

While other VCs seek Unicorns, Indie.vc is all about cashflow - r0h1n
http://pando.com/2015/02/17/while-other-vcs-seek-unicorns-indie-vc-is-all-about-that-cashflow/

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nissimk
The interesting thing about new financial instruments is to try to figure out
the risks for all parties involved. What I'm not really getting here is that
from the perspective of the company, this is like a loan with a really high
interest rate and other harsh terms like the equity conversion, in exchange
for no recourse. If a company had growing cashflow couldn't they just use debt
financing at much better terms? And if they don't have good enough cash flow,
why is this better for them than selling equity?

Will the distribution requirements be a drag on growth?

How does the company decide between reinvestment or distribution of profits?

~~~
bryc3
That's all part of the experiment.

Given the only forcing function for distributions is tied to founder salary,
there is no reason founders couldn't simply keep investing in, and growing
their business, for years without ever making a distribution. And we'd be
thrilled for that as an outcome.

~~~
prbuckley
Can you give more details on how distributions are tied to founder salary? If
salary is above X distributions to indie.vc need to be Y.

~~~
bryc3
Let's try this an example.

Say at the time of funding founders are paying themselves $100k salaries each.
They can pay themselves up to $150k each (150% salary at time of funding or a
market salary we establish with them at the time of funding if they're paying
themselves way below market).

If they chose to start taking out more cash than $150k, that would be
considered a distribution and the 80/20 would kick in until 2x our investment
is returned. Then it flips to 20/80 until 5x is returned. Once 5x is returned
there are no further distributions.

That said, they can continue to draw their $150k salary and reinvest in the
business as long as they'd like without ever paying out a distribution.

~~~
jhartmann
Bryce, This seems very interesting. I have been working on a Neural Network
SaaS startup for awhile now, and I think my plans could align with this
program. I just wanted to say thanks to you and OATV for trying this
experiment. I think traditional VC's miss out on lots of opportunities where
there is some consulting revenue early on in the company lifecycle to help
build the business. I have high hopes that INDIC.vc and programs like it could
help those sorts of businesses get going.

~~~
bryc3
thanks for the encouraging words.

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claar
I own a bootstrapped start-up that seems to fit their profile, but their
numbers seem way off to me.

They take 80% of all distributions until they're paid back 2X, then 20% until
they're paid back 5X.

They're offering $100k to 8 start-ups; in order to hire a few employees with
decent runway, $500k seems like the minimum useful raise.

I guess we're just too late-stage for this, which is funny, because from my
research we're too early stage for most VCs.

The idea of taking 100K today so we can pay 500K tomorrow just isn't very
appealing.

~~~
DevX101
If you're making more than $200k in revenue check out revenue financing:
[http://www.lightercapital.com/](http://www.lightercapital.com/)

Seems like it might be a better deal than this.

But I'm a big fan of alternative models of financing than defaulting to VC or
bootstrap everytime. There's room in the middle somewhere.

~~~
claar
Interesting, thanks for the link.

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gizmo
This is clever. Paying back 500k in a couple of years is no big deal if the
business reaches any kind of profitability, and the odds of getting there are
much higher when you start with 100k in the bank. Bootstrapping from 0 is
disproportionately difficult, so I can see how this is a great deal for some
people.

The incentives are aligned too. With a deal like this it's good for the
founders and for the investors if the startup gets to profitability quickly,
but there's no perverse pressure to shoot for a 100x return or die trying like
you get with conventional VC funding. Of course, if the startup takes off in a
major way then VC funding is still on the table. Otherwise the founders will
own 100% of a profitable lifestyle company. Win-win.

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adrianh
It's worth reading indie.vc's response to this article:
[http://bryce.vc/post/111385165695/the-biggest-
misunderstandi...](http://bryce.vc/post/111385165695/the-biggest-
misunderstanding-about-indie-vc)

~~~
solve
[edit: seems they're not doing revenue based financing.]

"Nowhere in anything we’ve written publicly or discussed privately about
indie.vc have we said we’re only interested in modest, cashflow businesses."

If they're not aiming for modest wins, then why wouldn't the startups be
reinvesting as much revenue as possible back into further growth, instead of
using it to immediately repay this loan? Eating up 80% of revenues to repay
the loan sounds like a major damper to being able to reinvest toward further
growth at those early stages.

