Talking Femtech, Fintech and Franchising with Co-Founder and CEO of ApplePie Capital, Denise Thomas

The next time you bite into a Jimmy John’s sub or devour a slice of Blaze Pizza remember that you wouldn’t be enjoying that experience if it were not for a franchisee taking a chance on opening that business. Franchises are a staple of the American economy and have proven to be an immensely effective way to scale businesses nationwide, while helping to promote business ownership in the U.S.

However, before a franchise can ever open an individual needs to secure the capital to get that store up and running. That is where old financial practices have acted as a hindrance to franchise development. Now there is a better way.

Denise Thomas, Co-Founder and CEO of ApplePie Capital is building out an alternative marketplace lending platform to help raise efficient capital so more aspiring franchisees can open businesses in their local neighborhood.

After speaking with Denise Thomas I am confident that she is well positioned to not only succeed in her mission to help franchisees access more efficient capital, but I also think she is going to help promote more female leadership within the Fintech ecosystem. Check out our discussion below to learn more…

CL: Denise, you may have the most extensive founding background of any other individual S.I.C has ever spoken with. What is it about starting up that drives you to go back to square one time and again?

DT: I think what really drives me is creating things from scratch. I get excited about taking ideas from concept to reality. It’s a fun process to build and scale businesses. When things get to be routine they become less interesting to me.

I like to observe areas that haven’t been innovated in a while and think about how can we do it differently? As I’ve evolved I have realized that doing this is what drives me, which is why I have gravitated to startups time and again.

Starting up over and over also helps me to optimize my approach. It’s like that old saying that it takes 10,000 hours to achieve mastery. By going through this cycle of bringing products to market many times I have started to optimize my approach. Building these businesses from the ground up is really my passion.

CL: For those who don’t know can we talk a bit about how you define ApplePie Capital as a business?

DT: We look at ourselves as a growth engine for the franchise industry. This is done by identifying ways to accelerate and propel brands forward that have a track record and are in a growth phase as an organization.

Today, we accomplish this by providing loans to approved franchises, but in time we will do even more. Our goal is to incorporate elements of support by providing financial advice to franchisees that want to build a network of units, not just one store. We will do this by guiding them in capital planning and teaching them how to smartly use liquidity.

CL: What characteristics of franchise investing make it a more attractive investment compared to other asset classes like real estate debt or startup investing that are now available to the public as well?

DT: There are key fundamentals that we think make franchises an attractive asset class. The first attractive element of franchises is the unit economics of the business can be easily understood. If you think about an average small business on the corner like a pizza shop, ask yourself how you know what the sales volume should be for that shop.

You don’t know what the sales volume is, but with franchises you know all about the unit economics. The whole idea is that it is a business-in-a-box. You know how much to invest, how long it will take to break even, the levels of profitability, and so on. With franchising, you have the historical economic performance as an assurance to investors that this business will succeed because it has in the past.

The idea of providing finance-in-a-box for a business-in-a-box using the historical performance of the brand is a concept that has been around for some time. When companies are looking to franchise, it typically means they have already opened stores in their own backyard and made them profitable by perfecting the systems in place for training and marketing. This gives investors in the roll out of the franchise an understanding of the risk and rewards associated, which is a leg up on other types of investments.

CL: At a more macro level, how healthy is the overall franchise market?

DT: The franchise industry has been growing at an annual rate of three percent per year. In total, 12,000 new business start annually, so it’s a very large driver of the economy and more than likely here to stay.

Franchising has proven to be a valid way to scale a business across the country. I don’t see anything changing – even in the worst of times there has been growth in this industry.

CL: Before ApplePie Capital existed where did franchisors and franchisees go for their financing?

DT: Historically, there have been a couple of sources. One source is to use your own capital. The other route is to obtain a small business administrative loan or an “SBA”.This avenue for capital was created by the government to stimulate jobs, and allows for small businesses to apply for a loan backed by the government up to a certain amount. However, it is a very lengthy and slow process.

There are also some alternative lenders that will provide a loan to an individual with experience and a strong record of success.

CL: How does ApplePie Capital improve this process and create efficiencies?

