Founders First Capital Partners brings a different approach to investing in diversity

Kim Folsom came rose through the engineering ranks in the ’80s and’ 90s before founding the first of six companies, three of which were successfully closed. Today, she is the founder and CEO of Founders First Capital Partners, a San Diego-based startup investment firm that uses a non-traditional approach to funding called income-based investing to invest in historically under-represented founders.

Unlike most Silicon Valley venture capitalists, Founders First isn’t looking for the next unicorn. Instead, Folsom is looking for founders from historically underrepresented backgrounds – women, people of color, LBGTQs, veterans – with solid ideas and decent, if not spectacular, incomes and growth, who have struggled to secure successes. external investments to help develop their businesses.

It focuses on B2B companies, usually in the tech arena, that have a complementary product and services that you could turn into recurring subscription revenue. And with the added help of the founders, coaching and advice transforms the business into an engine of recurring revenue growth.

Instead of buying shares in the startup in the hope that it will pull out at some point, Folsom wants to partner with these companies by lending them money, usually between $ 50,000 and $ 1 million, with an average investment of $ 300,000. As they are successful, she succeeds by being paid back over time, based on monthly income with a profit cushion for her business.

I caught up with Folsom last fall to discuss her professional background and why she decided to start a different kind of investment company for people who live and work in areas that are often invisible on Sand Hill Road.

Dreams of startups

Folsom, who is a black woman, became an engineer in the 1980s. She cut her teeth at companies like NCR, where she helped design ATMs, which were cutting edge technology in the early days of the early years. IBM PC. But her goal has always been to run a business, which she knew would not be possible in the companies where she worked.

“I spent the [early part of my career] trying to figure out how I could learn enough in the different companies I worked in to be able to go out on my own. And over time, in the dot-com era of the mid-90s, I started my first business, and I started six before launching Founders First, ”she told me.

She raised $ 30 million along the way and learned what it takes to start a business: valuable information she can share with the companies she finances today.

Folsom didn’t have many role models in the business world when it started out; there were few women, let alone women of color, in engineering roles in the 1980s. She also did not see women become leaders of big tech companies until the late 1980s. 90, when Meg Whitman was appointed CEO of eBay and Carly Fiorina CEO of HP.

Even today, only 8.2% of CEOs in Fortune 500 companies are women, and women of color occupy just 1% of CEO positions in the Fortune 1000, according to data from Women Business Collaborative.

When it comes to women of color running startups, few got venture capital funding when they started, and today the numbers are not much better. Crunchbase found in the first half of 2021, only 1.2% of the $ 147 billion in venture capital funding went to black founders. When you reduced that data to Black Women Founders, the number dropped to a tiny 0.34%.

After her experience as a founder, she wanted to set up a company that helps people usually excluded from this process to facilitate their access to sources of capital.

“The background of various founders is the same – whether they are a woman, a person of color, a military veteran, LGBTQ or in a low and moderate income area – it is difficult to develop. a business and having access to smart money so that you have a positive result of creating wealth, ”she said.

And that’s why she launched Founders First in 2015.

Give back

Folsom knew that she had this rich experience as a startup founder who set up businesses, raised funds and successfully retired, and she wanted to find a way to help others start businesses and get all the same benefits, especially people who were excluded from the world of venture capital finance.

“Having gone through this several times with my own experience, I felt I knew enough to be able to try something, but I wanted to structure this in a way that took advantage of what I knew of the market I was going to serve.” , she said. .

Folsom recognized that the exit offered a reasonable way for investors and founders to make money, but she also knew that the process was not very efficient and did not work for everyone, as many viable companies simply could not not meet the income and growth requirements of most conventional venture capital firms.

She decided that by using revenue-based funding instead of equity, she could build her business around a new class of founders and create an effective investment vehicle for her partners, while also helping those founders to. become much more successful businesses than they could possibly be. theirs.

“There wasn’t that prospect of unicorns in the dot-com era that there is today. But the path to getting to a unicorn business means you’re going to have to [ignore] a lot of really good companies that could have such a big impact on the markets, ”Folsom said.

Rather than unicorns, Folsom says she seeks to build “zebras.” In a 2019 article on Zebras Unite, an organization building a community of zebra founders, zebras were described as follows: “Because there are fewer financial incentives for investors to fund less focused startups. on the more traditional ways out of selling or IPO. , it can be difficult to attract investors. “

Folsom says that is precisely why she tries to help the zebras, because “they can have a significant impact and create wealth both for the community they serve and for the founders.”

Finance the fund

When it launched in 2015, Folsom struggled to find investment partners despite its impressive credentials. Initially, she says most investors thought the idea of ​​investing in various founders using the income-based model was too unorthodox and they didn’t want to take the risk. She started by investing her own money, then went to people who had invested in her in the past.

“You know when I started Founders First and said I wanted to focus on funding various founders and wanted to use a model that was more relevant to business owners, people thought I was was crazy. So I had raised funds in the past, and my first investors… were largely people who bet on me and had bet on me in the past, ”she said.

She did a proof of concept in 2017 with 10 companies, and when it worked, she started looking for a Series A. Before that, however, in 2019, she got a $ 100 million credit facility from Community Investment Management, an organization that promotes inclusion. through loans, a business that seems to fit Folsom’s goals perfectly.

The company has won a Series A totaling $ 11 million this year, including $ 9 million in March from the Rockefeller Foundation and the Surdna Foundation, followed by an additional $ 2 million in November from the WK Kellogg Foundation, Pivotal Ventures ( a Melinda French Gates Company), the Schultz Family Foundation and Arc Chicago, LLC.

She says a growing awareness of institutional racism in the wake of George Floyd’s murder has certainly helped a company like hers try to increase diversity by investing to raise capital. Yet while the company is based in San Diego, like all of its startups, it says no California institutional investor stepped in to participate in the round.

How it works

Folsom is looking for companies that are beyond the ideation phase and are already making money and with some potential for growth with the right fits to the business model. She says founders need to have the right amount of experience, expertise, and a commitment to growth. In addition, the founding team must be open to surrounding itself with new people who can contribute to this growth.

She said they assess investments in companies based on the strength and predictability of their income, but never ask founders to set up credit or personal assets. The company’s income serves as collateral.

The financed company repays the “loan” on the basis of an agreed ceiling amount over a specific period, generally three years. “For Founders First, that cap can be 1.35 to 2 times over that time. The company makes monthly payments using a percentage of revenue. This percentage is agreed upon which can vary between 2% and 10% [of revenue], “she explained.

As a success story using this model, it offers Klarinet Solutions, which provides managed services for Microsoft SharePoint and Office 365. The company had a six-figure average revenue that had been stable for three years before joining the partnership. with the founders. . The founders have helped create new sources of revenue, including recurring revenue, resulting in 2.5x revenue growth in two years, while doubling the size of its staff.

Folsom tries to use its expertise and experience to help other companies like Klarinet access funding to help them grow and expand their businesses in areas that are typically overlooked when it comes to technology finance.

She wants people to understand that helping various founders is not a zero-sum game, certainly not with all the capital available now in house hunting. She understands, through a lifetime of experience, that the current climate fostering diversity and inclusion could change rapidly. Folsom says she has seen opportunities open up in the past, only to close after a year or two, and she hopes it will be different this time around.

“The window opens for a year, 18 months, or two years and then it closes, and [I’m hoping that] this time, when the window is opened, it will not only be a [few people] coming out on the other side. We have to be able to get thousands of people to do it. “

Perhaps as companies like Founders First proliferate to help historically underrepresented groups access more investment dollars, it will help keep that window wide open, creating wealth and jobs in communities that have. been left behind in the past.

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