As part of our Founders + Funders SF 2019 summit, held in partnership with Seneca VC, we brought together an exciting group of startup founders and investors for a day of learning, networking and growth.

We had a lively discussion around alternative forms of financing with several experts in the field, including Karen Cahn, CEO and Founder of iFundWomen, Dr Roshawnna Novellus, CEO and Founder of EnrichHer, and Parker Thompson, Partner at AngelList. The conversation was led by Holly Grant, VP of Operations at LTSE.

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I’m excited to talk about fundraising today and what it means to raise money at a time when there are a lot more options than there were in the past. I think many of the founders in this room are probably relieved that you don’t have to make a choice between bootstrapping and assuming all of the financial risk yourself or taking traditional VC money and getting on that rocket ship that we’ve all read so much about. So I have three people on this panel who can talk about alternative options, and I’ll let them introduce themselves before we get started.

Karen: I’m Karen Cahn. I’m the founder and CEO of iFundWomen. We’re going to jazz it up for this last session.

There’s a whole world of funding out there that is not venture capital, and I’m so excited to talk to you about it. iFundWomen is a crowdfunding platform, a rewards-based crowdfunding platform for women-led startups and small businesses. We are sector-agnostic. We’ve got everything from blockchain, FinTech, app developers, to B2B SaaS companies, to farm-to-table restaurants, to The Coven, and to The Phoenix – we’ve got it all.

Our whole thing is, with startups, you want to prove demand for your product or service before you invest in supply. And by supply, I mean wasting years of your life trying to chase an equity round. Only 1% of companies, regardless of their gender, ever raise VC. So for the 99% of us, we have to look for alternative options. And I’ll get into it more, but I’m excited to talk to you about raising cash and monetizing your products, your services, your mission, your vision, your dream…. all the cash for all the queens now.

Roshawnna: Hi, everyone. I’m Dr. Roshawnna Novellus, the CEO and Founder of EnrichHER. We’re a lending platform for women-led businesses. We offer debt-based crowdfunding and direct loans. And our vision is to provide working capital to women across the country in every industry, as long as they have cash flow. We’re really excited because we just passed the 1,000-application mark.

Parker: I’m the undercover venture capital representative on the panel. I work at AngelList. We do something crazy and different in venture capital in that we help people get started as investors, so it’s a novel way of getting into VC.

But, even as a venture capitalist, I spend most of my time telling founders that I talk to not to raise venture capital, because it’s taking an option off the table. Often, there are either better ways long-term for their business where they get to own the whole thing. And I’m particularly excited right now because in the last couple of years, there’ve been a bunch of different models coming out of the woodwork to meet founders where they’re at that are better options. If venture capital is great for you, do it. Raise it. It’s awesome. And if it’s not, you should definitely explore these other options and see what works.

Karen, I’d love to start with you because I know you do a lot of advising of startups, and you’re a founder and CEO yourself. What are your top two to three considerations when you’re talking to founders about what options they should pursue?

Karen: It’s definitely about whether you have a business or not, and whether you have a product that people want. That’s the first thing you should be thinking about before you think about funding. A lot of people just completely miss that step, especially people who are in a bubble – the Valley, New York, coming out of business schools, working at the big tech companies. We’re all into thinking that to kill it and to be a successful entrepreneur, you need to raise venture capital. That’s just BS.

You have to have a product or service that people need or want. You have to be solving a problem that is actually a problem, not a made-up problem or not a thing that you just want to do because you’re passionate about it. So before we even talk about funding, we really dig into the problem you’re solving. What’s the product or service that is going to solve the problem? How are you going about it? If the person’s already kind of there, and they’ve got revenue and traction and maybe some beta customers, then it’s like, “Okay. We can talk about funding.”

We see this on iFundWomen as well. We’ve got thousands of companies that have crowdfunded and 1% of them have gone on to raise VC. Most people don’t go on to raise VC because they either prove that there isn’t demand for what they’re doing, or it’s just not going to work, or they’ve got to iterate, etc. The people that actually go on, typically, will go to loans as their next step. So we’re really that first stop on your entrepreneurship journey to get your business going, to figure out how to monetize your product or service, to figure out what you need to build or not – that’s a big thing we coach on. We have a whole coaching program at iFundWomen that’s, obviously, on funding, but a lot of it’s on just business basics, like if you’re thinking about raising money, how to structure, how to set up your cap table, how do you think about the stock, how do you think about choosing a cofounder.

The number one thing that we get asked is how do I find a Co-founder. That is the number one hottest topic that we get asked. So the start-up journey before you even get to the funding, I think, is really our sweet spot on top of then sending them along to crowdfund.

On the topic of crowdfunding, are there patterns that you’ve seen and the kinds of businesses that tend to do well on your platform or similar platforms?

