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Here’s your program.
Andrew: Hey, everyone, I’m Andrew Warner. I’m the founder of Mixergy.com, home of the ambitious upstart and the place you come to listen to entrepreneurs tell you how they built their businesses.
So how does one speech help change the lives of over half a million people in need? Joining me today is Jessica Jackley. In 2003, she heard a speech which she took as a call to action. The spark that that talk ignited in her became Kiva Microfunds, the peer to peer microlending website which enables you to lend money to entrepreneurs around the world. I invited her here to find out how it went from an idea to a nonprofit that helped almost one million people lend a hand by lending money.
I also want to find out about ProFounder, her startup which enables you to invest a few hundred dollars in a small business. And Jessica, welcome to Mixergy.
Jessica: Thank you for having me.
Andrew: Jessica, I wrote a really long intro there. I looked at that and said, ‘That’s a whole lot of text.’
Jessica: That’s great.
Andrew: So, basically what we’re going to do is find out how you built the first organization and what you’re doing today. I said that Kiva started because of a speech that you heard.
Jessica: That’s true.
Andrew: Who was the person who you heard speak?
Jessica: Correct. So I was at the Stanford Graduate School for Business, actually as staff at first, I’ve gone back since as student and been able to teach some things there, so it’s been are real home for me. I was there as staff, stayed a bit after work and there was guy, Dr. Mohammad Yunus, who was giving a speech about kind of pioneering modern microfinance. I hadn’t heard of the concept before so I stuck around to see what it was about and it really changed the way I saw so many things. And there were three parts to that.
Part One was that he talked about microfinance, which was news to me, that the whole concept was really fascinating and new. An idea that this little bit of money, whether through microcredit, through a loan or in other ways too. You know giving people the option to do microsavings and all of the products and services that are a part of microfinance. That idea was so powerful to me and so that information was huge. [TD] an accessible way. And he talked about, and I don’t want to paraphrase this story too much because it’s so good, so should all go and just watch it yourself if you’re listening to this right now, like push ‘Pause’, go watch some talks by him and then come back. But he tells it in a very accessible way. He talks about being somebody who wanted to figure out these answers to big questions that I think a lot of us about poverty, how to alleviate it, how to work with people who are suffering.
He left the classroom, so to speak, where he was teaching in Bangladesh and walked into a village, sat down with someone and asked them directly why they’re poor and what they needed. And that picture of this amazing, very accomplished person taking a step that was so simple and doable, and that anyone of us could. Like I could stop and talk to the homeless person sitting right outside my office right now, right? And I could actually be a very good listener and hear what they had to say and maybe respond thoughtfully. That picture was so accessible and exciting and inspiring.
So those were the first two things. Microfinance existed, wow. Anyone could start this way, in a very simple straight forward way. And then third he talked about the poor in a way that I haven’t heard anyone talk about before or hadn’t heard anyone talk about before. And really it was an afterthought that they were poor. They were entrepreneurs, they needed these things and he talked about them with such dignity and respect that, again, if freed me from a lot of the preconceptions I had about my own role interacting with other people, especially poor people, and what I could offer and what they needed.
It just changed something for me and I was so compelled that I quit my job a few weeks later and was in east Africa to learn about this microfinance thing myself. So I worked for three and half months with Village Enterprise Fund, a wonderful nonprofit that gives microgrants. It wasn’t even microloans that I was studying, but it’s close enough for me and it got me a foot in the door. So I was there for three and a half months, I interviewed 150 entrepreneurs and got to hear their stories of how they used $100, this grant funding, to start or grow their businesses and it was life changing for me. To keep a really stand from a desire to tell that new story of the poor and of entrepreneurship that was so unexpected to me. And to allow people to really, a way that made sense after hearing such a story to engage. So if you hear a story of dignity and respect, your reaction is not, “Oh, you poor thing, let me give you money and pat you on the back.” It’s, “You’re an amazing business person. You’re an entrepreneur that’s doing all that you can do to lift yourself out of poverty. How can I partner with you?” And so a loan really connotes that.
