Financing Your Business with Hitha Palepu
Financing Your Business with Hitha Palepu
As as start up founder, I’m always open to speaking to potential startup founders to hear their ideas and share my thoughts on next steps for them and what types of financing routes they may want to consider. After having three such conversations recently, I realized it would be really valuable to memorialize some of these thoughts for other potential founders, and when I thought of who I wanted to have this conversation with, my first thought was my good friend Hitha Palepu.
Hitha is not only an entrepreneur, but she’s also an angel investor who’s invested in multiple start ups, including The Financial Gym. Hitha joins me today to share her thoughts on process of starting and financing a business. This is a valuable conversation for anyone thinking of pursuing their own business.
What are we drinking?
Hitha - Water
Shannon - Black Cherry Schweppes
Podcast Notes
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Hitha’s dad started a company, gave her 50% of it, and said it was up to her to decide if it was 50% of something big or 50% of something small.
Hitha was a very early fan and customer of M.M.LaFleur and she sent them an email to ask more about the company, and she ended up beginning a friendship with the founder. When Hitha found out that they were raising money, she asked if she could invest. Now they have almost 20 investments in their portfolio to date.
You need to do the work to figure out if something could actually be a business. An idea is one part, but more important is execution. Is what you are building something people will pay for and how much?
This starts with talking about your business idea and getting some feedback. The founders Hitha invested in all started small. One of them started a blog before she started a newsletter and she was still working full time while doing this.
You need to try your idea out with the most lean, basic, bare bones version you can scrabble together on your own.
Shannon had a lot of detractors on The Gym. Many people told her it was a bad idea, but the people who said they needed it in their lives outweighed the negative comments. Have more conversations. Your detractors may not even be your customers. “Everybody” is not your market.
If you are starting a business and you are obsessed with it, you will find a way to get the capital you need to build what you are building, outside of venture capital. It may be through angel investors, a small business loan, a grant, crowd funding, etc. There are so many ways to raise capital.
You need to understand if there is a demand for your product or service, build that product or service, and test it out before you think about getting investors. There must be some proof of success first.
In the early days, there is so much testing that needs to be done with your idea, before you get into raising capital. If you are still working your business idea out on the back of a napkin, it probably isn’t the right time to get investors. Investors are not there to help you step by step.
Capital should fuel the idea that you have tested and proven. You need to know what you are building, who you are building it for, and how you are going to communicate it to the market. You need to have these things figured out before. Women get funded off results, not ideas.
With crowd funding, if you can communicate what you are building with enough passion and zest, with clarity, you will be able to raise a decent amount of money, that is non-diluted, to get going.
Start building relationships with people who can be your first investors. Build your network first.
First, what money do you have personally and what money do friends and family want to invest. Don’t assume your friends and family will want to invest.
Second is crowd funding. Direct consumer products and real estate do well with crowd funding. Healthcare does not do well.
Successful crowd funding comes down to how well you can communicate the problem you are solving and why you are the one to solve it. This is excellent preparation for pitching to investors once crowd funding has gotten you to a phase where you are ready to scale growth and you need a large amount of capital in order to get there.
Third is angel investing, which is usually someone outside of your friends and family network. If you are not a public company, you need to be an accredited investor. These are individuals and it is typically their own money. Sometimes it isn’t about the metrics, it is that the angel investor likes the founder or their idea. Angel investors like to invest in companies they can talk about with their friends and network, or they are going to be your super customer. Check sizes are usually anywhere from a few thousand dollars and up. Typically it is between $25,000 and $50,000.
SBA has some incredible grants for life sciences, or health care, where the requirements are not onerous, such as do you have an idea and do you have a little bit of data.
Understand what is the best way for you to get non-diluted capital for what you are building.
Fourth are family investors. This is in between angel investing and venture capital (VC).
Fifth is venture capital. They expect that about 90% of their businesses are going to fail. They only need about 10% of the businesses they invest in to do really well. They want you to either 10x the growth as quickly as possible or they want you to fail quickly.
VCs need to deliver to their partners, so they are under pressure. They are never happy, no matter the results. They are only happy when the business files for bankruptcy or if you have a positive exit where they make a lot of money. The road between investment day and the exit is very long and painful.
Shannon has been in this process for four years and it has been very challenging to deliver continuously.
When a VC says no or passes, there are reasons for it and they are business reasons. It took Hitha a while to stop taking it personally, but those constant no’s take a while to get used to. You will face rejection and disappointment more than you will ever face the good moments, but the good moments will fuel you through the next set of no’s.
Shannon has had over 300 conversations to raise $9 million.
Taking investment money from your friends and family can put a strain on your relationship. Shannon’s first investor was a former mentor and boss, who happened to be very hands off.
When it comes to raising capital for her company, she is happy it happened the way it did. There were a lot of moments in 2020 where she thought she would have to shut down the company and let everyone down.
If she had to do it again, Shannon would have made more conservative cash decisions. For example, she thought she needed a physical office space when she first started. For any decision you make, it is important to question if you actually need it, especially in the early days.
Don’t let other people deter you from your life’s purpose, just be realistic about your expectations. Even if your business fails, you learned a lot and developed skills along the way. There are so many lessons learned and you need to celebrate that, no matter what point you get your business to.
Takeaway: My biggest takeaway is that the startup journey is a long and bumpy road and the more prepared you are for what lays ahead, the more you’ll be ready to manage the ups and downs of founder life.
Random Three Questions
Would you start another chapter, and, if not, what business would you like to see started?
What is a book you feel like everybody should read? The Idea of You, by Robinne Lee
If this was your last meal on earth, what would it be?
Connect with Hitha
Instagram/Twitter: @hithapalepu
Newsletter: 5smartreads.com
Book: www.werespeakingbook.com
If you have any topics you would like me to cover on this podcast, or if you’d like to get in the financially naked hot seat, I encourage you to email me to Shannon@fingyms.com, or join the private Martinis and Your Money Facebook group, and let me know what you want to hear.
If you are thinking about starting a business or if you currently have one, my team at The Financial Gym has worked with hundreds of founders with businesses of all shapes and sizes. We can not only help you get personally financially healthy, but we can also help your business become financially healthy. If you’re looking for business finance planning or ongoing coaching, I hope you’ll reach out to my team at financialgym.com to get set up today.