Karen: The entrepreneurs who do well are the ones that have the biggest professional and personal networks and that are sellers and marketers, and people that have a well-honed pitch who go out, they live it, they love it, 1,000 times a day, and everyone knows that they’ve been doing this thing. They had a blog, or they’ve been building their product, or they’ve been tinkering in their 20% time, or they’ve been doing this since day one, it’s their passion.

They’re legit entrepreneurs in this thing, and they’ve been talking about it for a long time, so that when they launch their campaign, people aren’t surprised. People are like, “Oh, finally. She’s doing it . Good. I’m going to support her. Here’s 100 bucks.” It’s about legitimacy. It’s about building your network. It’s so much about marketing.

It’s not about the sector. There are certain hot sectors right now. IRL is the future, and the future is happening, as evidenced by this experience. People are craving human experiences, so the founders who are building coworking spaces, community spaces, IRL events where people can be together, that is the theme and kind of the white-hot space on iFundWomen across what we’re seeing.

Dr. Roshawnna, I’d love to talk a little about debt and when lending platforms are the most viable options for entrepreneurs.

Roshawnna: The truth is that most women are building non-high-growth companies. Most of the people who come to us have IT consulting companies and gyms. They’re in the fashion industry or in hair care. And they have great cash flows.

The wonderful thing about lending is that you don’t have to give up equity to get the money, so it’s perfect to go to a lending option when you actually have the cash flow and know how you’re going to allocate those funds to improve the financial position of your company. So just like every other kind of capital you receive, you need to know what your use of funds will be and how that can improve your business.

Most of us haven’t heard of debt-based crowdfunding. Can you talk a little bit about what that is and what that means for our audience?

Roshawnna: It’s similar to donations in that that you have to hone in on your marketing skills and use your community. But you actually add a financial return to those supporters of your campaign. So you’re going to offer anyone who invests in your company a rate of return over a period of time.

The first woman who launched on our platform had over seven figures in sales, and she wanted to close very quickly, so she offered people a 20% return for a one-year investment because she needed the money really quickly. She closed in just a couple hours, of course, because that rate was really hot, but she was actually factoring some of her invoices. So she saved 60% on her cost of capital, and that’s why she wanted to do it very quickly. She was able to use that money to open up some of her cash reserves and hire someone really quickly so that she could get another contract that she wanted to start immediately. And so going through that whole financial process and knowing what makes sense to you, how are you going to use your money, is really, really important no matter what you do. But that is a requirement for a debt-based platform to be really honed in on your financial model and your cash flows.

How does your platform change the investor mix for entrepreneurs? What kind of investors are flocking to the platform to invest in the businesses?

Roshawnna: A lot of investors know that women are undervalued and are a better investment opportunity. We’re more likely to repay any debt that we have. We actually care about money and being good financial stewards, in general, and so anyone who’s smart enough to know that walks through our platform.

Parker, what are some of the most exciting options you’re seeing that are non-venture, as the undercover venture capitalist?

Parker: There are a bunch of new debt products that are exciting if you have cash flows, if you have a real business. So I’m looking for like a 1% chance of a really unreal business. But if you’ve got a real business, you can finance it with cash flows, with customers, there are now options like Earnest, and their model is “We’ll loan you money. You can pay us back and own your whole business, but if, in the future, you decide to raise venture and this thing turns out to be something that can scale, then we’ll take equity and convert, and we’ll just be another investor on your cap table.” Those models are great because they provide optionality.

The conversation I have on an individual basis with folks is that the hardest part is you’re going to go out and talk to investors, and even if you are a venture-scale business, you’re going to get 200 “no”s before you get $1M. Sometimes, those people are just all wrong. Sometimes that feedback is really right, and you need to hear it. The hardest part is being honest with yourself about the opportunity and the options. That’s where you’ve got to hear the good feedback and ignore the bad feedback and look at these different options and sort of say, “Really, where am I at? What’s the market? Am I too early? Is this just not a fit?” and find the option that’s the intersection of what you want to do and what the market is going to allow your business to do.

I’d love to talk a little bit about syndicates because that term is thrown around, and I don’t know how many people in this room know what that actually means, so we have an expert here.

Parker: Yeah. I don’t even know what this word means [laughter].

The word syndicate – which we use at AngelList in a different way than other people – traditionally means when you raise a venture round, there’s almost always a collection of people involved, and that’s often referred to as a syndicate. So, of course, we said, “Hey, let’s use that word, but let’s use it in a different way [laughter].”

I run an AngelList syndicate, which means I go out and find good companies, and then I write up a deal memo, and I send that out to my backers or LPs, and they say, “Yeah, I want to do that deal,” or, “no, not that deal.” But really, all it is, is I do each deal as what’s called “special purpose vehicle” or SPV. You’ll hear this term. It’s just a venture fund with one deal in it. We just like to make it sound fancy. So that’s what AngelList ultimately does. But it’s really a product for you as an angel investor who wants to get leverage on your capital more than use a founder who’s trying to raise money.