Andrew: Why? Because if it is just $100 that can have such impact. Why not just say we’re going to get you $100? Why is it so important to get the $100 back?
Jessica: A lot of lenders on Kiva, I think, would say it’s not that important to them. I mean initially I think they would say that. What it does allow is for them to be involved in a sustained way and relend that money over and over and over again. So that’s one really simple thing from that lenders, sort of, usability perspective. But it’s sticky, it keeps people engage and involved and coming back to the site, all those things are great. But truthfully, I think people over time, I hope, do understand that what’s actually happening on the ground. Whether the lender acts as a lender, as a donor, as an investor, that’s one conversation to have, but what actually happens on the ground where the entrepreneur’s receiving a loan and repaying that with an interest rate that’s fair and appropriate and not too burdensome for them of course, that process is a really big deal.
And I think, in my experience, again the connotation there is, you’re a worthy business person, you’re somebody that can do great things with this, and can then pay it back. So this is yours, you own this thing. You have not just been given something that now you’re flourishing and thriving, but you earned this and you have accountability. Like, there’s a mentality that can be really negative when you’re only always, always given what you need to get the step in life. I think we all know this, right? When we work for something, we appreciate and we see ourselves in a different way. What I don’t want to say is the easy quick sort of answer that you hear a lot, ‘Well, it’s good for them.’ You know what? I think it’s good for all of us to have both kinds of experiences. We all have things that we just need to be given sometimes in our lives, and it anyone wants to argue that one I will, it’s an easy one. But we all also, I think, really can thrive, I know I have in my own life when I’m given an opportunity to take advantage of, sort of, feel like I’ve worked for it myself and that now I own that thing. That’s a really big deal.
There’s a whole different conversation to be had her around women entrepreneurs and how because microfinance was created to really serve the un-banks and the people that the traditional financial institutions don’t serve. A lot of people women because there’s such a high correlation with, you know, women not being to own things and being shut out of other, so it works all together. So the idea that women are often the recipients of a microfinance product or service or microloan, is a really big deal. And I’ve seen this with my own eyes and it’s been some of the most powerful experiences of my life, where you see somebody who changed the way they view themselves and belief what’s possible for themselves in the world. It is a really big deal and I think a microloan can do that in a way that sometimes gifts cannot always do.
Andrew: Okay. What I read was the first thing you did was you email about 300 people and you asked them to make a loan. How did you find the people who you were lending the money to?
Jessica: Who we were lending the money to?
Andrew: Right the recipients.
Jessica: So after that initial trip in east Africa I came back and my cofounder Matthew Flannery and I basically just did research and though about it, and made our business plan, and mocked up the site. A basic, basic site, I mean like on three pages at that time about us, here’s a list of people, it was really simple. But we sort of poked around and asked anyone, who would give us the time of day, what they thought. Then we were really ready to start, I went back to Uganda, myself, with a camera and I visited some friends that I had stayed in touch with, entrepreneurs in Uganda. And basically went back to them, took their pictures, put their stories online. I actually did this from a very slow dialup connection in an Internet café in Tororo, Uganda on the border of Kenya and Uganda, a very beloved space of mine and hearts. But we uploaded that information and then, yeah, we stayed on trends and [??], more or less. And that was that. And they stepped up and they provided the $3,000-ish that these seven entrepreneurs needed and we were off to the races.
Andrew: You said that you showed the website, the initial site, to some and got feedback on it. What kind of feedback did you get? How did it help shape that original launch?
Jessica: With the original launch it wasn’t that robust, the feedback, because there wasn’t that much to see, really, or do. A lot of we’re doing was still offline. And I think this is a good, maybe different, plus in here, because there is definitely less about having radical transparency and getting lots of feedback from your users all the time and to be able to every day iterate and refine the thing that you’re doing and get better and better and make those little tweaks. Whether it’s just basic utility things or bigger things, like there’s huge features missing or whatever.
