Unblocking entrepreneurship by increasing optionality at the idea stage

My chat with Kaela Worthen, Cofounder of Paintbrush

Oct 13, 2022

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Having various funding options at the earliest stages can encourage more people from varying backgrounds to start businesses. Not everyone should or can raise venture capital. Not everyone should or can rack up credit card debt to get started. While more capital is great for experimentation, having more types of capital is even better. I talked to Kaela, Cofounder of Paintrush, which wants to provide a safer financial option for people to explore ideas and reduce their risks.

In this conversation, Kaela and I talked about:

Evolution of tech ecosystem in Utah
Her journey across tech & journalism
Mistakes & learnings from her first startup
Overview of funding options available at the earliest stages
Increasing optionality & reducing barriers for starting new businesses
Differentiating term loans with an income-driven repayment option
Favorable current cultural and economic trends

Debt is typically frowned upon in the world of early stage startups for many valid reasons. She believes Paintbrush has a better offering for people to pursue new ideas regardless of whether they end up going down the venture path.

Sar: Utah has a deceptively large and growing tech scene. Qualtrics and Divvy have been high-profile stories that put it on the map. What are tourists most commonly surprised by?

Kaela: I didn’t love Salt Lake for the first several years I lived here. Then I moved to the Bay Area, and it turns out I love Salt Lake. It’s the perfect combination of just large enough that there are enough good restaurants I probably won’t eat at all of them and other great things to do, while not so many people that the cost of living is affordable and you can spontaneously go and do things without the crowds and traffic being so bad that it’s too much of a hassle. You have just about every outdoor activity available within 30 minutes to an hour. And while some people assume it’s super conservative, there’s a thriving scene changing the atmosphere and culture here—for example, I just went to Equality Utah’s Annual Allies Gala a couple of weeks ago. It was amazing to see so many people there.

And, of course, the biggest piece is there’s a growing tech scene, and it’s an especially great place to start a fintech company. There are a lot of fintech and banks here—Celtic, WebBank, Ally Bank, and Goldman all have offices here (and of course, so is Paintbrush’s partner bank, Continental) because historically, Utah’s made it friendlier for banks.

Some companies start out focused on fintech, like MX, Divvy, Galileo, Finicity, Atomic, Previ, TaxBit, and many more. Others evolved into fintechs—for example, Podium, the company I was most recently at.

Sar: Is Utah over-indexed on any functional talent? What roles do companies typically struggle to hire for locally?

Kaela: Utah has historically been very SaaS-focused; we haven’t seen many consumer software products. And because of that, I think the old SaaS DNA of having a large sales team has stuck across the ecosystem, which often meant that you would solve problems with people rather than products. That mindset is changing, and many companies have become more product-first in the last few years.

Because of that, I think product management in Utah started a bit weaker. Many people perceived the role as just people who build customer requests and features to close sales deals, rather than driving true strategic product-led growth. But again, that’s changing, and I know many truly exceptional people in this field.

For example, Podium started with one of the state's best sales teams. They were—and still are—known for being aggressive and having the best talent. If you could make it on the sales team at Podium, you can make it at any other company. But over the last few years, Podium has shifted more towards self-serve motion because they knew it was important to grow more scalably and provide the best user experience.

Sar: Talk about your time at Podium. You were involved with their foray into financial services.

Kaela: I was the director of product for payments and led a team of product managers, designers, and engineers focused on our fintech roadmap. Podium made it easier for businesses to communicate with their customers. They focused on every part of the customer journey, except for the actual transaction, from getting found online to talking with their customers when they show up on the website, to appointment reminders, and then collecting reviews or survey feedback after the service was provided.

We had this gap right in the middle, though, where the actual transaction occurred. Since Podium primarily focused on messaging, we first added payment links over text messages. We launched it the week before most of the United States shut down due to Covid, and suddenly everyone was interested in figuring out how to do things remotely.

Podium’s primary demographic is local businesses—a doctor’s office, a furniture store, or a carpet cleaner. They typically did transactions in person and didn’t have a solution for paying for services without physical contact. So weirdly, Covid probably jumped us six months ahead on our adoption curve. We went from nothing to processing a billion dollars within 18 months. Over time we added ACH payments, in-store card readers, reconciliation tools, and more.

Sar: How did you end up in tech? You went through multiple transitions before the founding of your current company.

Kaela: I have a habit of sticking myself where I don't necessarily belong. I see a problem; I’ll go and try to fix that. I was at a magazine, and we didn't have a marketing department. It was in the era when all businesses were getting into social media, so I started to run social media for the magazine. I started driving a lot of traffic that way and made Pinterest our biggest referral source for all our articles. And through that, I realized I enjoyed marketing—it was more interesting and dynamic than just writing articles and editing them all day.

