He Raised $120 Million In Debt Capital To Build A B2B Hub To Provide Financing To Entrepreneurs

In a recent podcast episode, we delved into the world of non-dilutive capital and entrepreneurial ventures with Keith Harrington, a seasoned investor and co-founder of Novel Capital.

Keith’s journey from a suburban Kansas City upbringing to becoming a key player in the venture capital world is nothing short of inspiring. This blog post captures the highlights and lessons from his remarkable career.

Kevin also talks about the meltdown of Silicon Valley Bank and how they successfully helped people raise more than $100M in equity and debt. Listen to him reveal his experiences with deploying capital for startups as an investor before transitioning to the other side of the table.

Listen to the full podcast episode and review the transcript here,

Humble Beginnings in Kansas City

Keith Harrington’s roots are deeply embedded in Kansas City, a place he fondly recalls despite its fluctuating sports fortunes. Growing up in a typical suburban setting, Keith’s childhood was unremarkable in many ways, yet it laid the foundation for his entrepreneurial spirit.

His early memories include the Kansas City Royals winning the World Series in 1985, an event that, while significant, didn’t foresee the impact he would later have on the city’s entrepreneurial ecosystem.

The Detour from Medicine to Entrepreneurship

Keith initially harbored dreams of becoming a doctor, enrolling at the University of Kansas with high hopes. However, a challenging chemistry class soon redirected his path.

After experimenting with various majors, including Political Science and Psychology, he found himself immersed in the burgeoning world of startups, starting with a local ISP in the 90s. This early exposure to the dynamics of small, ambitious companies ignited his passion for entrepreneurship.

Keith was introduced to the idea of a very small company trying to grow and punch above its weight. He learned a lot about early-stage companies and building a customer base.

Lessons from the Dot-Com Bubble

Keith’s next significant experience came at Birch Telecom, a startup that saw meteoric growth during the dot-com boom. The company raised a ton of money from blue-chip investors around the country from 1998 through 2000.

However, the subsequent bust and a Chapter 11 bankruptcy filing were humbling experiences. Keith watched as the stock options he and his teammates were counting on went from millions to zero in a very short time.

The date April 24th of 2000 left a lasting impression on his psyche. At that point, the company was gearing up to go public.

Despite the turmoil, Keith gained invaluable insights into corporate development, M&A, and the realities of startup life. His hands-on involvement in these transformative projects, often without formal qualifications, honed his skills and solidified his commitment to the entrepreneurial journey.

Transition to Venture Capital

The transition to venture capital came unexpectedly. After completing his degree in finance, Keith joined a state-funded life sciences fund guided by a former mentor. Despite his initial lack of expertise in life sciences, Keith thrived by focusing on the people behind the ideas.

He went from working in the technology and engineering group to eventually doing corporate development, helping with M&A, and assisting with the integration of a couple of companies. These were transformative projects and very inspiring.

Keith quickly learned that the success of early-stage investments hinged more on the team’s capabilities and persistence than on the idea itself. He got exposure to different kinds of board members, investors, private equity people, and VCs and enjoyed the opportunity to interact with them.

At that time, Keith had no idea what venture capital is. But he remembers being captivated by the concept and by the thought processes of the people he talked to.

Life Sciences Investing at KBA

Sometime in 2009, a guy with whom Keith had worked at Birch Telecom contacted him to tell him that he had taken a role leading investments for a state-funded life sciences fund. He offered Keith the opportunity to join him in the project.

Keith remembers his initial misgivings since he didn’t know much about life sciences or early-stage investing. However, his friend believed in his ability to figure out what he didn’t know much about.

Keith continued working there for six years, made a bunch of interesting investments, and learned a lot about early-stage companies. His job was to support early-stage companies with investment. He also learned some important lessons during his stint.

Keith candidly admits that the first lesson he learned was that he shouldn’t have been advising entrepreneurs since he had no idea what he was talking about. The second thing he learned was that the quality of the idea is critical in early-stage investing.

However, even more important is the people who are going to be implementing the plan. The focus should be on the team and their capability to execute, iterate, and keep going. And their persistence to actually achieve success.