But I remember at the beginning, because it was so basic and we were like we just want to do the first step. I mean we could have waited for a very long time to get a much more perfect website together, but literally was like a page where you could read about us and our bios, a page where I think had [TD] and a page where we listed the entrepreneurs. And so much was manual and offline. Like, it was my grandma giving me cash and then we were wiring this money over. We weren’t incorporated. It was so low tech actually, what was really going on in that first route. So mostly what we did was listen to the things about the stories of entrepreneurs that people loved and were fascinated by. So that’s what we paid a lot of attention to the ways that the entrepreneur updates were received by people who had loaned them money. Like, do they want to learn more about the business, do they want more business updates, do they want more information about how the standard of living was changing, that sort of thing is what we did in the very beginning.
Andrew: So I had Premal Shah on here, who was the president of Kiva for a while, actually he still is I think, right?
Jessica: Mm-hmm.
Andrew: And I asked him the same question that I’m going to ask you. What about the fear of you’re handling people’s money and you want to make sure that you’re handling it properly and that there might be rules in Uganda about how to handle and pass money back and forth, and then landed it in the U.S., did you do any research into that?
Jessica: We did.
Andrew: You did?
Jessica: I’ll go look up Premal’s response too, because Premal came on more than a year into it so Matt and I had already done a lot of initial research and asking questions. And I guess I’d say generally, so what I could do right now is tell you a nice long list of SEC regulations and talk about securities and talk about auditing the goat herder in Uganda and what that would look like. I mean, I could go there, if that’s interesting. What I think the more valuable principal is and the more valuable concept is this, there are a lot of things to be afraid of, of course, there’s always stuff to be afraid of. And yeah, you want to be careful with people’s money and yeah, you don’t want to miss anything that’s obvious or even not obvious and of breaking the law, you don’t want to do that.
You don’t want to do that, but you just ask and when you hear no’s you ask again. You ask, “Why?” You ask, “What about this?” And you figure out ways to get around it. So I talked to an entrepreneur yesterday and he was like, ‘Oh, we had this idea for a site that would do XYZ.’ And she’s like, “But I just talked to my lawyer and he said you can’t do it.” And I was like, “Well, then what did you say?” And she was like, “Well I just, I don’t know. I was done with the meeting.” And I was like, “No. You’re right at the beginning, because then you’ve got to understand the shape of the barrier, the shape and the size of this texture and then figure out ways to get around it or move it or whatever.” Right? So if you start getting no’s and you start getting, especially and God bless them, I’m not anti-lawyers at all, but law can be super intimidating so you really do need to find an ally and someone who wants to be entrepreneurial about it and help you problem solve.
And I’ve found it’s helpful to talk in terms of the vision and the solution and the thing that you want to do. And then you dive down into the actual how-to’s and sometimes it’s the initial strategy that you though and sometimes it’s slightly different, but you don’t need to be stopped when you feel afraid about these big areas on concern. And the ones you bring up are totally valid and we had those fears too.
Andrew: So what was one thing that other people might have stopped at? One piece of feedback or obstacle that might have stopped other people that you found a way around.
Jessica: So at the very beginning I remember people saying, there were too many pieces of feedback, I mean there’s a lot, but one was, “This won’t scale.” It was very hard for people who hadn’t spent time in the field and hadn’t been even to the particular places that we had been, to believe and to really understand that, yeah, a person with a digital camera in the middle of Uganda can actually do some of this stuff. It was hard for people to believe that was possible and it was also hard to think about microfinance institutions without the technology in place at the moment. You know, how they could take a picture of a client and upload that information on a website and also maybe add data, other that that they would normally gather for a loan application and put it on a site. It sounded like it was going to be difficult to scale and too hard and too expensive for microfinancing institutions to use this platform. So that as more on scalability end and then the partnership with microfinance institution ends of things.
