Kim Folsom knows what it means to be a Black woman entrepreneur. Even after founding and running seven successful businesses, she still feels “like a square peg in a round hole,” she says.
Yet Folsom is representative of what it will take to use capital in innovative and transformative ways to create broader systems change. Her latest venture, Founders First, explores the use of an alternative investment structure to aid in closing racial wealth gaps. Folsom supports under-funded, service-based small businesses to access the capital they need to grow.
Founders First does this using a revenue-based financing model as a promising alternative to traditional methods like venture capital and bank loans. Revenue-based financing (or “RBF”) is an alternative funding model that mixes some aspects of debt and equity, and that can be acquired quickly and repaid by the business based on their monthly or annual revenue targets. RBF is structured as a loan, but returns are tied directly to the company’s performance, which is more like equity. Like debt, this means there is no dilution of ownership and control since RBF investors are not purchasing a stake in the company.
Folsom says that this RBF model works well for businesses without many assets, which frequently are service-based businesses. Founders of color are more likely to start service-based businesses because they have fewer assets to put into a company, due to the historical and existing barriers in place for people of color to accumulate generational wealth. These businesses that Founders First serves traditionally do not have many financing options for growth.
Folsom and Founders First have found success in this innovative model. The businesses in the Founders First portfolio have seen a 65% increase in revenue, over half have developed new revenue streams, and have created over 400 jobs in total.
Folsom says her success with RBF “show[s] the doubters that there is value in this type of market.” Because of the tie to revenue, the model encourages investors to engage more fully in the business operations and support them when there’s a slowdown. During the beginning of the COVID-19 pandemic, cashflows slowed, but there was heightened interest from investors in helping the businesses improve their sales.
As a fund manager of color, Folsom struggled to raise her capital for the same reasons the companies she supports struggle. There is a perception that they are a “riskier” investment, despite Folsom’s track record of success. That, coupled with less wealth accumulated within communities of color, makes it more difficult for people like Folsom to raise the capital needed.
“It takes four times as long for fund managers of color to close a fund,” Folsom said. “Systemic issues are much more significant for fund managers of color. Majority-led [white] funds are created from their wealth. These fund managers have likely launched a company, and then they have a network of people to help that company get acquired. This is a huge wealth event for them. This wealth is then put into their first fund, and they can get another $3 million from someone else in their network. [Fund managers of color] don’t have the big exit of capital to run against.”
The alignment in mission and purpose not only made Founders First a compelling investment for the Blended Catalyst Fund but also offered Living Cities a valuable reference for further development of the Capital for the New Majority team’s investing body of work. Folsom said that the investment from Living Cities helped validate her model and bring others on board to support her work.
“Systemic issues are much more significant for fund managers of color. Majority-led [white] funds are created from their wealth.”
Ultimately, Folsom hopes that the RBF model will become mainstream as a way to help businesses that are somewhat in the “shadows” right now, unable to access traditional financing and grow accordingly. She likened it to a person only being able to play little league baseball, and never being able to “go pro”.
“My hope is that what we are doing with Founders First will be like what Elon Musk did with the environment and electric cars,” said Folsom. “There’s lots of focus on tech-related things in investing, but not the mainstream businesses. Because of systemic issues [entrepreneurs of color] can’t start tech businesses, but start more mainstream types of businesses. These businesses aren’t going anywhere just like electric cars aren’t going to go away.”