Talking About ProFounder with CEO Jessica Jackley, Part 1

Welcome to Zing Talk, where Benzinga brings you the biggest names and brightest minds from Silicon Valley to New York City.

I'm your host, Alex Schiff. Today our guest is Jessica Jackley, the founder of the microfinance organization Kiva, and most recently the founder and CEO of ProFounder, a peer-to-peer lending platform for small businesses.

Direct Download

Subscribe in iTunes

How are you doing today, Jessica?

Jessica Jackley: I'm great, thank you for having me.

Could you start off by telling our listeners a little bit about ProFounder?

Jessica Jackley: ProFounder is a platform that allows entrepreneurs to raise investment funding from their friends, family and community. First it was several weeks of research, especially legal research, on how to do this effectively, inexpensively, and legally. We basically launched on December 1, 2010.

Kiva was arguably the first mainstream organization of its kind. What sparked this new idea of raising money?

Jessica Jackley: Kiva started…time is flying. It was over six years ago that I was working in East Africa with a wonderful nonprofit called Village Enterprise Fund (VEF). VEF is basically an organization that provides small grants, not even loans, to entrepreneurs within very remote, very rural areas, often served by no other institutions. Many of them are pre-micro loan candidates. Assistant farmers, seamstresses – small, small, actually micro enterprise owners.

As I saw the power of this small amount of money that changed their lives…the financial vehicle was amazing. What blew me away even more was that I was suddenly hearing this new story of the poor and this new story of entrepreneurship that I had never heard before. A lot of what I learned from business initially was from farmers and people doing very simple business activities everyday.

So it was that desire to share a new story of the poor and to share, with my friends and family, the stories of the people I was meeting everyday. Not only people who had sadness and suffering, which is often what you hear from very well-intentioned nonprofits from the typical profile of somebody living in Africa who is poor. I wasn't hearing those stories. I was hearing stories and seeing people's lives that were very much about strength and dignity and these micro loans. These micro loans and micro grants were really empowering them.

The natural question was: how can I stay in touch, and how can we, myself and my co-founder, basically do more of this? How can we get involved and participate? So we set up Kiva as a very basic way to involve ourselves and our friends and families in lending directly to these entrepreneurs.

It was about a year after I had done that work in Africa that Kiva was launched officially. In the first year, we facilitated around $500,000 in loans. The second year was around $15 million total. The third year was around $40 million. The fourth year was almost $100 million. The fifth year – we're, I guess, five and a half years in now – and I think the total amount is almost around $200 million. It's in almost every country around the world at this point. And all of this has been done by little $25 and up loans from everyday people. So this is a beautiful way to connect people and a beautiful way to empower folks all around the world who are doing their very best and working harder than anyone else to lift themselves out of poverty.

That was the inspiration for Kiva, and that was really what turned me on to entrepreneurship, period. That was where I saw it first, and what I fell in love with first.

I read on TechCrunch that Kiva thought its biggest competitor was not another nonprofit, but instead thinks of it as being FarmVille, because it is competing against the same level of disposable income. People could raise a farm virtually or help someone create a real farm.

Jessica Jackley: It's funny. To be very clear, I'm now with ProFounder – I'm not the official voice of Kiva. But I definitely speak frequently about it as a co-founder, from that perspective.

Truthfully, [the story] was a little surprising. I can see where you could say, “Oh, that funding could otherwise go to Kiva.” But at its core, what I hope is that it is not compared to or swapped in for a game. I believe that the most beautiful parts of Kiva are the parts that allow you to learn about a real human being on the other side of the planet – not just someone like the poster child that you often get exposed to, and it's the only kind of person that you get exposed to when you're exposed to through a lot of other nonprofits.

And it's certainly not, I have 15 minutes and $25 and I'm either going to play this video game or help this real person that is in need. Truthfully, while I absolutely love and respect the thinking behind that, I personally would not have compared it to that exactly. But I get the intention and the comparison. It just wouldn't have been the thing that I'd name as the biggest competitor. And truthfully, I think the biggest competitor, and I think this is going to sound a little cheesy, but we've always said the biggest competitor is ignorance, and just people not caring to engage.

What has been the biggest challenge in developing ProFounder's model?

Jessica Jackley: That's a great question. With ProFounder, continue with the theme of, how do we connect people to each other in a way that honors the story and allows participation? We thought that investing was the next step.

With a Kiva loan, you get the money back and there's this statement of equality. You [provide] $25 and you get your $25 back. The fact that there's no interest on that loan – again, there are many people that [helped build] Kiva. It's not just me, it's not just mine. But originally, the idea to provide interest back to people was, again, sort of an intellectual question. But because it was so difficult – there are so many regulations and rules that we would have had to follow had we provided an option for lenders to receive interest, we chose, for that reason and other reasons….[since it's not] a tax-deductible donation, and not an interest-bearing loan, it really paved the way for us to move very quickly and not worry about a lot of regulations that we would have had to worry about.

With ProFounder, we thought – if you want to contribute to the success of small businesses that start around you in the United States, what's the best vehicle? Well, investing allows you to share in the success together. There's a beautiful story around that too, right? As we looked at investments that would provide a return for people, obviously there's a whole separate body of law that deals with that.