The other thing that was very interesting was that we got this what really sound like common sense kind of feedback like, ‘OK. You guys are talking about a 0% loan. So that’s not a tax deductible donation and we all know,’ this was the common sense I’m doing error quotes, okay. They would be like, “Yeah, we all know that people donate at least in part because they get this tax write off. So you wouldn’t get that and it’s not an interest bearing investment, so you’re not going to get $27 back for your $25. So why will people be motivated to do this?” And that was a real unknown and we were trying to do early projections based on, “Well, maybe someone who would donate to a child sponsorship program would want to do this.” Or, “Maybe someone who otherwise would have invested would have done this.” I mean, it’s hard to say but as we sort of ball parked those numbers we looked at all of the above and we had to just cross our fingers and hope that people would like this thing that was in between. And it turns out that at $25 or $50 people are very, very happy to just do a 0% loan and have an amazing experience and then get to lend it again and again.
Andrew: You know what, Jessica, actually the first that I lent to Kiva, I forget what the amount was, but my accountant saw and they didn’t know what to do with it. They said, “You can’t write it off.” I said, “I don’t want to write it off.” They said, “Well, you can’t expense it.” I said, “I don’t care.” It could’ve been more than a couple of hundred bucks, but it was on my business account and they weren’t sure.
Jessica: And at a couple of hundred bucks you were higher than most initial users. Just so you know, we’re talking about $25 or $50 at a time. Right? So you got that pushback too.
Andrew: Yeah, and what I said to them was, “How about you just make it a personal expense like I bought ice cream for $200. Let’s assume it’s never coming back.”‘ They also want to know how they can handle it if it comes back and I said, “Who cares?” I should never have done it through the company. I just happened to do it through the company because we did an event and, I know what it was. It was poker and we donated all the winnings from to Kiva. It was like that kind of thing.
Jessica: A great idea.
Andrew: All right. So you get a few hundred people to try this out with you. They all know you, they love it, they give it a shot, what do you do next?
Jessica: I didn’t have the funding and I my IMIA program at Stanford. So there was no funding or the time to go take another few weeks and go back to Uganda. So we called our friend Moses, who was there and who had worked with us the first time, and asked him to ask them if there were another few businesses, another dozen, another two dozen, that he could start to work with and upload that information they that I had showed him, I had left him my camera. As we had more people show up on the site the word spread very naturally, to be honest with you.
Our friends and family, we encouraged them to spread the word and tell friends of friends and they loved it. They loved what we were doing. They loved the experience so they readily did this and that’s how it began. I mean it literally started as friends and friends of friends and beyond, and very much family too. From there, to be honest with you, we were in the right place at the right time and we got very lucky. We official launched, we took the word beta off of the site and those first seven entrepreneurs were paid by October of 2005. And so at that point we wrote a press release and then the next month hundreds of blogs had written about us. Not out of the blue, kind of because of this press release, but also just because there were a lot of enthusiastic people that were spreading the word, really. And when those blogs started to happen, I mean two of the three most widely read in the world wrote about Kiva at that time in November. So suddenly it wasn’t just our friends and family and their friends and family come to the site. It was tens of thousands of people coming to the site and lending.
Andrew: What were the two sites that blogged?
Jessica: What’s that?
Andrew: Sorry. What were the two sites blogged?
Jessica: Oh, it was Daily Kos and Boing Boing.
Andrew: Okay.
Jessica: Actually [??]
Jessica: I ‘m going to pick up and move and keep talking while I move in there, okay.
Andrew: Okay, sure.
Jessica: Literally we have another interview right after this one.
Andrew: Oh, you do? At what time?
Jessica: Whenever we’re finished.
Andrew: Okay.
Jessica: We’re scheduled for 11:30, so in the next few minutes.
Andrew: Okay. All right. So wait, you said in a couple of minutes is what we have?
Jessica: I had 30 minutes on my calendar for this.
Andrew: Oh, okay. I had us for us for an hour. I didn’t understand. All right we’ll work with what we’ve got.
Jessica: Well, let’s do one thing.
Andrew: Yeah, let’s do it.
Jessica: Is that okay?
Andrew: Yeah. Actually just to make sure that I’m recording what you’re saying in the pause, I’m going to hang up and I’ll call you right back. I don’t want to get . . .
Jessica: Actually, why don’t we keep going? We can go for another 10, 15 and after see where we’re going.
Andrew: 10, 15, let’s do it.
Jessica: Let’s do it.
Andrew: Okay, cool. At what point did you put an organization around it?
