For our 29th episode, President & Chief Strategy Officer Ethan Whitehill chats with Keith Harrington of Novel Capital about lightning bolt moments, taking smart risks over a flying leap, and why equity is the most expensive form of capital.
Ethan Whitehill: Hello everyone. Welcome to our podcast, “To the Point.” I’m Ethan Whitehill, president and chief strategy officer of Crux, the “un-agency.” We produce this monthly podcast to bring you thought provoking conversations that get to the crux of it and help entrepreneurial brands fuel growth. Our guest for episode 29 is Keith Harrington. Keith is the co-founder and COO of Novel Capital, which provides non-dilutive capital to B2B SaaS companies in the US. Novel has provided more than $100 million to more than 150 customers and has raised more than $130 million in venture capital and debt since launching in 2021. Keith is an active member of the prestigious Kauffman Fellows, founder of the Revenue-Based Financing Network, and host of the RBFN podcast, which brings together alternative capital investors to share knowledge and improve access to capital for entrepreneurs around the world. Prior to Novel, Keith was co-founder and GP at Fulcrum Global Capital, a venture firm focused on ag tech investments across the US. And before that, Keith was a managing director at KBA where he made early-stage venture investments in tech and life sciences startups. Keith, welcome to the show.
Keith Harrington: Thank you, Ethan. It seems like that’s a really long bio and I apologize for that.
Ethan Whitehill: No, you know what? I absolutely love it because the deeper you go it just gets better and better.
Keith Harrington: Well, the deeper we go, the less I have to talk, which is great.
Ethan Whitehill: So, you and I had the pleasure of doing a podcast with the roles kind of reversed not too long ago, but for those who aren’t familiar and maybe didn’t listen to us, what is Novel Capital?
Keith Harrington: We are a FinTech. We are founded here in Kansas City. As you mentioned, I’m co-founder and COO. Our whole goal is to change the way that founders fund their businesses and their growth. And so, we are providing non-dilutive capital, which is just a fancy way of saying debt capital to early-stage SaaS and software startups across the country. As you mentioned, we’ve provided a little more than $100 million to over 150 companies in the last three and a half or four years, and really built what we think of as a debt product that is perfectly suited for early-stage software businesses and for the complexities of early-stage software businesses and the founders that run them. And in doing so, we’ve also built a FinTech platform that actually takes the data of our customers–their financial data, their data from their banks–and that’s how we actually make our underwriting decisions. It’s pretty algorithmic. And what we try to do is provide a very quick and easy experience from first contact to hopefully funding.
Ethan Whitehill: So, from there, you also have a platform called Venture Match. Tell us a little bit about that as well.
Keith Harrington: Yeah, so my co-founder and I are both Kaufman Fellows. Neither one of us are as prestigious as the program. I think you described it as prestigious. We are both Kaufman Fellows and so we have a great VC network, really a global network of VCs. And one of the things that we realized is as we are providing capital to all these entrepreneurs around the country, we are getting a lot of inquiries about, “hey, do you guys do equity?” And the answer to that is always no, we don’t that have that on our radar. It’s not what we’re built for. In fact, we started Novel as a way to supplement equity alternatives in the market. And so, what we realized was, given that we have this great network and we ourselves have a lot of experience raising venture capital, maybe we can help these entrepreneurs even when we’re not providing them debt capital, maybe we can help them ease the path to equity.
So, we’ve built out on our platform a way for our customers to get matched seamlessly to VCs for whom they’re a good thesis match. And so, you know, a company will say, “hey, I want to raise equity.” And our platform will automatically match them to the VCs around the country that are on our platform. And then they can request an intro and it’s a double opt-in kind of a thing. Data is only shared when the company says, “yes, I’m okay with that.” And, and it’s working really well so far.
Ethan Whitehill: And that makes perfect sense because a lot of the companies that you’re working with, you know, they’re trying to scale and grow and they’re looking for that flexible capital option, and you get them to the next step. You kind of say, “okay, here’s other partners that can take you from here.” And so, talk about non-dilutive capital for those who may not understand that concept.
Keith Harrington: Yeah, so, you know, capital comes in a lot of different forms. The easiest way to think about it is that you have capital that is dilutive, meaning it is capital that is provided in return for a share of the equity of your business, ownership in your business. And that comes with a bunch of different terms and conditions. And some might call them strings like control provisions and maybe an investor needs to be on the board if they’re providing equity capital. And then there’s another kind of capital that is non-dilutive, which can be in the form of debt, which is what we provide. It can also be in the form of grants. We don’t do grants, but there are a bunch of different kinds of non-dilutive capital. We believe that there is a point in a company’s evolution when they’ve gotten past that initial product market fit, where it makes sense to find non-dilutive capital because it’s cheaper. It’s substantially cheaper than equity capital.