DT: At the core, we are utilizing technology and data to make the underwriting loan process faster, better, and cheaper. The first step we take to build efficiency into the process is prequalifying the brand of the franchise seeking a loan by looking at past performance and credit worthiness as a baseline. We then look at the borrowers through a normal credit process.

We consider several items when performing credit reviews, including what their level of liquid net worth is, and what their FICO score is, all with the aid of technology that enables us to provide a faster, more efficient process. This process has enabled us to bring expense down significantly on the underwriting of the loan.

An average loan is $425,000. Banks can’t affordably underwrite loans of this size with the current regulatory framework they have to work within. Even when we work with banks we are doing it from a distance, thereby we are not tied to those regulations.

Additionally, our sourcing method to find people interested in a franchise loan is through the brand, which reduces marketing cost. With people demanding digital experiences more and more, banks struggle to obtain the walk-in loan clients. We provide that easy digital experience that people are looking for, making it easier and more cost effective to obtain customers.

CL: One of the challenges that some marketplace lenders have struggled with is managing both sides of the equation including the loan underwriting side of the business and the investing side of the business. How are you managing this challenge?

DT: I have always worked in financial services where there is a supply and demand side. It is not unusual for me to have to service both sides of the market dynamic. Both sides have different requirements, and they have to meet in the middle. Investors want returns, and franchisees want to grow more units. The question we are solving is how to do that in a responsible fashion.

CL: Would there ever be a scenario where you would offer either an equity model or revenue sharing opportunity to investors? Or are you solely focused on the fixed income approach?

DT: I have always worked in financial services where there is a supply and demand side. It is not unusual for me to have to service both sides of the market dynamic. Both sides have different requirements, and they have to meet in the middle. Investors want returns, and franchisees want to grow more units. The question we are solving is how to do that in a responsible fashion.

CL: Do major corporations like McDonalds and Jack in the Box have their own internal financing options for franchisees or is this the type of capital product that would create capital efficiencies for any business?

DT: Currently, we have a maximum loan size of two million dollars to cover startup cost. When you get into franchises like McDonald’s that are also owners of the land that is different. We only work with leased environments, not those that own the real estate.

This helps us to create more diversification for our investors. If we provide one loan of five million dollars that is not very diversified. At four hundred thousand dollars, investors can build a pretty nice portfolio and take a slice of each of those loans for individual investors.

For institutional investors that buy whole loans, this loan size limitation helps maintain diversification for their portfolios. For now, we will not be looking to service larger loans from those types of capital intensive franchises in order to ensure that we serve both our investors’ needs and franchisees’ needs as well.

CL: What are the qualifications for prospective franchisees to obtain a loan from ApplePie Capital? How much does experience factor into the decision?

DT: Overall, our clients are very prime borrowers, but we do have a set of minimum requirements to which we hold all of our clients seeking a loan. For instance, we require a minimum FICO score of 680, a net worth at least equal to the amount of debt they are seeking, and an ability to put down twenty to thirty percent down up front if they are recapitalizing or refinancing.

These minimum thresholds are often outperformed by our clients. The average FICO score of our customers is actually 750. The net worth of our clients is typically much higher than the debt they are seeking, with a median net worth of two million dollars and on average, they have liquidity in excess of fifty thousand dollars to cover six months of working capital.

In terms of experience, we have a range in our client base. Two-thirds of our clients have previous experience, and the remaining clients are seeking first-time ownership, though many of them may also have business experience in the category they are purchasing.

CL: When it comes to franchisees are the loans considered to be securitized by the assets of the franchise?

DT: We do have a first lien debt position. Our loans require a Uniform Commercial Code (UCC) filing on all business assets and a personal guarantee from the individual of their net worth. Additionally, we have a life insurance policy that covers the amount of the loan in the event of something happening. Lastly, we require twenty to thirty percent equity down so that they have meaningful skin in the game.

CL: In recent months ApplePie Capital has partnered and obtained an equity stake from Fifth Third Bancorp as well as partnered with SunTrust Banks for future purchase of loans originated on the platform. Is the goal to move towards being an institutional investment more than individual investors or is this just another avenue to be able to deploy capital more efficiently and offer more franchisees access to these loans?