From there, I ended up becoming the first marketing person at Reddit and getting into the tech industry. I did just about every type of marketing possible—ads, emails, blogs, social, PR, partnerships, etc.—but all my best marketing ideas were always product ideas, even though I didn’t know it at the time. It was never some viral campaign. It was always “we can increase signups or conversion if we change the product this way.”

I left Reddit to cofound a startup called Imzy with some other ex-Reddit and ex-Twitter employees. I was theoretically joining as head of marketing because that’s what my experience was in officially. But we didn’t have a product to market. So again, I just started sticking myself where I didn’t belong and decided I’d figure out how the product should work.

Eventually, one of the Imzy engineers told me I was a product manager. My response was literally: “What is that?” And then I proceeded to screw it up in every way possible. We made many mistakes at that startup, which eventually shut down, but we all learned a ton, and after that, I knew that product was what I was meant to do and that I loved being at startups. So I set out to learn and fill the gaps that had caused that company to fail so that I’d be prepared to do it again at some point in the future, and this time it would succeed.

Sar: Talk more about some of those mistakes and the biggest learning you’re now bringing to Paintbrush.

Kaela: My biggest soapbox has become MVPs. You need to be hyper-focused on the problem you’re solving, who you’re solving it for, and how you’re solving it. Your customer persona should be super small and targeted, and your product offering should narrowly reflect that. One of the things I think people get wrong when they think about the minimum viable product is that you should be building half a product, not a half-assed product.

Unfortunately, we didn’t do any of that at Imzy. One of our taglines was that our product was for everyone. And when you build something for everyone, it's also for no one. When you don't know and can't describe who it's for in a narrow, specific way, you don’t know what to build and whose problem or needs you should focus on. We ended up trying to build our 5-year plan all at once, but none of it was exceptionally better than what else was out there because we were trying to spread ourselves too thin. If you can’t describe the excruciating problem you’re solving in a single sentence, there might not be a reason for your product to exist or for people to care about it—you’re probably a solution in search of a problem.

The other problem when your demographic is that broad is that it's hard to get any network effect. Imzy was a community-based platform, but we were trying to be a community platform for everyone. That meant someone would come in and create a community about photography, and another person would create a community about anime. And then, someone else would create a community for wedding photographers, and another person would create a community for shipping two characters from a specific anime show. And we ended up with around 100,000 people who all felt alone because they were so spread out, so then, of course, they didn’t stick around, and it became hard to get any traction. So you need to be hyper-focused. It can be a microscopically small demographic and a microscopically small problem, as long as you are solving it at least ten times better (or in social, I believe it needs to be 100x better due to how powerful the network effects are).

With Paintbrush, we've got a big vision of where we're going to go in the long term, but we've started with a much more targeted, straightforward product.

Sar: I love the framing of “MVP is building half a product, not a half-assed product. That's a good segue to start talking about Paintbrush. I love the name, by the way. Is there a backstory to the name?

Kaela: Yeah. Our goal is to unblock entrepreneurship and allow people to create whatever business they want. A paintbrush enables artists to go and make whatever they want. We want to be a tool for entrepreneurs to go and build their businesses. We are here to help you create something that will ultimately be even cooler and more impactful than what we’re doing.

Sar: And the tool is funding?

Kaela: We’re starting with funding. It's a $50,000 startup loan at the idea stage—no pitching, no revenue requirements, literally at the idea stage. You do have to be a real company, though. You fill out an application centered on the business registration and owners (which may be just you), and most people get approved or declined immediately.

Sar: What was the motivation behind getting into the lending business for this demographic? Where do you see the opportunity? I have to be honest; I’m skeptical of the model of lending to people with just ideas.

Kaela: Everyone’s skeptical—that’s why there’s nothing else at this stage. Because nobody lends at this stage, founders often run into this chicken and egg problem: I need the business to get the funding, but I need the funding to start the business. Now I'm stuck. The existing options are limited and not ideal.

You can raise venture funding, which is great if you get it. But the overwhelming majority of businesses started are not venture-backable. Even if they are, unless you’re the perfect Silicon Valley founder prototype, you likely still have to show some traction before getting any money. So that means you may still need some cash from somewhere else to start.

A lot of people assume they can go and get a bank loan for their startup. You can't—banks want to see years of revenue before giving you a business bank loan. So that's not an option to start a business.

Many fintech companies have launched merchant cash advances for financing their customers, but they still require months of revenue. So that’s not an option to get off the ground, and MCAs are meant for short-term financing. The other obvious truth is that most founders don't have rich friends or family who can give them money.

So what most founders do is rack up credit card debt. There are tons of cool war stories of founders who maxed out four credit cards until their business took off. And that's great. But if you didn't get your seed round or that big customer and maxed out those four credit cards, you’ve ruined your finances, and maybe you’re declaring bankruptcy or just having a massive amount of debt and collections. It will be hard to get anything else due to your history.