And if you know what your business is, you know what your product is and you know how your market behaves, it’s the perfect kind of capital to use because you’re not selling part of your business to get to that next growth milestone. So, what our capital is best suited for is a company with let’s say $500,000 or $1 million in revenue. Their product is out in the market, they understand their sales motion, they don’t have to have it perfected, but they sort of know what it looks like, and they have a good understanding of their unity economics. And once their unity economics are positive and they can layer on a little bit of debt capital with an interest rate and still be profitable, then that’s when debt capital and non-dilutive capital in general is a good option.
Ethan Whitehill: You said something really important because equity is the most expensive form of capital
Keith Harrington: Asymptotically expensive. Yes.
Ethan Whitehill: Because it becomes exponentially more valuable over time.
Keith Harrington: It absolutely does, and that’s something that I think a lot of entrepreneurs–it’s one of those things that nobody mentions to an entrepreneur, right? We’re all taught as entrepreneurs, you got to go out and raise angel money, you got to go out and raise venture capital, but nobody says it’s infinitely more expensive as you are more successful, right? It’s just, as you become more successful, that capital gets more expensive. And that’s great if you’re going to have a giant exit, great for the investors. Maybe not necessarily for you, but it can be a challenge for companies that aren’t growing at 300% a year and just need some capital to help them grow at a reasonable cost.
Ethan Whitehill: So, let’s say you have a concept and maybe you’re not going to grow 300% a year, but you know you’re going to grow. When do you know you’re ready to take on, you know, some debt capital and you need that investment?
Keith Harrington: It sounds like a really complicated question. I don’t think it’s all that complicated though. I have the benefit of having been thinking about this for a number of years. It kind of boils down to this. If you have a good understanding of your unity economics, if you can look at the revenue that you’re going to get, your CAC, your customer acquisition cost, and look and see that you’re going to be net positive based on your current unit economics. And then let’s say you take a loan for $100,000 and that that loan has a certain interest rate. If you can, on a unit basis, still pay for that loan and still be positive–still net positive–at the end of your unit economics, math, it’s a great time to take on debt. It really is a function of “can you continue to grow while you’re still seeing dollars drop to your bottom line and still service the debt that you’ve taken on.” It’s not, I just want to–sort of as a supplement–it’s not, in my opinion, a great idea to take on debt when you haven’t really proven out your product market fit and you don’t understand your unit economics because that’s where you see, you know, maybe you get a loan, but it’s difficult to pay it because the product isn’t as profitable as you thought it was.
Ethan Whitehill: Right. You’ve got to get your model right. You have to have faith in the model. And it’s a good time. So, and I know that’s probably some of the criteria that you look at when you’re making a decision, but you also focus on a particular niche. Tell us about those companies that you invest in.
Keith Harrington: Yeah, our niche is actually pretty broad. So, we look at B2B SaaS, B2B software companies around across the United States. We don’t have a particular vertical that we really focus on, although I will say that we do have a concentration of EdTech businesses. My co-founder Carlos Antequera was CEO of a business called Netchemia that was a company in the EdTech space. And so, he’s an expert in the space and has a great network in EdTech. So, people, when they’re raising capital, it’s almost like an affinity group. They’ll be like, “hey, wait a minute, I heard that Carlos is doing something interesting with capital.” And, and so we have a lot of great EdTech companies that we’ve had the opportunity to fund. Aside from that, though, we really are totally industry agnostic. What really matters to us is the unity economics that I mentioned before. And are you growing? Are you a company with recurring revenue? Are you growing? You don’t have to be profitable, you know, can we see that you’ll get to profitability or sustainability while you’re a customer of ours. And usually if we can get conviction on those kinds of questions, then we can usually find a way to provide some capital.
Ethan Whitehill: So, good time for a shameless mutual plug. So, full disclosure, Crux is actually in a relationship with Novel and we are looking to help those SaaS and tech companies, you know, advance their cause through debt capital financing specifically to fund marketing efforts. And, you know, Keith, if you want to walk us through, how did the peanut butter and chocolate come together in that situation?
