
Earnest Capital is live - tylertringas
https://earnestcapital.com/is-earnest-capital-live-yet/
======
tylertringas
Hello HN - I'm Tyler the founder of Earnest Capital. We officially went live
today and I'm here for questions, comments, criticisms, whatever really.

~~~
skrebbel
Tyler, I've been very interested in this development and I have a somewhat
fundamental question to you.

I've seen a number of VCs and other pundits recently say things of the form
"there's a reason why for decades, there were only bank loans and VC and not
much in-between". Eg Jerry Neumann (a NY based solo investor) has a nice
twitter rant about it here:
[https://twitter.com/ganeumann/status/1093961051425697794](https://twitter.com/ganeumann/status/1093961051425697794)

If I follow the math in his linked blog posts well (eg [0]), he's basically
putting down the hypothesis that there's 3 categories of companies (determined
by the alpha value of the power-law distribution they're in):

1\. Companies where the risk and the upside potential are small. This is where
bank loans are focused.

2\. Companies where the risk is enormous but the upside potential is "meh".

3\. Companies where the risk is enormous but the upside potential is also
enormous. This is where VC is focused, and it's why they're _all_ about
finding those few big hits because this covers all the losses (or mediocre
performance) of the rest.

Neumann appears pretty confident about this hypothesis; not because he can
explain the underlying phenomenon, but simply because until now he's not seen
much successful funding for companies that's neither VC nor bank loans. And if
his hypothesis is right, then you're targeting companies of type 2:
investments with enormous risk (comparable to that of a high-growth startup)
but at the same time you're hard-capping your upside at 5x. That seems
madness.

I don't think you're mad, however, so you must believe that his hypothesis is
wrong. If so, why now? What changed in the world, or in the investment
landscape, or in technology, that suddenly multiple people (you, indie.vc, etc
etc) believe that a low-capped profit sharing scheme for startup investments
_is_ a good idea, when nobody did before? Did the risk go down? How did it?
Why? Why now and not 10 years ago?

Super interested in any insights you might have on this. Great job, hope you
succeed (i.e. I hope to be proven wrong)

[0] [http://reactionwheel.net/2019/01/why-do-vcs-insist-on-
only-i...](http://reactionwheel.net/2019/01/why-do-vcs-insist-on-only-
investing-in-high-risk-high-return-companies.html)

* disclaimer: I'm a founder, not an investor and I don't spend a lot of time thinking about this stuff. Ergo I probably misinterpreted a lot of what Neumann is saying. If someone (or Jerry himself) reads this and thinks they know better, I'll be happy to stand corrected.

~~~
tylertringas
I like Jerry's work a lot but come to a different conclusion. My basic thesis
is that we're in the deployment age of the internet/web/mobile era and there
is a whole new wave of a lot lower risk and a bit less reward opportunities
for companies to bring the "peace dividend" of the software areas into markets
that are not winner-take-all. The upside is these businesses are much more
capital efficient, can scale and potentially produce much higher returns than
SMBs from previous eras. The downside is they have no collateral and are thus
completely unbankable for traditional small business lending. We need a new
default form of capital for entrepreneurs and we are trying to build it:
[https://tylertringas.com/a-new-default-funding-for-tech-
comp...](https://tylertringas.com/a-new-default-funding-for-tech-companies/)

~~~
rficcaglia
pre-orders? That gives them cash to build what (pre)buyers showed they really
want? It doesn’t have to be Kickstarter, per se, could be an academic grant,
or a pilot project with an enterprise customer. I have seen this work well -
from idea to V1 product without selling any equity. It’s a very efficient
filter.

traditional VC model is great for generating scale and creating barriers to
entry/competition, but few businesses warrant that kind of scale and fewer use
the capital to create real barriers.

Lending is for cash flow businesses - you can have zero hard collateral (eg
PPE) but if you have historical steady cash flows, you can get loans, no
problem (in my experience). The problem here is few startups focus on cash
generation. They are enamored with growth at all cost, aspiring to the VC
model when it isn’t appropriate.

~~~
tylertringas
Pre-orders are an awesome way to bootstrap a business.

------
moflome
Congratulations on launching! Sounds like a nice compliment to IndieVC[0] and
TinySeed [1]. I'm glad to see innovation here, interesting times!