We wanted to provide a safer financial option for people to explore ideas and reduce their risks. The $50,000 Paintbrush Loan is spread over five years, so your monthly payments are barely over a thousand dollars. You have a lot of time to use that money to build your business and a lot of time to figure it out and get traction.

Sar: That’s a good summation of the pros and cons of the options available today. The obvious question is, how do you underwrite the idea stage? Venture capital was invented partly because banks wouldn’t lend to risky startups at the earliest stages. Banks require some traction for a reason. In financial services, it is easy to paint the status quo with a broad brush and make a case for how they are harming or undeserving a group until you realize there’s a rational case (which you do not have to like!) for why things operate the way they do. We see this in everything from using leverage in crypto trading to why the big banks can’t serve lower-income people well to the SPAC mania. How does your offering weigh against the available options?

Kaela: Venture capital has mitigated its risk by building on a diversified fund model. The assumption is that most of the portfolio will return little to no capital, but the fund winners will return huge amounts to compensate for the others. That model works for moonshot startups with big exit multiples but not for the vast majority of new businesses whose goal is cash flow for the founders.

Since loans get the same repayment amount regardless of the business’s success, they have to mitigate their risk differently. Historically that means that banks have only lent to existing businesses that are already successful.

The problem is that it's never been easier or faster to take a new company to market using tools like Stripe, Shopify, the dozens of great no-code tools available, and even Instagram. We believe that a stable term loan like the Paintbrush Loan can be a foundational building block for many new companies.

What has unlocked this is the structure of the Paintbrush Loan’s income-driven guarantee, which helps mitigate risk for both the founders and us. In a traditional commercial loan, like an SBA Loan, the bank would want the individual to pay back the loan immediately if the business fails and the personal guarantee kicks in. And if you can't, you will probably lose your car, house, 401k, whatever. That's terrifying. The personal guarantee, in our case, can be income-driven. That means the borrower pays back 15% of their monthly income until they hit either the repayment cap or the end of the loan’s term life (which is five years). And because of the way the Paintbrush Loan is underwritten, we have confidence that the founders we partner with are high earners who are not only capable of repayment on terms that fluctuate with their income, but it often works out better for everyone involved.

Sar: Why 50k? The initial capital you might need is the function of the business you're trying to build. What kind of businesses are you targeting? Are we just talking about early software companies?

Kaela: We talked to many different founders, and that number came up frequently. It's enough to get a very light MVP, buy some inventory, etc. We needed to find a balance where it was low enough risk for both the founders and us—enough to get off the ground, but if their business fails, repayment with an income-driven guarantee is manageable.

Over time, founders will be able to choose how much money they want. Some people may only want 10K, and some may want 100K. But to begin with, we tried to keep it as simple as possible.

Since we are focused on the idea stage, we mostly don't have to care about the type of business you're building. You don’t have to pitch or prove your business model. You can build a software business, have an Etsy shop, or be starting a nail salon. We just have a few restrictions on what types of businesses we work with; we can’t work with content creators or bio/pharmaceutical, for example. We have a list of all the industries we can and can’t support on our site.

Paintbrush founders can take their companies in any direction they want—they aren’t locked into a path like venture-backed companies. Some of them will raise a seed round from venture funds, some will get larger loans later on, and for some, this will be enough to give them the start they need, and from there, they can bootstrap on existing customer revenue.

Sar: If you don’t hear pitches and lend at the idea stage, what’s stopping people from borrowing from you and doing one of those things? Also, why are those specific ventures not explicitly allowed?

Kaela: Unfortunately, I can’t tell you our secret sauce for how we verify the identity of the businesses, or else that would make it easier for people to evade it. Still, we have practices in place that allow us to verify at the time of application and on an ongoing basis to ensure the businesses fit within our framework.

The business types that aren’t eligible are those with a longer time to revenue, are prohibited by our banking partner, or are in a category that we have deemed a poor fit for a Paintbrush Loan.

Sar: You talked about how you have structured the personal guarantees to differentiate your loan from others. Talk about how the repayments work. The repayment model shifts if or when the business fails. How do you track and verify the status of the business to change the repayment model when needed?

Kaela: The Paintbrush Loan is a commercial term loan. That means it’s structured just like your car loan or mortgage—the same fixed, flat amount every month for the full five years, and at the end of that, it’s paid off. You can also make additional payments towards your principal or pay it off early if you want to, just like your mortgage or car loan.

If the borrowing startup defaults on the loan, the personal guarantee kicks in for the founder. They can take advantage of the income-driven repayment option, which requires monthly payments at 15% of the founder’s gross income if they make more than $50,000 a year. That gives the founder the flexibility to go back to work and pay off the loan without draining their savings account, selling their home or car, or going bankrupt the way they would in a traditional personal guarantee. And if you’re in between jobs for a while? Guess what—15% of zero is zero.

