because your payment is based on the money you bring in. For example, you can sign a loan and say 5% of your monthly revenue is your payback. This is helpful in situations where you might be a seasonal business, like swimsuits where no one may by from you in February. You wouldn’t have to pay back a portion of the loan in February because you didn’t have a lot of revenue coming in. But when May and June hits, your payments for that loan may increase.

Another option is factoring your invoices. If you have a company where you have steady invoices, for instance a government contractor, or you have clients who pay you a steady amount of money every month, there may be institutions that may offer a factoring program where they’ll take a percentage of that invoice and pay you that money up front. This emerged because a lot of contracts will pay you 30 to 60 days after you do the work, and a lot of small businesses can’t float their whole company without payment for three months. That’s a time to use factoring.

A couple of other that have been on our radar too are equity crowdfunding, and some of the things you just mentioned like factoring invoices are starting to be built in to some of the SaaS products, such as Freshbooks, who offer the ability to access funds on created invoices within their system, even if those invoices haven’t been paid. It allows you to get some of your running capital. Those are some interesting improvements on some of the small business tools that can be used for invoicing.

Let’s shift gears. You specifically have been doing a lot of pitch competitions, and with success. How can people think about pitch competitions, especially when it might be 6-10 companies pitching, there’s usually only one, maybe two “winners”, so the chances of winning might look low?

I’ve definitely evolved my thinking about pitch competitions. Three weeks after I came up with the idea for EnrichHER, I submitted my idea to the Essence Festival pitch competition, and was excepted. The competition was “what was the best idea that would help women grow their economic power,” and that’s exactly what I do. The competition had our platform, a platform with organic supplies for our menstrual cycle, and the third company was one that kept collars for shirts from wrinkling or staining. That’s the company that won.

I was so frustrated, because what does that have to do with economic power for women? The judges said that the women don’t have to spend time ironing the shirts, so they would have more time to do other things, so that’s why they thought that was the best [laughter]. So I took it very personally, wondering if it was about my idea, and whether people understood what I was doing.

When I was walking out of the room there was a writer from Fast Company in the idea who approached me and said my idea was amazing, and asked me for an interview for an article that was going to be published the following month. I said yes, and within a month of me coming up with this idea, before I developed anything, I was in a Fast Company article based on this pitch competition that I thought was crazy.

Ever since then, I think pitch competitions are about amplifying your message to the audience at large, versus winning. If you win, that’s great, but sometimes that really doesn’t come down to you – like the story I just told – or it could go your way because you’re the best. Almost every competition I’ve participated in, I’ve gotten an opportunity to be featured in press, which brought in new customers, or maybe interested investors, or an audience member who might be willing to connect me or invest in my company. I think that’s the best way to think about pitch competitions and evaluating them, if you think it’ll bring a good audience, with someone who might be able to fulfill one of your KPIs.

Just so everyone is clear, you’ve also won a healthy number of competitions.

Yes, I’ve won the San Diego competition, I won the SoGal Charlotte a few weeks ago, I’ve won the Hera Hub… I’ve done about seven pitch competitions, which isn’t a whole lot, but out of those I’ve won three, so those are pretty good odds so far.

Yeah, I like those odds. You were edging on this concept when we were talking about revenue-based loans, but the whole idea of financing companies is that we’re financing successful companies that are going to produce sales, have positive cash flow, revenues, etc. When we think about raising money, we think about outside capital – investors, various vehicles we’ve talked about – what about raising money from customers? Can you talk about that concept?

The most obvious is to sell more of what you’re doing, so the customers are funding your business and you’re bootstrapping.

Another way that’s not as obvious is getting your customers involved in the growth of your company. There are different ways to do that. One of them, which we do through EnrichHER, is we have in-person activations in different cities, and we have the standard price, and then we have a higher price if someone wants to contribute extra money to our cause, our business and what we’re about. And every time, there are people who attend who do just that. So if you give people access to contribute more money to what you’re doing, they will.

The most formal way to do that is by launching an official crowdfunding campaign. There are three types of crowdfunding. Donation-based crowdfunding is what most people have heard of. The other two fall under the JOBS Act and are considered securities-based crowdfunding: Equity-based crowdfunding and debt-based crowdfunding, which is what we do.

Typically, before you start any of these types of crowdfunding , you reach out to your base, whether it be customers, advocates, people who are really involved in the cause or the business you’re building. You receive commitments from these individuals before you even launch a formal campaign. A lot of times when people are your customers, and more and more of the people who see your messages across channels end up buying more of your goods. It ends up not only getting you additional financing through the funding campaign, but it financing in your company through the additional customers it produces.