Betting on the jockey rather than the horse is how VCs think. Keith had to learn to think that way because when he first started working in early-stage investing, he would think a lot about spreadsheets and models.

However, he quickly realized that nothing ever worked the way that the spreadsheet or the model said it would. But, aligning with the founder or a team of founders who had grit, capability, and persistence and were able to execute that’s when interesting things would happen. Essentially, it’s all about the team.

Transitioning Out of Venture Capital

His stint at KBA came with valuable insights that Keith carried with him. After listening to entrepreneurs talk about their ideas, business dynamics, and metrics, he needed to align them against the narrow approval criteria he had. He spent a lot of time turning down capital requests.

For instance, entrepreneurs would have a million dollars in revenue with a growth rate of 30% year-over-year and some amount of profitability. But they would still not be venture-backable. Around 40% to 50% of startups had a real business and a shot at building something meaningful.

That’s when Keith started to explore the idea of coming up with a capital solution other than venture capital. He researched how to fund more entrepreneurs more broadly with some kind of tool that’s going to actually help them grow. Solutions other than factoring or working capital finance.

Keith mentions that he is a Kauffman Fellow, and when working in venture, he was invited to a seminar, a design session day at their headquarters in Kansas City, to talk about funding small companies.

Learning About the Concept of Microfinance

The conversation was about microfinance and the idea of unlocking a trillion dollars of capital for early-stage companies and entrepreneurs who don’t typically see equity capital. At this meeting, Keith met a couple of people who would change the course of his trajectory.

He met a guy at a firm called CIM who funds other funders. The firm provides capital to lenders and other kinds of capital providers for entrepreneurs. Their goal is to create more capital in the ecosystem and new, generally non-dilutive forms.

Keith also met a couple of entrepreneurs who had taken on a form of financing called revenue-based financing. Initially, he didn’t know much about how it worked but he quickly caught on the concept and was excited about it.

On leaving the meeting, Keith was determined to build a revenue-based financing firm. He went out in Kansas City, and over the next 60 to 75 days, he had two or three meetings a day with investors, entrepreneurs, lawyers, accountants, and anybody who would talk to him.

At the end of the day, Keith was convinced he wanted to raise a revenue-based financing fund and fund a bunch of entrepreneurs.

Founding Novel Capital

Keith’s journey eventually led to the founding of Novel Capital, a fintech company providing non-dilutive capital to B2B software companies.

Partnering with Carlos Antequera, who had faced his own challenges raising capital for his ed-tech business, Keith developed a model that leverages company data to determine appropriate loan sizes.

Carlos had ended up selling his business to VISTA equity partners, but it took him about seven years to find an equity partner who would write a check that was meaningful enough for him to really help him grow.

Over coffee with Carlos, Keith knew he could have provided him with a revenue-based financing loan, which would pay back maybe 1.5x or 1.75x or whatever over three or four years.

Eventually, they ended up starting Novel Capital in 2021, which has since raised significant debt and equity, demonstrating robust growth and solid execution.

Keith and Carlos take company data and use it to underwrite a business and determine the size of a loan that is useful and appropriate for the companies that approach Novel.

The Novel Capital Business Model

The Novel business model is to lend funding and build new tools for entrepreneurs. Keith and Carlos are leveraging their insights and turning them around for the CEOs that they lend money to. That’s how they help them make better capital decisions.

The premise is that getting a loan and equity is not always the right answer. Novel’s goal is to be a one-stop shop for insights and capital. To date, the company has raised more than $120M in debt to deploy to the entrepreneurs that they fund.

In addition, Keith and Carlos have raised a little over $15M in equity for the company itself to support growth, new initiatives, and software development. Keith explains that the fundraising journey is similar to any entrepreneur’s journey.

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The duo has a pretty great network in fundraising circles and knows a lot of ECs. They have been able to show solid execution since the beginning, solid growth on the loan side, and also solid product development.

Keith and Carlos are releasing a new product or feature every couple of months. And that’s what got the VCs that invested in Novel’s latest round super excited. They see that it has strong credit standards, a strong portfolio, innovative software, and a business where the revenue flywheel is running.