Jessica: Well, it depends on exactly what you mean by that. I mean we had people, we had, I mean I think it’s easy and people get excited about it and all, getting incorporated and making a logo [TD] and stuff and that’s great. Do those things it’s wonderful, but don’t let it actually get in the way of doing the thing itself. So we didn’t actually incorporate for a year and a half, or something. I mean, it was a long time. We should’ve done it sooner, but it was a complicated structure and a complicated set of tasks that we wanted to and this international care pre-lending thing is new, etc. So it took a while.
But we had people around us. We had the thing itself going and the other stuff, it gets easier and easier as you go. So it’s great to set up all the infrastructure and framework first, but for us, we took our time getting the other parts lined up. We had a handful of very high net worth individuals that were helping us fund the very early stages. We did a lot imperfectly too, like I didn’t take a salary for two plus years. I didn’t even have a title for a long time besides cofounder, it wasn’t perfect. So that’s what did, I’m not saying it’s the best way to do it.
Andrew: You said we should have done it sooner. Why? Why do you say that?
Jessica: Should have done which part sooner?
Andrew: Should have incorporated sooner.
Jessica: Well, there were times during that phase when people did want to donate a bunch of money and we were limited, because we couldn’t take it ourselves and give them the tax deduction and at $25, 000 or $50,000 that’s a problem.
Andrew: Gotcha.
Jessica: So people are willing, and so we would get up for [??] sponsor and other things like that, but it would have been a little easier had we had our own stuff ready to go, a little more streamlined.
Andrew: Okay. All right. And I said incorporate, but I meant set up as a nonprofit. You also said that you high net worth individuals who helped you out. How did you find them? How did they find you?
Jessica: So one of the best pieces of fund advice I ever got was, if you go into a meeting and you basically treat someone like a means to an end. You know, if you ask for money you’ll get advice and sort of a nice [??]. If you ask for advice you may in the end get money too, and that’s great. And obviously no one’s a means to an end and you and you don’t worry just like ask for advice when you don’t really want it, but we always surround ourselves with people who were very, very smart, and invested, and could give a lot to the vision. We’re initially always wanted them to buy in above and beyond just writing a check. And so, it’s not like our direct friends and family were wealthy, we just were able to start to spread the word and as we needed things we stepped up and asked them for support.
Andrew: How did you get to them?
Jessica: How do I?
Andrew: Were you cold calling? How did you get to the people who helped you?
Jessica: Everyone has friends. Everyone has friends and so we asked our friends and they asked their friends and so it really doesn’t have to with anything special. I also, by the way for the record, I’m a very good stalker. So if I want to meet somebody . . .
Andrew: A very good stalker.
Jessica: Oh, yeah.
Andrew: Give me an example of how you stalked. I love that.
Jessica: [talks to some people in the background]
Andrew: Is that a live interview that came in?
Jessica: Yeah.
Andrew: Okay.
Jessica: Yeah.
Andrew: Cool.
Jessica: [to people in background] So we’ll be quick, I’ll talk quickly.
Andrew: We’ll make it work, ten more minutes. So tell me how you stalked?
Jessica: What’s that?
Andrew: How did you stalk?
Jessica: Oh, yeah stalk, I . . .
Andrew: You’re a good stalker.
Jessica: So I would literally figure out who I wanted to go be in touch with and I would figure out who knew them and if I didn’t know anyone that knew them I would try to work my way out. So for example, let’s say there was an amazing person that I had heard great things about or that I really admired their work or something, I would often just cold call or cold email and just say, ‘Hi, this is me.’ I would always have a very specific ask and if it’s huge you just don’t want to call someone or email them out of the blue and say I want to meet you, I want to talk and have lunch with you and not say why or what and be really general about it. So that’s really good, ‘I want 15 minutes of your time. You’re clearly an expert on like blah blah blah and can I, please, pick your brain for just 15 minutes. Here’s why. Here’s who I am, and here’s a non [??]’ and then keep it really brief.
