July 16, 2024

Raising Capital in 2024

Happy Tuesday, friends. I mentioned on a couple podcast episodes that we recently raised capital. I didn't make much of it because I'm not very good at celebrating successes (I just move to the next challenge and stop thinking about what we just accomplished -- probably not a great personality trait, now that I say it out loud!), but back in Feb we closed an equity round at Novel. It was not easy and if you read this newsletter you're probably not surprised. Why? The VC market frowned on fintechs and had particular disdain for fintech lenders. Competitors were leaving the space. Other competitors had outright failed and VCs had been burned as a result. It was brutal out there. Several of you readers and listeners out there have asked me how we raised capital in this market, and I promised I'd share more at some point. This is a bit of a long one, and something of a disorganized brain dump, so I recommend a cup of coffee while reading.

First, I want to make sure I point out that the VCs who led our round -- Ignia Partners and Ulu Ventures -- are great firms led by incredible people. They had the foresight and the courage to think about Novel and the market through a different lens -- a lens not tinted by fear, but rather one informed by the realities of market dynamics, which can very much be in our favor.

Back to the fundraising trail. When we decided it was time to raise capital, we knew we were in for a tough road. Our timing was...suboptimal. Pipe had essentially left the market and was by all accounts a disaster. ClearCO had left the market and was selling off part or all of its portfolio. Another disaster. I have friends who are VC investors in both of those companies, and the honest ones told me they were not the outliers they once were in the portfolio. The less honest ones said things about how they continued to hit milestones, had total confidence in the team, etc. And there were other failures in the market, and still more negative signals.

Some competitors weren't growing. Some were transforming themselves from fintech lenders to neobanks, capital marketplaces, and other business models far away from the risk incurred by lending to early-stage companies. Several of them had built their loan portfolios too quickly (just like Pipe and ClearCo), and were seeing their losses erode their revenues very quickly. That's what VCs knew about fintech lending when we hit the market.

All along at Novel, we stuck to our credo that sound underwriting was the basis upon which we could grow, and as a result, we were growing and needed to raise capital to accelerate, partially by capitalizing on the mass exodus from the market. So we looked around, decided it was time, and we hit the road.

The first thing I should mention is that Carlos and I had a very clear competitive advantage in the fundraising market: we're both Kauffman Fellows. The magnitude and importance of that advantage becomes clearer in retrospect as I talk to other entrepreneurs raising capital today. Frankly, there is no group like this on the planet. It is 800+ VCs from around the world, all of whom will take a call from another Fellow at a moment's notice. So we were able to get in front of everyone we wanted to talk to. Everyone. Our co-leads are both Kauffman Fellows. That's how powerful this network is.

That's a double-edged sword. It's amazing to have that kind of access, and I'm grateful for it (I always tell people I don't know how I tricked them into letting me into that program in 2015, and I'm 100% serious when I say it -- imposter syndrome reigns supreme when I'm in the room with Fellows.), but I am acutely aware that I leaned into one of the biggest criticisms of the VC world to get our round closed. I leaned into an exclusive network of investors which, while diverse, is still...exclusive. I cannot confidently say that I think we would have closed this round if we weren't Fellows. It gave us credibility and access that we otherwise frankly would not have had. I'm very grateful for that.

We had another competitive advantage: we were growing our portfolio prudently. We were not pursuing a grow-the-book-at-all-costs strategy, and the health of our portfolio reflected that. We did not have to spend time trying to convince investors that there were not a bunch of losses just waiting to happen. We had confidence in our underwriting, and we were therefore not on our heels when the predictable questions about the risk of portfolio blow-ups came. In fact, there was a time back in 2020/21 when we looked around and saw other alternative capital lenders growing SO FAST, and we were perplexed and frustrated. Did they know something we didn't know about underwriting? Were they better at this than we were? I concluded long ago that they were pursuing a market share grab strategy that would end up biting them before long, and it turned out I was right about that. Their results were predictable, and that played to our favor when we were raising capital. Investors knew we were not going to put them at risk of failure because we just wanted to deploy capital.

Along the way, it seemed to me that nearly every VC we talked to knew someone who had been burned by fintech lenders. Their questions signaled what they thought about the market. In several other cases, we got a very quick no, sometimes as a result of initial contact. "We don't take balance sheet risk," or "We don't invest in balance sheet businesses" were common refrains. We were able to get past those pretty quickly. After all, fintech lending is a really nichey space, and generalist VCs don't usually understand it (or want to, for that matter).

We actually used that to our advantage after a while. We would acknowledge to the investor on the other end of the Zoom that fintech lending isn't for everyone very early in a conversation, and if they agreed it wasn't for them, we might shift to understanding their objections (which we would use to strengthen our pitch) and then we would ask for referrals.

It took every bit of six months. We had solid internal support all along. Our existing VCs were all willing to invest at least their pro rata, but we were on the fundraising trail for around three months before we got a term sheet and a lead investor we were happy with, and that was about 60 days after we initiated conversations with that investor. It's a funny story actually.