What’s the best fundraising advice you’ve ever given?

Karen: I’m dogmatic about crowdfunding for cash to prove demand for what you’re doing. I’m on my second start-up. My first start-up was a spectacular, fabulous failure. And we crowdfunded as a Hail Mary to make payroll for the first start-up, which is where I started becoming a lunatic about why crowdfunding should be the first stop on the funding journey. But the idea that we’re wasting so much time chasing equity around that may never happen or going into debt before you even have a business is crazy.

So my best piece of fundraising advice is, if you are a brand-new, early-stage, pre-revenue company, it doesn’t matter what sector you’re in; crowdfund for cash, and make sure you have a business that you are going to stick with and love. And then your next step can be VC. It can be loans. It can be whatever. But don’t go into debt funding your start-up because 92% of them are going to fail.

Parker: My advice is to make sure that you set the terms and you’re in control of who you accept capital from. So many of us have been offered money from people who give us the heebie-jeebies. You don’t have to accept capital from everyone. You don’t have to. It’s not the end of the world if you turn people down. And so no matter what the decision is, just make sure it’s right for your business, it’s right for your vision of your business, it’s right for you personally.

Roshawnna: I think I said, “Right tool for right job.” But a piece of advice I give to founders that I think is useful is that you get a lot of “no”s in the process, and the thing to remember, that I’m looking for that one great company, and it’s really hard to know. So I get one shot to say yes or no to you. It’s a really high-stakes thing for me, but there are an infinite number of people like me. So you get the “no”; you move on. You take the 200 meetings. You just ignore the ones that are bad and find the people who are going to believe in you because all the “no”s don’t matter. You just need enough “yes”s. Don’t get discouraged through that process. 200 “no”s is totally normal, and I think people don’t realize that.

And on the flip side, what’s the best piece of fundraising advice you’ve ever received? And I’m curious if you took it after you received it.

Karen: What Parker just said. I worked at Google and YouTube for 10 years and was not used to hearing “no”. I won two OC awards. Everything I did was fabulous, and it did not prepare me for entrepreneurship at all, which is why my first start-up was such a fail because I was like, “This is so different from working at Google. Wow, it’s so hard to run your own company.” And no, I didn’t take any advice the first time around. I literally took no advice. I’m like, “I got this. I know what I’m doing.” So I guess the advice is listen to the advice because they’re right.

Parker: It took me a while to accept this advice, but the best that I received is that the most important thing is to take care of your personal energy. You’re going to receive a whole bunch of rejections. You’re going to receive ups and downs and go through ups and downs. But if you can be neutral and be happy in your own skin, then it doesn’t matter. We have to enjoy this journey that we’ve decided to embark on, and if you’re always upset and feeling like you’re less-than all the time, you’re not going to enjoy it. So take care of your personal energy no matter what.

Roshawnna: So you’re kind of selling a really bad product. Right? People don’t want to buy it. And you’re just struggling, being pushy, following up aggressively, saying, “No. This is a really great product.” And so the best advice I’ve gotten is just to get out of my comfort zone on that and be really aggressive. And I always smile when founders just keep emailing me, and they keep– it’s like it’s on me to say no. Until I do that, just keep harassing me to invest in your start-up. So I appreciate that when I see it in founders, and I think you’ve got to feel like you’re not being a jerk if you’re just trying to get to a decision from that investor.

Question from the audience: Does crowdfunding, debt funding, or syndicates take your equity? How is this different in each scenario?

Karen: For iFundWomen, it’s a rewards-based crowdfunding platform. We do not take equity. You’re selling your product, your service, your mission, your vision, your side-hustle, your dream, the fact that you dog walk, anything that we can monetize. And we will find anything that you can monetize because this is my superpower [laughter]. We will monetize whatever you’ve got in exchange for cash to fund your start-up. So no equity exchanged at all. It’s cash.

Roshawnna: EnrichHER also does not take any equity, but the investors are repaid principal and interest on the loan.

Parker:  AngelList is boring in this way in that it’s traditional venture taking equity and so, like I say, the right tool, only if that’s what you want to be selling and is the right fit for your business.

Question from the audience: When should a founder stop to take their finances seriously when in the red and not see it as another thing to just push or a hurdle to overcome?

Roshawnna: Finances are always important because you need to know how you’re going to stay in business. The number one job of a CEO is not to run out of money. Right? So if you’re in the red, you need to make sure you’re out of the red by the next day. Get on it.