Sar: You mentioned earlier that MVPs require a narrow customer demographic, but it sounds like you’re focused on a wide variety of businesses. Tell me more about how those two ideas work together.

What’s so great about this is that we’re hyperfocused on the type of founder we’re looking for, which means we don’t have to worry as much about the type of business they’re building. So to give you an example of what narrow demographic looks like ours is like this:

Currently employed in tech
Making around $100k/year
First-time founder
Less likely to have a strong network
Doesn’t fit the typical Silicon Valley founder mold: more likely to be in non-tech hub geography, a person of color, gender minority, LGBTQ+, etc.
Good at building their product/service but anxious about ancillary parts of starting a business such as funding, taxes, payroll, etc.

We aren’t rejecting someone just because they aren’t employed in tech. But that’s how we’re thinking about our persona based on all the research we’ve done, and that’s helped inform the way we’ve built our product, our brand, our go-to-market approach, and everything else. It also means that our target demographic will all be facing similar challenges with their business, even if the business itself is different.

Sar: Your founder criteria are pretty specific and a high bar to cross for most people in the US. Talk about how you think about access. How do you avoid cutting off access to the very people who can’t get capital through the traditional options you laid out in the beginning?

Kaela: One of the core reasons we built this is because we wanted to reduce barriers to entry. We’re not doing it perfectly or for everyone, but we hope to prove the model and expand to more founders over time. Startup financing right now is often so much about who you know, so we’re providing an alternative that doesn’t require introductions or pitching or someone deciding if they “like” the idea or you as a founder. We hope to open up startup financing to more people. You just have to fill out an application, and our software makes an automated decision quickly.

Sar: Lending startups typically have to prove their models on a small scale using equity capital before they go out and raise large debt facilities. You didn’t have to do that. Talk about your relationship with the banking partner.

Kaela: We have a fantastic partnership with Continental Bank. I've heard so many horror stories about how bad it is to work with banks, and we haven't experienced those. They've been great partners every step of the way. We’re so lucky that we’ve found a model that not only do we believe will be extraordinarily successful, but our banking partner does too.

Sar: You’ve worked in payments before, but this is your first time working in lending. What have been some early eye-opening learnings? What do you have more appreciation for now?

Kaela: Everything in the lending industry is heavily regulated beyond what a general payments product needs to be. So everything we build needs to be gold-plated and go through a dozen levels of a compliance review. It can be exhausting sometimes, but it’s good because it’s helping us make sure we’re providing the best possible customer experience and thinking of things we otherwise might not have. Most of the regulations we are building our software to comply with are about protecting borrowers, which we strongly believe in.

Sar: How do you think Paintbrush fits into the current cultural and economic trends? Are there things that make it a bigger challenge or easier?

Kaela: Most trends make this the perfect time to launch this company. When Covid hit, business creation skyrocketed—and even though many aspects of life have gotten back to normal now, that hasn’t slowed down. Around 50% of millennials have a side hustle. That’s people’s way of having hobbies now—running a side business or figuring out how to make money off their passions. Many people would love to turn their side gig into their full-time gig if they had the opportunity to, but they don’t have the time to because of their day job, and they can’t leave their day job because they don’t have enough money. The Paintbrush Loan will enable them to do that. And some people may keep it as a side hustle and use this money just to buy some inventory or ad space while they keep working their day job, and that’s great, too!

The other obvious trend is that the market is down right now. That means it’s harder to find angel investors or land a pre-seed round—the burden of proof is much higher to get funded. Hopefully, this becomes a way to help founders bridge that gap—they can figure out how to get just a bit further so that it’s easier to fundraise when or if they decide to.

We’re also trying to fundraise now on the things that make it a bigger challenge. So if you know anyone (or if any VCs have read this far), let us know!

Sar: You mentioned in the beginning that the loan offer is just the first tool you are focused on. What is the long-term vision?

Kaela: Our goal is to unblock entrepreneurship. There are a lot of ways to do that. The biggest one is access to capital, so that’s where we started. The most obvious expansion is additional financial products—follow-on financing, revenue-based financing, venture debt, etc. Beyond that, there are so many other areas where founders need help, and we’re excited to dig into those over time. I’ll keep those a surprise for now, though!

Sar: What do you think we are not paying enough attention to? It does not have to do anything with what we talked about

Kaela: Climate change! I didn’t feel like I had the knowledge to solve it personally, so I tried to start a company that would enable others who are smarter than me to go and build the products, tools, services, and ideas that will fix our planet instead. I’d love to see more and more people taking this into account in their daily decisions as they can afford to—purchases, meals, transportation, the companies they work at, etc.

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