DT: I think it’s the latter. It’s really the scale it’s giving us to grow the business with predictable capital. We will continue to offer fractional loan offerings as we can, but the whole loan purchase program will be predominant in the next eighteen to twenty-four months.

This coincides with our desire to scale the business on the loan side. We prefer to work with the franchise brands and have them introduce us to qualified operators and borrowers in their system, rather than scaling the business one franchise at a time.

CL: What advantages do the banks see in obtaining franchise loans investments from ApplePie Capital, rather than sourcing the loans themselves?

DT: I think they are looking at the front-end origination cost they would incur in trying to obtain those loans versus obtaining those loans from us. Banks are horizontally oriented, not vertically oriented. Typically the banks are serving a regional geography and a horizontal set of needs with products and services, which makes this loan class difficult for them to manage.

Contrary to the banks, we are specialists that are vertically integrating all of our systems towards serving the franchise model. And we are able to do it at a fraction of the cost because of our focused structure and tech-enabled capabilities.

Having the banks participate by providing financing and access to capital in conjunction with us at ApplePie Capital is really a great marriage between our firms and has benefitted everyone involved.

CL: ApplePie Capital recently closed its series B with Fifth Third Capital and QED Investors. What attracted you to working with these firms?

DT: QED Investors is just the best Fintech investor in the space as far as I am concerned. Nigel Morris is also the former cofounder of Capital One, and has invested in a great number of amazing Fintech projects. One thing I value deeply is the ability to learn from within their set of portfolio companies and access their amazing set of resources.

They provide tangible help from opening doors to vital connections, to helping with the building out of infrastructure, to helping us understand industry benchmarks that could really accelerate our growth. It’s essential to have a partner that doesn’t just provide money, but gives you the tools to succeed.

Likewise, Fifth Third Bank is a real innovator as a bank. They bring an immense amount of institutional knowledge and their own set of small business loan skills to help us learn from and really help us grow.

CL: 2016 has not been a fantastic year for marketplace lending. How did ApplePie Capital prove its value during this time to be able to raise a meaningful Series B round?

DT: I would say we delivered on our growth, and we have grown between our seed and series A enough to triple our value as a firm. We stuck to what we said we would do. I think we have remained clear that we need to grow responsibly, and we have done that by growing the business two and a half times between rounds, which says we have a great team that has proven this concept works.

We were revenue-generating two years ago, and I think that kind of performance coinciding with our unique model shows that we have an efficient channel to develop our business. A lot of scrutiny in this industry has come from various actions that are not great, but there has also been a questioning of the models out there, and the scalability of those models.

I think people are finally coming back to a reasonable place. Our model has been efficient from origination, and we have always had the technology. Though our loans are chunkier in size, typically thirty times the size of consumer loans, we are not processing the same kinds of volumes as consumer lenders. Nonetheless, we have a lot of efficiencies from carrying over those models. At the end of the day, we have some very profitable unit economics in doing what we do.

CL: You mentioned that you need to grow responsibly. How do you manage investor growth expectations while trying to be responsible?

DT: I think a company at our stage is not focused on profitability. It is more about unit economics. We are focused on growth and proving the scale of this business. That means ApplePie Capital is remaining focused on serving our channel, and being a valued partner to our customer base. We need to show them that we can be the growth engine for their industry.

If we do that well, we will succeed in the long run. Think about Amazon. When Amazon first came out and said it was going to take over the bookstore market, no one believed it. They definitely would not believe that Amazon would become a place where you could go to buy anything you want and have it delivered within 24 hours. Products have to stand on their own, because if you eliminate all other factors, they are the best at what they do.

I say we need to be best in class at what we do. We need the best experience for our customers, and be that growth engine for them. Just because we are digital doesn’t mean we will win. ApplePie Capital still needs to be the best product. Everyone can deliver a more efficient experience, but we need to be best in class with a great product.

CL: Do you think as we move forward we will continue to see more banking partnerships with ApplePie Capital?

DT: As an asset class, we will continue to see adoption from institutional investors and high net worth investors that have decided that franchise loans are a good fixed-income asset.