[0] [https://www.indie.vc](https://www.indie.vc) \- loan vs. future equity
with buy-out [1] [https://tinyseed.com](https://tinyseed.com) \- equity with
revenue share (?)

~~~
tylertringas
Thanks! Yep, fun times.

------
dmonn
Hey Tyler! I'm actually super interested in Earnest. One thing I was thinking
is, the traditional VC model works in cycles - founders raise some money,
build & sell, raise some more, build & sell - by the time they raised $100M
hopefully they are at least close to profit.

How does that work with bootstrappers? Ideally they'd only have to raise money
once (from you), but what happens after the $100k (example) run out and the
business is only generating, let's say, $2k/month? Back to 9-to-5?

~~~
tylertringas
Well, yes in some cases. Our goal is definitely for founders to get to
personal break-even, where they can pay themselves enough to work on the
business full-time, by the time our investment runs out. Some percentage of
these will fail (startups are hard) and we're expecting that.

Hopefully, you meet a ton of cool people along the way and we can sort out
something cool as a next step that isn't 9-to-5 drudgery tho.

------
laser
In principle this seems pretty cool, but the gap between what's communicated
on the website, and what's actually contained in the 'Shared Earning
Agreement' [1] makes me concerned this might be good marketing on a
fundamentally predatory investment agreement. This could very well be a
completely unintentional idiosyncrasy, so I don't want to be too accusatory,
but the implication of the terms needs to be laid out more clearly on the
website, if this is simply an oversight.

The single biggest red-flag is the fact that the equity stake vests in company
sale or priced-raise as unpaid return cap (a multiple of 3-5X investment) over
valuation cap. What this essentially means, is that in the scenario that you
raise more money or sell the company before you've paid off the 3-5x multiple
of the investment, then the investment essentially vests as if the valuation
cap was 3-5x lower than what it was actually set at.

This probably seems abstract, so I'll make it vividly clear with an example.
Let's say you raise $200k on a $2 million valuation with a 5x return cap on an
SEA. Business goes well, a year or two goes by, and you either sell the
company or raise more capital at a $10 million valuation, having in the
interim say paid off $200k of the agreement from earnings. With 4x still
outstanding. Suddenly, likely to your surprise, that $800k (4x investment
amount) vests into equity—at the $2 million cap from the original agreement.
In other words, Earnest Capital suddenly, to your surprise, owns 40% of your
company. If you hadn't monetized at all and paid any off, this could be a full
50% stake.

Even if you run the numbers with the more conservative numbers in their
document—is it clear to people that a $150k investment at a "$3 million"
valuation could convert to a 15% equity stake in your company?

I'd love to see how this could be revised to address this issue, and I'd love
to see the website more clearly communicate the equity implications. As of
now, I can't help but feel that this is double-dipping, predatory investing,
that is getting heaps of praise on HN due to clever marketing around tapping
into the trend of anti-VC and indie-hacking, that will ultimately lead to some
very frustrating experiences for first-time entrepreneurs that didn't fully
comprehend the terms they were agreeing to.

Tyler—please prove me wrong and fix this thing. Or, since IANAL I may have
completely misunderstood the document, in which case—screw me, my
apologies—but please explain how it actually works :)

[1]
[https://docs.google.com/document/d/1MoLiH_VnhX-0vfZ1zgMSfpcI...](https://docs.google.com/document/d/1MoLiH_VnhX-0vfZ1zgMSfpcIt0rdyD9rc27BbypplDI/)

~~~
hotpockets
Would it be legal for the startup to take a loan of $800k and just pay off the
remaining balance? Then EC gets their 5x, and you keep your equity? (Probably
the new investors would see the advantage of this)

~~~
laser
IANAL, but it's ambiguous from my reading—leaning towards no, not without them
accepting. The reason being that the reduction in the 'Return Cap' is through
a quarterly pay-off-mechanism as a percentage of earnings, set out in the
agreement. There may be case law or general legal precedent that requires them
to take your money if you wish to pay them off, but a literal reading of the
agreement in a vacuum doesn't suggest to me that they have to take your early
payment. There is precedent for things like car loans or mortgages or w/e,
where there's a penalty for paying off early (They want to keep milking you
for interest). So, without an explicit provision I would assume you cannot pay
off the return cap, except through the set percentage of earnings per quarter.

------
lgregg
Tyler, What's your position on B-Corps that aren't 100% profit driven?

