My journey as a founder began as an investor and, before that, as a kid who sold Beanie Babies online. I was interested in buying and trading from the time I was old enough to understand it. I devoured books on Warren Buffett and by age ten, I was buying stocks.
It’s hardly surprising that I went on to start Capital, a company that helps investors choose the companies they invest in based on hard data. But the path to founding my own company was a long one, and even with my experience in investing, not an easy one. While I faced some unusual challenges such as lawsuits and even a death threat, I also faced an issue that many founders stumble upon:
How do you get funding when investors are making subjective, not objective, decisions?
That’s precisely what Capital has set out to solve.
How Small-Scale Investing Works
After college I took a job at Intuit as one of two product managers for their Quicken product. Working there, I got to see what it was like inside a real FinTech company and understand the nuances of the industry. A couple years later, I left to work at DFJ, a venture capital firm. My experience at Intuit turned me into the FinTech guy at DFJ. I was always on the lookout for good FinTech companies to invest in.
I discovered there was a clear pattern among the FinTech companies that got off the ground: they all made very small loans with very narrow criteria. To get the capital for those loans, these companies were piggybacking off of existing hedge funds and pension funds that were already following strict guidelines, such as only loaning to people within a narrow range of credit scores and with specific interest rates. Founders realized that if people were already comfortable loaning under those terms, they’d be willing to do the same with a new company so long as they offered 1% or 2% higher returns.
It was a straightforward, systematized process. If you met the criteria, you got the loan. If you didn’t, you didn’t.
But funding companies was different.
Why Is Funding Companies Any Different?
Often in venture, there are no transparent systems to determine who gets funded and who doesn’t. Founders get anywhere from one to ten meetings where different questions are asked every time. In my experience, some founders would come in with a strong, thoughtful deck filled with everything we needed to know; others had great ideas, but needed the information forcibly dragged out of them.
The system was broken. Good companies didn’t get funding because the decisions were more subjective than objective. I heard stories of founders who were turned down by investors for being too fat, not dressing in a certain fashion, or for presenting in other ways that didn’t fit the model of an “ideal founder.”
These issues have manifested themselves across the industry. VCs often say “Don’t contact me directly. I’ll only speak to you if a mutual friend introduces us.” In practice, this means that viable companies with capable founders lose out on funding because they didn’t go to the right school or network with the right people. People who don’t live in investing hubs don’t get funding. People who don’t meet an investor’s expectations personally don’t get funding.
And no one was trying to fix this system. Why would they? The people in power are those getting funding through this exclusivity and subjectivity. Of course, this is not to say that those in power had personal failings that led them to not correcting it; rather, it’s a systemic issue. The system doesn’t incentivize incumbents to better it, so they don’t.
But there’s a societal incentive to correct this broken system. Companies that are having the greatest positive impact on the world — those that make life more efficient, happier, or easier — could be funded more sufficiently if funding was an objective process. Good companies would no longer fall through the cracks. And companies that shouldn’t have been funded, wouldn’t be funded.
Consider WeWork, a company that vastly overextended itself. The issue with WeWork was not that it was a bad idea; in about 20 cities, WeWork was a great fit. But WeWork was funded to expand to hundreds of cities. People in cities like Lima, Peru weren’t interested in paying 3x market rents to use a beautifully retrofitted WeWork space, but because WeWork was funded to do so, they expanded to Lima anyway. Think about how much money was lost to other projects because WeWork was overfunded. With an objective system, WeWork may never have gotten more funding than it was actually positioned to use. That money could’ve gone to other projects that needed the support — projects with founders who may not have been charismatic or good-looking, but who had a product that customers loved.
Projects that could change the world would be given the capital to do so.
Like with FinTech companies, funding would be allocated by looking at the numbers, not at whether the investor likes the founder’s looks or not. While FinTech investments are smaller and less complex, it turns out that evaluating companies through data is easier than it seems.
Accessing the amount of data needed to evaluate a multifaceted investment such as a company seems difficult, but companies are already well-poised to meet this need. More and more companies are using cloud systems of record, meaning their banking, accounting, payroll, and more are all available digitally. This data could offer a powerful glimpse into the health of a company and its long-term viability.
But evaluating this data in individual pieces is time-consuming and not feasible for most investors. Those who do look at the numbers are likely to pull it into Excel, which breaks at eight megabytes of data. Meanwhile, the average company that gives Capital their data is handing over nearly 40 gigabytes.
So when investors evaluate a company with data on their own, they’re missing out on 99.998% of the data available because they don’t have a way to process it.
This is why Capital created a tool that could suck this data in from its various sources and put it into one cohesive dashboard, allowing investors to see all of a company’s up-to-date data at a glance. With Capital, the investing process would be easier for investors and founders alike. Investors could feel more confident in the companies they chose to invest in, knowing that they’ve been able to evaluate them not by their founders but by their metrics. And founders could worry less about networking and more about running a successful company.
I thought financing Capital would be relatively straightforward for two reasons:
- I worked at a venture capital firm, so I not only had connections but the knowledge of what investors were looking for.
- I’d watched dozens of FinTech companies receive funding at DFJ and elsewhere, so I knew that companies in a similar niche should be able to get funding.
That couldn’t be farther from the truth.
Virtually every investor I spoke to declined to fund the company. I never expected such resistance from firms that had previously funded other FinTech companies, but Capital struck differently. Investors I knew personally suddenly seemed distrustful. There was near-universal skepticism towards a Capital-as-a-Service (CaaS) company.
I spent two and a half years raising $100M by going to family offices one at a time and trying to get funding. The process was arduous, and I even had to deal with a lawsuit that was ultimately dismissed as moot a year and a half later.
Eventually, I pulled through, started Capital and I couldn’t be more proud of our team and its accomplishments.
But I remind myself that even though I was in a better place than most when it comes to getting funded, I still had a tough time. It didn’t matter that my company was similar to existing companies. It didn’t matter that I had connections. Investors were skeptical, which meant several years of hustling for funding that I could’ve spent actually building the company.
I’m not alone. Thousands of other founders with strong ideas are wasting precious time trying to scrape together funds. At Capital, that’s precisely what we’re trying to fix.
Today, more than ever, investors and companies need the tools to make deals digitally and remotely. The future of investing isn’t in networking events and pitch meetings; it’s in hard data, which will allow investors to make more informed decisions about the companies they choose to support.
While CaaS is not the same as FinTech, the parallel remains: if we can deploy capital through the use of objective criteria and data, why can’t the same go for larger investments?
That’s the future of Capital.