We will continue to see banks partner, because they can’t efficiently serve this market with current regulations. There is no level of peeling back that will make servicing these loans cost-effective and profitable for the large financial institutions.

Banks generally wait until the risk profile is proven out. They have now watched us for two years, which is why we are starting to have banks at the table with us. And we will likely continue to see an uptick in this financial institution interest since we are just a new vehicle for an asset class that has existed historically and has already proved itself to be strong.

The Minute Rundown with Denise Thomas

CL: If you could provide one lesson to individuals considering starting up what would it be and why?

DT: Never give up. People will tell you that things are hard, but they have no idea. You just cannot give up. You will need to overcome too many obstacles to think giving up is an option. There are too many moments in time that you consider yourself too insane to keep going, and I didn’t come up with that. My co-founder provides this as his explanation as to why we persevere, because we don’t believe giving up is an option.

CL: Since you are in the business of franchises, what is your favorite franchise out there?

DT: Now that’s not fair, I can’t say that, but like all my customers I like everyday services that we all depend on, and that are in replenishing markets. For example, at the risk of assuming you have hair (we often tell this joke with someone bald in the room), most people need a haircut about six to eight weeks apart and they will always need a haircut.

In poor economic times, you may go from every six to eight weeks or eight to ten weeks between haircuts, but no matter what, we know a haircut will always be needed. Replenishing markets and models where we can break even quickly are easier credit decisions.

Subscription models with recurring revenue streams fit into this same category as well.

CL: What are some of your goals as a hugely successful female founder in a male dominated finance industry?

DT: I’m actually kind of gender blind in that it’s not a factor that drives the goals I set, but I will say that I’ve been surprised by the fact that you are remembered pretty easily because of that gender difference when being called on by investors.

In a male gender dominant industry like mine, it’s an odd advantage to be a female. You are actually remembered, and probably not just remembered, but you are watched and with that comes a great responsibility. That’s where the gender piece comes into play.

I want to do a great job as a CEO regardless of gender, but because of my gender and the predominance of male participation in this industry, it’s very satisfying in many ways to be called out and to be watched because then it does encourage other people. I don’t know to whom, but I hope my actions have been meaningful. Women who have come to work for ApplePie Capital are interested in having a women running it and take pride in that.

I take it very seriously. I want to service my investors, and I have quite a few female investors in my company. From the early days, there have been people who believed in me and I hope to do that for other women in the future, as well as mentor people. I have been very active in mentoring, even starting a women’s leadership group to help support great women in their endeavors.

CL: If you could model yourself after one founder who would it be and why?

DT: You know, I have a hard time with one around this type of thing. It’s an amalgamation of experiences and learnings that has really helped me along the way. I like to reflect on my great experiences that include mistakes, failures, and successes, and I like to look to others’ successes as well.

My co-founder was my CEO twenty years ago, and I was very inspired by him. He made a big difference in my career and mentored me, and I never would have imagined he would be working for me. To successfully be able to do that as an inversion experience, is to me, what characterizes the great leaders.

The great founders I work with believe in people, have the right people in the right seats, and give them room to succeed and achieve their potential. That’s what’s been done to me, and I want to pass that onto others. Every great founder I ever worked for possessed those qualities and has had an impact on my ability to achieve my potential. I need to set the table and give others the same opportunity to succeed and support their growth. If that had not been done for me, I wouldn’t be here today.

In closing:

Denise, thank you for taking the time to speak with S.I.C. You epitomize everything that S.I.C stands for. You are tirelessly working to find intuitive solutions to solve age old problems of inefficiencies and out of date practices within the financial world.

Promoting growth through efficient capital is something that I think is only now getting the attention it deserves and we are lucky to have alternative lenders like ApplePie Capital reshaping our financial markets.

At the same time Denise, you are helping to reshape a male dominated culture with more gender diversity and an emphasis on inspiring and supporting more female involvement in the Fintech ecosystem.

The marketplace lending space has been mired in controversy over the past year, but there is likely no argument in saying that ApplePie Capital has built the necessary focus and control to succeed in this arena. Not to mention that Denise is poised to prove that promoting success in Fintech means supporting the growth of more fantastic female founders liker herself.

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