But the other thing is, I mean, there are literally, you know, you look at other nonprofits, you look at the boards of nonprofits, the advisory boards, whatever, and to just see the people that are involved those. And maybe it’s them maybe it’s other people that are related to them that you think would be interested in that, but you can start to see a community of people that care about the same issues. And the truth is, a lot of that turns opportunistic later, so then you’re well informed about who’s out there and who is the chair of this board and good to know, because maybe in two years you run into them at a conference and can say, “By the way, I know about your work with this and I think it’s great.” So to be informed about who’s who and who’s doing what, you’ll start to put together connections maybe you didn’t before.
And another thing basically like maybe an alum of your school, maybe they’re an alum of your brother’s school, things like that.
Andrew: Can you give me an example of someone who you get through to, because of a cold call?
Jessica: It is such a blur at this point. I mean, I do this all the time, so I don’t know.
Andrew: Okay.
Jessica: I don’t know. I don’t even know the relevance of the [??].
Andrew: Let me ask you this, at some point one of the things that Premal and I talked about in the interview was how exciting it is to know exactly who you’re giving money to, to see the picture, to know the story, to give the money to them, to hear them tell you back that the money came in. At some point you guys decided that it was inefficient, and it is inefficient to do that, and you changed things around. Can you tell me how that decision happened?
Jessica: That’s not true.
Andrew: It’s not? Okay. What happened?
Jessica: No. What do you mean, ‘Changed things around?’
Andrew: Oh, I’m talking about where the local organization would be faced with an entrepreneur who needed money and instead of saying, “I’m going to go put this online and wait a couple of weeks for entrepreneurs in the U.S. or people in the U.S. to send money. I’ll give you the money right now and we’ll put your picture up later.”
Jessica: That was a slow transition. That was a slow transition and I feel like if you already Premal that question then he probably did a good job at answering that . . . [SS] . . .
Andrew: Oh, no, I didn’t actually ask him that.
Jessica: Yeah, in short, as we worked with bigger institutions, that weren’t literally waiting there for the money to show up to be able to lend it and they had some cash reserves, imagine the little steps that could happen. Well, one little step that could happen is they see the thing get funded online and they’re waiting for the wire transfer to come and they have our word that it’s on its way and it will take three days. Well, they have cash in the bank , they can lend it and have three days worth of waiting for that cash, they know it’s coming. Okay, that’s one easy obvious step.
Another thing would be, you can image that going and going and going without going into too much detail and eventually allowing these microfinance institutions to serve the clients that they have and to just be super transparent about, “Look, this person’s already been funded and here’s why, and we would love for this loan to actually be handed off to you, if you want to lend and then be directly connected to this person. Liability and everything else will transfer to you and it will be a real connection. They’ll know that the money actually has now been provided by you.” I think this is probably more of a question for Matt and Premal in the Kiva team, since I have been gone for year and too many startup.
Andrew: But this was a transition that happened while you were there, right?
Jessica: And it happened slowly with many institutions over time and I think we were transparent about it to a degree and continue to be transparent about it today. But what made me frustrated about the way it was handled in the press and stuff, was that it made appear to be that there was no longer a direct connection and that we weren’t being transparent about it. But I was slowly transitioning out at that point so again, I’m not the best person to answer it.
Andrew: Okay. All right. So one last question and then I promise you we’re going to ProFounder and that will be the end of the interview.
Jessica: Actually, okay, I really should hop off this, if we do want to talk about ProFounder at all. I really think we should [??]
Andrew: No, seven more minutes and I promise one last question. But the question is, that there was this sense that you’re giving people online a way to connect directly with the entrepreneur who needs the money and by paying the money the first and then later when the money comes in from the lender sending it to a different entrepreneur who’s in need, but also a different entrepreneur none the less, you do break that connection. There was like an internal conversation about that, wasn’t it? How do you decide to say, how do you decide that?