Keith Harrington: Yeah, it’s a really cool story. I think. So,when Carlos and I first started Novel, this was back in 2017 when we were having our very first conversations. I don’t remember who, but someone introduced me to Melea, Melea McRae, the founder and CEO of Crux. And I met her, had a nice conversation with her and we sort of, you know, said, well, maybe someday we’ll work together. You know, we’re going to be funding companies. We weren’t funding companies yet. We were just thinking about it. Maybe we can help fund companies that you guys are going to help grow. And it was one of those things, you sort of put a bookmark in it and then I’ll get back to it and then you sort of forget about it because there’s a million things going on.
And then we both ended up in the same room about six months ago. We’re both on the board of a local economic development organization called Enterprise Center of Johnson County. And after the meeting we were talking, and I was telling her about where we were with the business and how we were funding companies and why we were funding companies and the kinds of companies that were being very, that were very successful with us. And it just totally matched. She was like, well, those are the companies that we’re helping every day. And I said, “well, do you think it would make sense if we helped pay for that?” And, and it was really quick from there it was like, okay, let’s get the teams together and try to put something on paper. To me it makes perfect sense, right? I mean, I said earlier that the companies that do really well for us are the ones that are thinking about and investing in sales and growth and marketing. Well, that’s what you guys do. So, when companies are looking for those kinds of services and they need a little bit of outside capital to fund it, we’re the perfect option because that’s what we like to hear. We like to hear that CEOs are trying to grow. That’s where the rubber meets the road.
Ethan Whitehill: And in our prior conversation about this, you know, what’s interesting is we see a lot of entrepreneurs, they have three challenges, right? It’s capital. It’s marketing. And it’s sales. And this allows us to address all of those and kind of give them the rocket fuel they need to really get off the ground with their concept.
Keith Harrington: And it’s interesting. I think it’s a very interesting thing too, because I’m sure you’ve had conversations with founders who are really, they’re just trying so hard to grow and one of the things that they’re thinking about with capital is they think they need more money than they actually do. So, we see founders come to us and say, “I need a half of a million dollars. I need a million dollars.” Okay, what do you need? “I need three salespeople and two marketing people.” Well, you don’t need that much money, we can scale down the ask. Let’s really talk about what it is that you need to pay for your investment and growth. And then you’re getting what you need and then you’re going to be able to maximize the return on your investment. And that’s one of the things that we’ve also learned is we’ve learned how to have those conversations to help really zero in on what is it exactly that you need. What are the hires that you need to make, what are the investments that you need to make? And that’s why I think this is such a good fit because you can put on paper, “here’s exactly the amount of money that it’s going to take to get you to grow the way that you want to grow.” And then we can come in alongside you and finance that growth.
Ethan Whitehill: Yeah., and the fractional model that we provide is really efficient use of capital, because you don’t have that headcount, you have very specific things that you’re accomplishing. So, knowing the interesting uncertain economic environment we’re in, what predictions do you have for capital? You know, because you hear a lot about, “oh, there’s billions of dollars in private equity waiting in the wings, just ready to invest” and all that. So, what do you see for, you know, companies that are in the early stage looking to really grow and scale right now?
Keith Harrington: So, we are still an early-stage company building and growing ourselves, right? So, I am saying this not just from the perspective of a provider of capital, but also from the perspective of someone who’s raised capital and needs to deliver results to, to his investors. Stick to the fundamentals. I think it’s that simple. Every time I raise my head, and I look around and I read the Wall Street Journal or anything else, my eyes roll back in my head. I have a minor panic attack, and I don’t know what to think. What I do know is if I just focus on the fundamentals of our business, then I think we’re going to be successful. And I think that’s the only thing that you can do. Sell your product. If it’s not working, if sales is all of a sudden, a challenge because the world is doing what the world is doing, then maybe you modify your approach and just keep iterating until you can keep moving that ball down the field. But man, predictions, it’s hard for me to have any. I wish I felt smart enough to make a prediction, but I would say what we do, what we do every day is we focus on the fundamentals.
Ethan Whitehill: I’m not a financial advisor disclaimer there. But I do know there is some perspective that people need regarding the cost of capital. You know, even when I hear about mortgage rates today and, and people kind of wringing their hands, I remember what I paid 20 years ago.
Keith Harrington: What are mortgage rates today?
Ethan Whitehill: They’re almost pushing towards 7%. They’re like 6.8% or something like that, I think now.
Keith Harrington: But that’s cheap!
Ethan Whitehill: I remember my, I remember my 8% loan.