Carlos and I were in Nairobi for the Kauffman Fellows Summit in September, and we talked to several VCs about the opportunity. He talked to one of his Kauffman classmates, a GP at Ignia Partners, who would turn out to be our lead, who was interested to learn more. Separately, I ended up on the same flight out of Nairobi as his classmate, and when we landed at Charles De Gaulle Airport in Paris, we sat down for a cup of coffee and talked for a couple of hours. I barely knew her at the time. By the end of the conversation though, we had become friends (in the way that Kauffman Fellows can quickly bond over a shared and transformative experience), and she was excited to continue learning about Novel. I was honestly not planning to pitch her, and truth be told, I didn't. We talked about life, our families, our individual journeys, and I barely touched on Novel until the end of the conversation when she started asking me some very well-informed questions. Turned out she'd invested in fintech lenders before and knew the space very well. I talked mostly about why I started Novel to begin with, and what the future might look like. A week or so later, after we met the rest of her team, we knew we wanted to work with them.

That was a direct result of being plugged into the right network. It would have been a longer trail without the Kauffman Fellows.

Once they put forth a term sheet, the race was on, and even that took another three months! We had to go fill up the rest of the round and, of course, negotiate and deal with all the stuff that came up along the way. The good news was that another of our investors, Ulu, got very excited and came in as a co-lead, investing more than their pro rata and helping us get the round across the finish line faster. The Kauffman Fellows strike again -- that's how we knew the Ulu team too, after all.

My friends, we got so much negative feedback along the way. The market was totally against us. "I commend you guys for going out to raise money in this market." Gee, thanks for the compliment. Honestly, some of that was fuel for me. You think I can't do this? Watch. This is hard, and you're not sure it's possible given this-that-or-the-other market condition, or whatever? Great, thanks for the feedback. I'll text you when we get it done. (I actually did this, by the way.)

There were VCs we met with four times who kept asking the same questions and not getting to a definitive answer. I regard them as tire kickers who just wanted to maintain optionality. Cowards who couldn't take a stand one way or the other. I have so much respect for the investor who says no quickly. I'm a former VC so I get it. But if you're an investor and you keep asking the same question just trying to maintain access to a deal and preserve your optionality, you should find another line of work. Don't waste entrepreneurs' time. It's an irreplaceable resource, and you should have to pay for it if you waste it.

Ok, so this has been more brain dump than structured set of lessons to share, but I kind of like it this way. The things I think are worth knowing as a result of this experience are these:

1. Like it or not, network and access still matter in VC. Internalize that and make it a strength rather than a weakness. Say all you want about how that dynamic might be changing. It's not. Network matters. Period. If you're an investor, that means you need to get out there and meet EVERYONE starting businesses. If you're an entrepreneur, that means you need to meet EVERY investor before you need to know them. I despise saying this because it reflects market dynamics that I wish were not true, but they are. It is what it is, friends.

2. Fundraising takes at least 6 months. Your plan should account for that. To be safe, plan for 12 months.

3. If you're an investor, please please please just get to the answer quickly. Don't be a coward; take a stand. Be definitive and commit.

4. Relationships are critical. VCs invest in people, after all. So when you're talking to a VC remember that there is a human being with whom you need to connect on a deeper level on the other end of that conversation. If you don't connect, there won't be any investment.

5. Very few investors understand your business. Even fewer take the time to learn. If you find a VC who gets what you do fundamentally, you've found a special investor. If you find one who doesn't, but wants to and then does learn about your business, that's a special investor too. Those are the ones to pursue, to build relationships with, to keep close.

6. Use the feedback you get to strengthen your business and your pitch. What an investor doesn't like about your business can make you stronger. BUT: remember that no one knows your business like you do, so some of that feedback needs to be filtered out. Give credit to the advice from an informed investor. Discount the rest.

7. If you're an investor, don't be a pain in the ass. The two investors who were the biggest challenges during this round invested tiny checks. I'm grateful for both of them, but their investments weren't critical to our raise, and they both acted like they were. One was a group who bombarded me with post-close questions and forms to fill out and changed the name of their investing entity four or five times, in the days leading up to close, and the other was a VC firm who wanted to negotiate terms in the deal a day before closing. Come on. Anyone who calls to ask me about either of those firms will get my direct and honest feedback.

8. If you're an investor, re-read #7. I'm no different from any other founder in that I will give a founder who asks for it my honest experience and feedback about an investor. My job as a founder is harder than yours as an investor. I know this because I've been both. If you make my life difficult, other founders will know. We talk. Don't be a pain in the ass.

That ended on a bit of a sour note, didn't it? In any case, there you have it, folks. I hope that's helpful, and I apologize for the brain dump. But I thought it was worth sharing. Feel free to share with friends and please share your reactions and feedback!