Jessica: I don’t know how to tell you, I’m just not, I’m not the person to answer this question right now. I was there during the smaller transitions that I described, where there was a direct connection, but again, it’s really straight forward and I think easy to understand. We’re dealing with microcredit, right? People on credit, so if there’s a bank that has cash reserves and knows for sure that the loan is coming in. And by the way there was a time when like 100% of loans, most of the time 100% just get funded all the time, it’s just a matter of timing. And its, so if you know the loan has been funded and you’re waiting for the money to arrive and you front the money. And that’s just one case that I was very much aware of, that I knew was happening when I was there, so that I can easily justify. All the other steps, I just wasn’t a part of those processes.
Andrew: Okay. All right. Fair enough. ProFounder is the next company. What is ProFounder?
Jessica: Sure, ProFounder. I left two years ago to do ProFounder. I was really curious about the needs of entrepreneurs in the U.S., microenterprises as well as small businesses and beyond. And I looked around and saw a few things. I saw small business entrepreneurs and startups being funded in these really interesting ways and it seemed like sort of a dichotomy, there were the Silicon Valley friends from business school, that whole amazing robust community of where you have Standhill Road and you have all these angels and VCs. And if you’re in the know and you’re a part of the right communities you can go access this crazy funding from really wealthy people and institutions, and it’s amazing. And there’s mentorship and advising that goes on and it’s valuable in a number of different ways.
The rest of the country, if you don’t live in Silicon Valley or New York, or Boston, what do they do? As I started and my cofounder for ProFounder, a new company, I started to interview entrepreneurs and understand their journeys outside of Silicon Valley, again whether startups or small business or any other smaller enterprise, small by stage or just by the nature of it. We heard story after story were people would access funding from their friends and family. So every story seemed exceptional. Like the entrepreneur would say it in a way that it sounded like they were patching it together, this crazy thing were they barely got by, but there rich uncle baled them out, or something like that.
Andrew: Or a former boss I’d hear about here in interviews. Yep.
Jessica: Right.
Andrew: Yep.
Jessica: So we would hear these stories, but it turns out that this is ridiculously typical and in fact it’s the norm. So 87% of funding that goes to private companies in the United States today comes from friends and family. It is not banks, it not a line of credit, it is not the loans that we hear about, even SBA loans, which are wonderful. I mean, there’s a lot of really good stuff out there, but the more typical thing is for a community of friends and family types to fund a business.
And so knowing that, we started to look around and say, “Okay. Well, so if that’s what happens, if your dream is to open up a new corner cafe of yoga studio or to do your new tech startup, whatever and you know the that the people who believe in you the most and are willing to invest in you first and take on the risk are your friends and family, how do you get that done?” And then I heard crazy stories, even one of Dana’s classmates at Stanford Business School basically set up a Beta company, there was $500,000 from angels and then they really wanted to include friends and family too, so they had 35 $1000 seats for classmates. It was a beautiful story except that it took them 10 plus months and tens of thousands of dollars to get the deal done, because they were dealing with what we call unaccredited investors. They had to do all this extra legal work and was just so unbelievably complicated and costly in terms of time and money, that we started to say, “Why isn’t this stuff online?”
So in short, what ProFounder lets people do, and that was a really long lead up, sorry. But ProFounder let’s any entrepreneur come to the platform and have every tool that they need to go from start to finish to do their own sort of do-it-themselves fund raising round, whether it’s for seed round or growth capital or whatever. And the can basically create a profile and a pitch for their business and what they want to raise. They create legally compliant term sheets by just answering a few questions about, either how much revenue they’d like to share over the next years, and they decide all those things or if they want to issue stock, they can with a few clicks of the mouse actually have an equity investment option ready to go. I mean, it’s sounds intimidating, it’s not intimidating, it’s really simple and straight forward.
And then what we’ve also done, we’ve spent a year doing this, we’ve mapped all the state laws. So we just tell you what to do, ‘Sign this form, fill out this paper work, send that in.’ And you can include, even, these unaccredited, unsophisticated investors, which are most of the world, in your company. So what we’ve seen, it’s been wonderful. So we’ve seen some success stories already of people raising tens of thousands of dollars from a few dozen friends and family and then even go on and raise other funding later if they want or need to. But that’s what a lot of businesses need first to really get going. And the community is the place to look for that and the place to look for, not just the financial support, but all the other forms of support that they need.