And 100% revenue financing, instead of some kind of equity / revenue funding
hybrid? Sounds like a recipe for all kinds of misaligned incentives.

~~~
bryc3
There is no timeframe on repayment of the loan. If founders want to keep
reinvesting in the business that is fantastic. If they want to start taking
more out for themselves, that's when the distributions kick in. We hope that
helps keep our incentives aligned.

~~~
solve
I see, thank you for clarifying. Somehow, I think the word "cash flow" gave me
the impression that this was based on revenues, not distributions.

Can you clarify what distributions means? So if the founders pay themselves a
salary, that counts as distributions?

~~~
glenngillen
Only if the founder salary has increased by more than 50% since the start. See
this response from Bryce with more detail:
[https://news.ycombinator.com/item?id=9139507](https://news.ycombinator.com/item?id=9139507)

------
kyledrake
I stopped by the indie.vc meetup in Portland to discuss this, and found the
idea fascinating. I strongly believe that it's going to fill a missing piece
in modern startup investment, and could end up being a very important program
in the future, because frankly, it's a better fit for most startups.

I'm not saying there's no place for VC, but I think it's been a big mistake to
plug it into ideas that simply don't make sense for it. There's a reason my
copy of "Nothing Ventured" has a pair of dice on the cover. VC is designed for
high-risk high-capital projects (the Intels and Lyfts of the world), and yet
we continue to use it for things it was never designed for, like low-capital
web startups that don't really require a lot of labor and simply need to find
a niche in their market (let's face it, it's almost impossible to predict your
market beforehand).

The consequence is startups that are either an enormous success or a complete
failure, with zero room for deviance. There's a big hole between enormous
success and complete failure, and in practice the vast majority of startups
land in it. When we don't provide investment devices that work for that middle
area (but scale to potential for enormous success when discovered), it's no
surprise to me that we assume 90% failure rates in the industry, and end up
with startups that fly way off the handle, sacrificing sustainability at the
altar of "growth".

The Indie.vc proposal IMHO fills that massive hole by allowing for the
possibility of moderate success. If your company doesn't go IPO but still
makes a profit, you don't get stuck in a trap where you're forced to keep
raising money to prevent disaster (which you're dishonestly selling as a
growth opportunity), sell (often an acqui-hire that shuts down a perfectly
good business) or go into an asset sale to pay off the investors. Running on
that treadmill destroys a lot of perfectly good companies.

Neocities is in this boat. We've turned down quite a few offers from VCs
because the terms were too dangerous for us, and I'm assuming many other
startups are in a similar place. We need some investment and help to grow, but
I refuse to do that at the expense of our great users. They deserve better
than to lose their sites because I used them as poker chips to gamble the size
of our market niche. If we get big, great, but moderate success is great too.
Today's investment devices are simply too dangerous.

IMHO, that's the way startups should operate, and that's the way our
investment devices should work. Indie.vc is a really great idea.

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lgas
All about that cashflow... no bubble, no bubble.

------
JacobAldridge
Interesting, in the context of this discussion yesterday on lessons for VCs
from the industry in the 1980s [1]. Why risk so much looking for the one
unicorn in a hundred when we can achieve a 500% roi focusing on cashflow [2].

 _" The VC community is purposely avoiding risk because we think we can make
good returns without taking it. The lesson of the 1980s is that no matter how
appealing this fantasy is, it’s still a fantasy."_

[1]
[https://news.ycombinator.com/item?id=9129911](https://news.ycombinator.com/item?id=9129911)
[2] Not that I'm necessarily disagreeing with that as an investment strategy.
As I noted in that other discussion, this is a field where I have limited
experience.

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auganov
To be honest I thought it was going to be a joke. It's actually interesting as
an experiment, but they need bigger N to find out if it can possibly work.
50-100 would be more reasonable. Tho maybe it's good to start with 8, it might
be impossible to even find 8 reasonable people willing to take this deal.

Anyways I doubt it's going to work. They're competing with banks at this
point. But their per-company [management] overhead is an order of magnitude
higher than for a bank. Most people willing to take up the offer will probably
be scammers.

~~~
loceng
In part I have thought about Indie.vc as an option more for the connections to
the people, and a bank wouldn't care for investing in us at this point,
however people who understand internet business models more likely would.

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manishsharan
I wonder what model you would use to evaluate a startup with varying cash flow
like negative cash flow for some quarters or growing cashflow for others. I
understand how to model utilities or infrastructure projects using cashflows
but those models are based on having very predictable cashflow.

~~~
pdecker
I'm just curious, but how do you "model utilities or infrastructure projects
using cashflows". I would love a detailed explanation. Thanks!