Most people know donation-based crowdfunding – Kickstarter, Indiegogo – and you went over the debt-based model. Can you quickly go over equity-based crowdfunding for anyone who doesn’t know? Republic is a commonly used platform, we love them.

With equity-based crowdfunding, you would be advocating for investors to get a percentage of your company. There are different types, whether that be a token-based raise, or convertible notes, or direct equity. I’ve seen campaigns with all three options, so it’s up to you how you want to structure it legally.

Essentially, it’s like all the other types of crowdfunding. You’d create an offering, a statement that would include your company information – your team, your product, your projections, your financials – and as you meet those objectives and grow your company, that owner that participates in the crowdfunding would be able to reap those rewards. Whether you structure all of your crowdfunding investors as one company – for instance if you have 300 people who’ve invested in your company, but you don’t want all of those names to be on a cap table. You might set up a separate company so it looks like only one entity, and that’s what goes on your cap table. Or it can be the opposite.

But it means that their campaign is open to the public, the public can decided they want to invest in your company, there’s a minimum amount and a maximum amount depending on their accreditation status (that means your wealth status), and the registration of the crowdfunding campaign (that depends on how much funding the company wants to raise. After that, you can move forward and be successful at doing this.

One of my friends, a black woman, was one of the first women to raise over $1M on a crowdfunding campaign. It was a token offering, and her pitch was vending machines for the pharmaceutical industry. For those who can’t access pharmacies, what if there are vending machines in rural neighborhoods that have a few prescriptions for people. That’s what she raised over $1M for on one of these sites.

One of the things we talk about too is, while you’re raising money, it’s less about (and in some cases not at all) about the returns people will get. Equity-based is a little bit of an exception, but many contributors to an equity-based raise aren’t necessarily looking for huge returns. But it’s often customer-focused. Crowdfunding is a really good opportunity – even if you think you’re going to go on and get VC or other types of capital – to actually prove your product out as well, and show that this actually got funding, which shows market demand.

For some people who might not have what some have a VC-backable company – it might not have the hockey-stick type of scale, or it might be a lifestyle business – how can they think about the fundraising process, especially supporting something that might not have a huge amount of returns in the long run?

Firstly, you’re in the majority of businesses. Most companies are not hockey-stick growth, do don’t think you’re less-than if you don’t have a venture-backable business.

Secondly, you are probably making more revenue than a lot of those hockey stick companies. Many of the companies out there that have business models that are theoretically supposed to start making revenue in a few years. That means they’re dependent on the investors to give them the cash flow they need to stay in business.

Traditional business don’t have that luxury. You have to have that product-market fit, and more often than not if you have that you’ll actually stay in business. You’re less risky and typically have a stronger foundation. Because of that, you can access different kinds of financing, many of which we’ve talked about here, that’s available, it’s made just to you.

A lot of people at service-based businesses try to go to VC meetings and get so disappointed, but you have cash flow, which actually means you have a lot more options. I also advocate researching grants and other types of funding. What I do is I spend four hours every week applying to different sources of free capital. That’s where some of these pitch competitions comes from, or the free accelerator programs that I’ve received. That’s really helped in the growth of the company. If you have a traditional business and something you can sell, it’s easy for you to say, “This weekend, I’m going to do a pop-up shop,” or do something different to create revenue. You have more flexibility to try quick experiments to get more customers in the door.

Ok, you spend four hours a week on this. Any tricks for us?

Yes. I could teach a class on how to win money and awards. I have a google doc, and it has every answer for every application that I submitted for every competition. Most of the applications ask the same questions – who is your inspiration, who are your team members, what will you do with this money, how can you contribute to this program and what do you want to learn from us? I literally cut and paste 80% of every application, so I’ll have the 200 character count version all the way to the 500 word count version and I’ll have them all for these questions, ready to do. Once you have a system like that, it’s really easy to keep applying.

It’s a numbers game. I know I’m not going to get into everything that I apply to, but I’m going to get enough. This is the exact thing I did back when I was in high school to get that $600,000. It’s the same process. You just have to be determined and keep trying.

Any parting advice?

You’re in charge. Don’t feel like you have to make a decision to accept financing that isn’t in line with who you are or your goals. Let’s say you get a factoring option that’s 10% of your invoice… that’s pretty high. You can decide to turn it down. If you get an offer from an investor that may not be the greatest person to have next to you for several years, you can turn it down. Know what your goals are, know what you want to get out of every financing deal, and use your intuition as you plot out the finances for your business.

Q&A

Audience questions start at 36:00. We answered the following:

  • Is it better to raise more money than you need?
  • What options are there outside of grants if you’re pre-revenue?
  • What criteria do you use to judge whether a certain crowdfunding platform is the best one?

If you’re interested in exploring the resources available at EnrichHER, please head over to their website for more information.