The biggest challenge that we faced when we wanted to execute on that was figuring out exactly which tax laws…there are some laws we thought might be relevant. There are securities, regulations, and exemptions that we needed to educate ourselves on. There are all sorts of things. These are the kinds of legal questions we had to ask and answer before we could do this safely, effectively, and legally for people. So that's what we've been doing.

Only now do we have this awesome platform built that allows an entrepreneur to navigate all of the issues that they need to navigate state-by-state limitations on the number of, for example, unaccredited and unsophisticated investors that they can include in their round. Now they can do that. All of the first year for us was making sure we had the correct answer for those questions.

Another part I can tell you about now is what happens with the platform when an entrepreneur uses it.

Basically, an entrepreneur comes to the site and they create a profile. There are four main sections of info that they can complete, and if they have all of the info at their fingertips, it can take as little as 15 to 30 minutes to do. What we find is that many entrepreneurs take several days, if not weeks, and sort of work through getting the right information up there to create their online pitch.

First, it's just basic business information. They also tell their story about why they created their business – some of the same kinds of questions that you asked me in this interview. What motivated you to do this? What is this business about? What brought you to this point in your life, and what is your vision for what you're doing?

Then we ask them about their financial needs. How much money do you need to raise, and what would you use it for if you could raise that money? We ask them to fill out a very simple budget, so that if an entrepreneur says that he needs $200,000 to renovate his café, well, what does that look like? What are some of the line items? They can describe in as much or as little detail as they like.

We also ask what their financial projections are over the next few years. Again, if they just have a number for each of the next four or five years, that does it. If they've been in business a while and they have historical financial data, they can upload that as well.

If and when entrepreneurs want to provide more information for possible investors, they can of course do that.

One of the reasons why financial projections are so important is because our terms are based around revenue share. On the final screen, entrepreneurs are asked to enter how much of their revenue they could share with investors over what amount of time in the coming year to reward those investors. Either give them double their money back or whatever it is they want to do.

So basically, after they [list] how much money they'd like to raise, and after they talk about their revenue goals for the coming year, and they say, “I'd like to share 2% of my revenue with investors over the next four years.” They can delay those payouts, so they can say, look, I'm not gonna start paying out till January 2012. But they name their terms there.

Just with that information, we feed all that information into that beautiful pitch and fundraising site they've created. When that's all up and running and ready to go, we basically allow them to publish their website and make it live. That costs $100, by the way.

When an entrepreneur reaches their raised goal, all the transactions can happen online as well, including signing their term sheet. We store the documents online. They transact online, so all the investors' funding gets transferred to the entrepreneur's account directly. And what's great is, over time, if the entrepreneur would like to, they can pay $1,000 for ProFounder to service the contract. Over, let's say, over the four years that the business will be sharing its revenue, ProFounder will, every quarter, withdraw the correct amount from your account and distribute that revenue to all of the investors. So they don't need to worry about a thing. They give us the right information every quarter and confirm that their revenue projections are accurate or not, and then we pull the revenue and distribute to investors.

Another thing we do is [handle] legal compliance issues. The entrepreneurs' experience should be just like what I described; they shouldn't have to worry about a lot of the legal compliance [issues] that can trip people up. We hop on the phone with them and ask them which states they believe they'll involve if they invite investors in because the law is based on where investors reside. If there are any states with pre-signing requirements, we let them know about that. That's much more of a dynamic hands-on process.

More importantly, once they publish their rates and invite people in, let's say someone comes from Colorado and pledges $5,000 to contribute to that rate. Our compliance engine that we built will take into account any relevant information that the state of Colorado basically has. For example, unaccredited limits. The state of Colorado allows you to have up to 499 unaccredited investors. That's one of many criteria and characteristics that we've programmed into our compliance engine. For now, it's based around Regulation D Rule 504. We also have ways to base it on other exemptions at the SEC, but that's where we're starting.

How does ProFounder profit from this?

Jessica Jackley: It's free to join, get a profile, complete all the forms. It's $100 to publish your site and make the attempt to [raise money]. And then, if and when you reach your goal and you would like to move forward with the ProFounder system – you don't have to, but we believe we're creating so much value by being able to service the contract that a lot of entrepreneurs have wanted to continue on – it's $1,000 to pay for everything into the future where we can basically help you facilitate the signing of all the terms online, document storage, repaying investors, basic bookkeeping; again, over the course of your contract.

Could you tell us about this from the investor's perspective?

Jessica Jackley: Basically, entrepreneurs invite everybody into the site. So they can invite hundreds and hundreds of people, as many as they like. But they're inviting people.

This is a little bit different from what we were testing out; we were testing things in December that would have allowed investors to browse the site, see different businesses and invest. But their investment provided no financial upside. All of the upside went back to the community. I think it's beautiful idea and is something we will do in the future, but for now, many of the successful raises on our site – whether they were that sort of public, open raise, where you could have a marketplace, or a private, invite-only raise – many of them looked like private raises no matter what we were doing. So we are only focusing on that for now, at least for the next six months to a year.

Basically what that means is [that] investors need to be invited by the entrepreneur. So it's a privilege to be invited in to invest. So they'll receive an e-mail through our system, which is triggered by the entrepreneur. And then they would go to this website, create an account, and may access any investment opportunities they've been invited into.

As they look at the site, we try to [provide] really simple ways for [investors to see] the information we've received. Investors are able to understand very easily [the offers presented]. It's communicated very simply. They can look at the term sheets. They have ways to contact the entrepreneur directly.