In short, Novel is growing quickly, and now is the right time to take on growth capital and really run with it. Keith admits that at the onset, neither of them knew much about debt capital, and learning about it was one of the hardest things he had to do professionally.

Keith and Carlos had to learn how to be credit guys out on the fundraising tour and how to talk the credit language. He remembers noting down questions investors asked him on Evernote and telling them he would get back to them with answers later.

However, the duo learned a lot through the process, which helped them become better lenders and a better steward of the capital that they have been able to raise.

Navigating Challenges and Crises

The collapse of Silicon Valley Bank (SVB) in recent years was a significant event that Keith vividly recalls. While Novel Capital had minimal direct exposure, the crisis highlighted the importance of having reliable, non-dilutive funding sources.

Keith and his team acted swiftly to help their portfolio companies navigate the turmoil, reinforcing the value of Novel Capital’s offerings. They were able to do some cash movement and cash protection quickly.

Novel also engaged with the companies in its portfolio that were struggling and helped them navigate the crisis. It helped companies survive the upheavals, come out the other side, and thrive. This period saw a surge in demand for their services as entrepreneurs sought stable and trustworthy capital solutions.

Novel Capital has a strong track record and an excellent reputation in the market. Keith and Carlos spent a lot of time making sure that they were always doing right by the entrepreneurs that they served.

As a result, they have seen a significant uptick in demand and a substantial uptick in originations. And that’s been sustained over the last 15 months.

Building a One-Stop Capital Resource

Keith’s vision for Novel Capital extends beyond providing loans. He aims to create a comprehensive resource for entrepreneurs, offering insights and advice on making informed capital decisions.

By helping founders understand the nuances of different funding sources, Keith hopes to prevent the kind of detrimental mistakes that can derail promising startups. He aims to help entrepreneurs answer their fundamental capital questions like:

• What kind of capital do I need?
• When do I need it?
• How should it be structured?
• Who should I get it from?
• What should the terms be?
• Who’s a good person to take it from?
• Who’s not a good person to take it from?
• How do I stack this stuff up?
• How do I make it work for my business while building value?

The information is complicated, and without a great network or a whole bunch of mentors who can help them think this through, entrepreneurs are in trouble. It’s easy to make bad decisions that can kill the company.

As Keith explains, giving entrepreneurs a single spot, a single source of insights, advice for capital, and a place where they can actually get capital at the same time is absolutely critical. It can be game-changing for a company. This is why they are building the tools that can provide that data.

It helps them work out what kind of capital they should raise according to the purpose and why they need it. For instance, working capital financing or invoice financing.

Advice for Aspiring Entrepreneurs

Reflecting on his journey, Keith emphasizes the importance of action over perfection. His advice to aspiring entrepreneurs is simple yet profound: “Just go. You’ll figure it out.”

He acknowledges that overthinking can paralyze progress and that real learning comes from navigating challenges in real time.

Keith Harrington’s story is a testament to resilience, adaptability, and the power of seizing opportunities. His experiences offer valuable lessons for entrepreneurs and investors alike, underscoring the importance of perseverance and the right partnerships in achieving success.

Novel Capital continues to be a beacon for startups seeking non-dilutive funding, driven by Keith’s unwavering commitment to supporting the next generation of entrepreneurs.

Listen to the full podcast episode to know more, including:

• Keith Harrington transitioned from aspiring to be a doctor to a successful entrepreneur and investor after discovering his passion for startups in college.
• Early experiences with startups during the dot-com bubble taught Keith valuable lessons about growth, crisis management, and corporate development.
• Keith’s venture capital career began by focusing on the strengths of entrepreneurial teams rather than just the ideas they pitched.
• Founding Novel Capital, Keith created a unique model for providing non-dilutive funding to B2B software companies based on their data.
• The SVB collapse underscored the importance of stable, non-dilutive funding sources for startups, leading to increased demand for Novel Capital’s services.
• Keith aims to make Novel Capital a comprehensive resource for entrepreneurs, helping them make informed decisions about various funding options.
• Keith’s core advice to entrepreneurs is to take action and learn through experience, emphasizing that perfection is less important than progress.

 

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