We’ve seen companies already on our site funded by customers, by classmates, by traditional kind of friends and family, and by people all throughout someone’s social network that they might not have thought of initially could have stepped up and been that, kind of , supporter in that way. So it’s been really great.
Andrew: How can unaccredited investors lend money? I thought you had to have a million dollars in the U.S. and maybe . . .
Jessica: That’s lend, invest.
Andrew: Sorry, to invest money. I thought you had to have that a certain amount of money in order to be able to invest, no?
Jessica: No, so to include unaccredited investors, I mean a company could do things, there’s a lot of things they can do. But imagine, to put it in really simple, simple terms, if you want to do a public offering and include anyone and everyone, it’s a really intense process. So must small businesses and startups are not going to do that. To keep it as a private offering of securities there are basically exemptions that you can use. And these exemptions, more or less, if you’re watching this and you’re not a business person and certainly was not just five or six years. The simple way to think about it is this, you use an exemption, basically, to exceptions to the rule. So it is hard to include unaccredited investors, however.
One that we’ve built our compliance engine platform on, and there are other compliance engines that we’re building right now, it’s called Regulation D Rule 504, very exciting title, but basically it allows a company to raise money, up to $1 million in the first year, from unaccredited, unsophisticated investors as long as they are friends and family. So that’s sort of the check on things you should be friends and family, but as I understand it the spirit of that law’s to basically give people assurance that if they want and need different information disclosed, they’ll have a relationship already established to be able to get what they need. And they have sort of already [TD] how should I say? A reputation built up with this community, because it’s with people that they already know. And the definition of friends and family is a fascinating conversation too, but the short answer of that is like, it’s somebody with whom you have a substantial preexisting relationship and we leave that up to the entrepreneur and their and their investors to decide on basically validate for.
Andrew: Preexisting relationship?
Jessica: Yeah. So just like online den or something else, you would say, “Yes, I did [??] business with this person here.” And you validate the thing.
Andrew: Gotcha.
Jessica: [??] a two. And then suddenly you can create a huge network of people that you can reach out to for funding. So it’s not just your wealthy uncle handing that check to you over the dinner table and then Thanksgiving gets weird anymore, you don’t have to do that. And it’s not a full on public market place, like come one come all, I’m going to post my great idea on online financials and everyone will see it and everyone will crowd fund me. No, it’s something in between, it’s kind of community based crowd funding where you can access friends and family and a little beyond that to get it done.
Andrew: Is this the kind of thing where if I have a website. Well, let’s suppose with Mixergy, I say, “For a million dollars I can invest in a beautiful studio and great cameras and all that. I’ll put a half million of my own money.” Can I turn to the audience and say, “If I get 500 people who will each invest $1,000 you’ll get a share of the business?”
Jessica: Well, so there are some asterisks that you and I should talk offline, because well, 500 technically turns it into a public offering.
Andrew: Gotcha.
Jessica: Like common law marriage, you like jump over the line. They’re certain ways you can get 499.
Andrew: So you have 499 and then I don’t have to get a lawyer, then I just came to the site and you can help me organized the whole thing?
Jessica: Yeah.
Andrew: And if it’s me and ten past friends, I don’t need a lawyer, I just come to ProFounder.com and set it all up?
Jessica: [inaudible] and I never want to be quoted on this is like, ‘You don’t need a lawyer.” If you want to engage a lawyer great. What we want to do is provide you all the tools so it’s ready to go. Some people just also get a lawyer to look over things and feel really good about that. But the idea is that we’ve done the legal research. We’re giving you the tools you need and we’re telling you how to comply with law. So, that’s how I’ll say it. Yes, you can do that, I can get stuck with that. I’m serious it would be great, I’d be an investor.
Andrew: All right. I get it completely. I get it.
Jessica: Yeah.
Andrew: Well thank you. The website is ProFounder.com. I love the name. I love the concept. Thanks for doing the interview.
Jessica: Thank you so much. It really is a pleasure.
Andrew: Check out ProFounder, let me know what you guys think. Bye everyone.