Keith Harrington: Yeah. I got my first house in Mission Kansas, and it was an 8% loan 20-some-odd years ago. And that was like the best possible rate. So yeah, I mean if you take the long view and you put everything in perspective, the cost of capital goes up and down. When you have a need in your business and you need capital, you just have to find a way to match that need to the kinds of capital that are out there. And make sure that whatever capital you take is going to be accretive to your business. Make sure that it’s going to help you grow.
Ethan Whitehill: So just shifting gears a bit. From your bio, I think it’s clear you’re a little bit of a serial entrepreneur. You’ve founded or co-founded several, several companies along the way. What is it about this space that interests you so much? Well, you’re clearly addicted to it.
Keith Harrington: It’s funny that you say that. I don’t think of myself as a serial entrepreneur, and I guess maybe I could–or I should. I just get enamored and then frustrated by problems. And then when I get frustrated with a problem, I really like to try to solve it. It’s that simple, for me–Novel in particular. I was out as a VC and I was talking to all these entrepreneurs who we just never would’ve been able to fund. Right? There’s a company with $1 million in revenue and 30% growth, and they’re flirting with profitability. To me, that sounds like a great business. But as a venture capitalist, that is completely uninteresting. What I found really frustrating was that I would talk to these founders and I didn’t have anybody to refer them to. I couldn’t send them to a friend or anybody who had an answer for them.
And they would ask me, and I just didn’t have an answer. And so, I started thinking about how can I not have an answer for these entrepreneurs? And just through a series of lightning bolt moments, I would call them. I landed on the concept of revenue-based financing. That got me all excited about, “okay, there are alternatives to being able to fund entrepreneurs out there.” But this particular space, you know what, why is it so intriguing to me? It’s because early in my career here in Kansas City, I was hired by a company–a startup at the time–called Birch Telecom. And I was at that company when it was a startup, and then when it was taking on growth equity. And then we went through two bankruptcies. It was just an insane roller coaster ride.
Keith Harrington: And I thought–I was young–so I thought, “ooh, a venture capital is very sexy.” And so, I decided that that’s what I wanted to get into. And eventually I finally got there in the late ’00s, I guess. And once I got there, I realized it’s not the end all, be all. It only solves a very small problem of the capital ecosystem. And then that is the realization that brought me to Novel, which I don’t know, is still something that I can’t stop thinking about.
Ethan Whitehill: So, you had to make a decision to take a leap at some point then. And what advice do you give to entrepreneurs who are, you know, they’ve got the idea they want to go, but maybe they’re a little tentative.
Keith Harrington: There are people out there who are just happy to risk it all, all the time. Right? And I am not one of those people. I, you know, I didn’t take a flying leap. I have never taken a flying leap into anything. It’s always been calculated. So, it looks on the outside and my wife laughs because she’s like, “oh man, you just love taking risks.” I’m like, “actually, I don’t love taking risk”, but I will take risk if I feel like I can mitigate it. If I feel like I can understand it and I can see how to take risk off the table as I continue to build and as I continue to progress toward whatever my goal is. That’s how I would advise people to think about it. You know, it is incredibly risky to take the leap and start your own thing, but if you can sort of systematically think about, “this is the first great risk and this is the second risk,” somewhere along the way it’s like, “I’ve got to be able to pay myself as a risk.” If you can figure out how to take those risks off the table one by one, then I think you’re in a good spot and you’ve got a good mindset.
Ethan Whitehill: I think that’s a great approach. I think my experience was similar. It’s, yeah, take a risk, but do it smart.
Keith Harrington: Yeah, exactly. Exactly.
Ethan Whitehill: So that leads us to our secret question.
Keith Harrington: Oh no.
Ethan Whitehill: So, you’re going to take a risk on answering my secret question right now.
Keith Harrington: Flying leap. Here I go!
Ethan Whitehill: Okay. So, I have my 20-sided die. I’m not going to influence the role. Let’s see–12. Oh, this is a good one. You have to wear one color for the rest of your life. What is it?
Keith Harrington: It is easy. Blue. Absolutely. Yeah, absolutely. Look, I got blue pants on. I’ve got blue socks on. I’ve got blue on all on my jacket and on my shirt. I would say 80% of my closet is blue. That’s perfect. It was very easy for me.
Ethan Whitehill: Well Keith, thank you for joining us today. If folks want to learn more about Novel Capital, how do they find you?
Keith Harrington: Find us at www.novelcapital.com. You can find me at Keith@novelcapital.com. And you can find me on LinkedIn as well.
Ethan Whitehill: Thanks a lot.
Keith Harrington: Absolutely. Thank you, Ethan. I really enjoyed this.