Karen: It’s fine to be investing in your business. And if you need to invest more than cash flow will allow, that’s great. That’s actually what equity financing is good for. If you’re buying a customer, and it takes six months to break even, but you’re going to make a lot of money because they’re going to stay with you for six years– the faster you grow, the more money you “lose.” If you can get debt to finance that growth, that may be the right option, but often that ends up being equity very early. That’s where it can be a win-win because you’re selling 10% of your company, but you’re making it 50X bigger. You’re going to come out on top there.

Question from the audience: Are there positive or negative implications in your Series A, B, C down the road if you do debt investing early in an early round?

Roshawnna: There are both. In terms of debt, some investors don’t like to see any debt in the balance sheet, so some of them will ask you to just pay it off before they proceed to the next round.

Karen: Investors tend to love rewards-based crowdfunding because you’re not putting anyone on your cap table, and you’re proving demand for what you’re doing – it’s a positive proof point. I have investors calling me all the time, asking, “Who are the hot founders? What are the trends?” We are becoming deal flow, frankly, so investors love rewards-based. They do not like equity crowdfunding because you have 100 people on your cap table. It becomes a bit of a mess, so it’s important to distinguish between the two.

Parker:  I don’t think it really matters.

When you’re going for a Series A, the folks you’re talking to are going to ask, “Is there a 1% chance that this could be a $1B company? And I don’t care if it’s a 99% chance that it’s a 0.” How you get there and what those data points are are just going to feed into answering that question. So if debt keeps you alive, that’s great. We can always pay it off later.

Where people often do something that can be good for some businesses but aren’t as good, particularly in Series A, is they’re not leaning into growth over sustainability. And that’s a valid decision to make. But that Series A investor is asking the question, “Can I get this thing to $100M of revenue in three or four years?” which is a very different question from, “Is this is a good business that’s going to thrive and be sustainable?” So whether you’re validating the market with a rewards-based thing or taking debt, I don’t think that matters. In the case of crowdfunding, often that investor is going to say, “Do I want to go through the headache of cleaning up this cap table?”

You can also create that problem in other ways too. You can have too many seed rounds, and you can do all sorts of funky stuff. Talking to people about what your milestones need to be at two years before you need to be there is going to help you make sure that when you get there you don’t get any nasty surprises.

Karen: iFundWomen just closed our seed round, and I’ve been thinking about, “What do we do for capital between seed and A? Do we take some debt on?” I’ve been talking to our investors, and, actually, they seem to think it’s cool because it’s non-diluted capital. Right? And if we’re putting it towards growth and marketing, it hasn’t seemed to be negative.

Parker: I was just going to add a similar story. One woman who’s just closing her seed round now, she actually did get some funding from us two weeks ago because she wanted to have more time to finalize with her seed round investors. It really helped her not to stress out while this process is concluding, so there’s a time for it.

Can I ask how you secure the debt? What happens if they don’t pay back the loan? Because there’s venture debt, right, which can be a little bit scary.

Parker:  We do typical debt collection processes, but we don’t go after any equity in the company.

Roshawnna: What I would say about venture debt, which typically isn’t available this early, is sometimes venture capitalists are scared of that because the venture debt folks and venture capitalists are misaligned. If you have a little bit of venture debt and a lot of equity and you mess up, the venture debt people take the whole company, and they sell the pieces, and they’re just worried about getting their money out. That makes us a little bit nervous.

But if you have solid-unit economics and a good business, it can be a really attractive way of financing growth without diluting the company. And that’s good for your investors too because raising more equity capital costs us money like it costs you money.

Question from the audience: How do we find cofounders?

Karen: You date before you get married. You date before you get married.

We talked about how IRL is the future, so community and going to events and really getting to know your sisters in the hustle. This event should happen all the time, and joining communities, women’s-focused coworking spaces, whatever, getting to know people and starting to work with people.

My two co-founders worked with me at my first failed start-up, and then we decided, “Oh my God. We’re going to pivot to this other thing.” I was like, “We can pivot, but I’m only doing it if you ladies come on as cofounders.” We had worked together for two years. We dated. We committed. And now we’re married, and it’s two and a half years later, and we couldn’t be happier. But you need to work with people. You need to work with people and get out and meet people. Everyone’s looking for a cofounder.

Roshawnna: Similarly, I found my cofounder at an event like this. I was speaking, and she came up to me at the end and said, “I want to join EnrichHER.” And she’s been with me for the last year and a half, ever since that day.

Parker: The dating advice is right.

To add something that may be another tool in the toolbox, it’s so hard when you break up. And sometimes you don’t have the luxury of dating if you want to get going now, so you can say, “Look, come on. Let’s work together. Let’s have equity that’s not necessarily 50/50 today. If this works out, we can always adjust it over time.” You see companies go back and retroactively give people cofounders’ titles, and that’s fine. It’s just reflective of contributions. So if you don’t have time to date, just think about, “Okay. Well, what’s going to happen if it doesn’t work out? And whose company is it? And how are we going to break up?” Sometimes you have to do that.