[https://bcorporation.net](https://bcorporation.net)

~~~
tylertringas
I like them a lot and don't see any problem with us investing via a SEAL in a
B-Corp.

------
no1youknowz
I was very excited by Tinyseed. However, I didn't quite like the model. I
inquired about a model similar to this and it was declined. Fair enough I
thought.

Now this comes along. Definitely sending out an email! Pretty excited to be
honest.

~~~
tylertringas
The thing is, this category of "not VC" is actually like 99% of all
businesses. There's going to be a ton of diversity of viewpoints and alignment
and I think it's good lots of folks are trying out different models. Not even
clear to me that there will end up being one "best" approach over time.

------
staunch
Anyone helping early stage startups is doing god's work as far as I'm
concerned. Technology is what pushes the world forward and anything that helps
that is, with limited exceptions, a very positive thing.

My questions/comments/criticisms after a brief look, please correct me if I'm
wrong:

1\. It funds startups that already have growing revenue, which is fine, but
that's the hardest part by far. So it might filter out all of the best
startups who can just choose to grind it out a few more months, having already
overcome the biggest hurdle. Taking the calculated risk of funding startups
that are pre-product/market fit is where the real magic happens.

2\. It's legally complicated which means a smart founder would definitely want
a lawyer (unlike SAFE), which could be quite costly. It could (potentially)
scare off future investment as well.

3\. It converts to equity (optionally, which seems scary) to a hefty ~10%
valuation, which is more than YC takes in exchange for a much, much better
deal because they all but guarantee successful startups will raise a large
amount of money at a very high valuation. In effect this costs a startup maybe
3-10x more than YC on the VC route.

4\. Like TinySeed, I think it also ignores the inescapable fact that startup
investing is a hits-based business regardless of what anyone wants it to be.
One out of 50 investments is going to be worth more than the other 49, so it
makes sense to align interests with reality. By focusing on getting paid from
the biggest winners, you can afford to be much more generous and high-minded
with the rest.

5\. Also like TinySeed, it doesn't seem to account for just how high living
expenses can be for founders with families, etc. Having to negotiate with your
investors about paying rent is going to feel a lot like having a boss, which
could be very demoralizing for founders. YC is extremely careful not to make
founders feel like employees for good reason.

6\. Having to negotiate the amount of investment also seems less then ideal.
Knowing exactly what the deal is would be much better than having to haggle as
the start of the relationship.

7\. Wildcard: have you considered evolving this into an ICO-funder for
startups? Equity crowdfunding with an initial seed investor seems like a huge
idea.

I applaud the effort and hope it becomes huge. I wouldn't bother commenting if
I didn't!

~~~
staunch
Unfortunately, after further analysis, my suspicion that this is a very bad
deal for founders seems to be true. A founder would have to be desperate and
ignorant to take this deal, and no one deserves to have years of hard work
wasted by taking a predatory deal like this.

I hope they fix their terms but based on how misleading they've been, I would
never personally do business with this person.

------
javery
I always feels it's disingenuous to say you don't take equity if you ask for
warrants or other % of the upside - it's essentially a proxy for equity. When
you factor in a 3-5X cap, PLUS warrants - this doesn't seem like a better deal
than something like Lighter Capital which has a smaller cap and zero warrants.

~~~
louisswiss
Equity comes with a whole host of conditions (which _can_ be unpleasant for
founders) that Earnest Capital's deal doesn't include.

I think it's more than fair to say they don't take equity.

~~~
javery
Not necessarily, equity and loans both have conditions around them. Sometimes
loans are more punitive than equity. Taking common stock has almost zero
downside for instance, it's when you get in to preferred equity and the rights
that come along with it that you can get in trouble.

------
networkimprov
A "minimum viable product" can raise the range of capital discussed on the FAQ
via crowdfunding (Kickstarter, etc).

Not every product category is suitable for crowdfunds, but for those that are,
a successful Kickstarter campaign is also an effective marketing launch, worth
a small fortune by itself.

~~~
axlemax
I read this excellent article Last week about raising funds on Kickstarter.
TLDR some categories have a hard time raising on Kickstarter
[https://thehustle.co/crowdfunding-success-
rate](https://thehustle.co/crowdfunding-success-rate)

------
asien
Very excited for this.

We have yet to find a funding model where products don’t turn to shit after
the companies that raised hundreds of millions of dollars don’t meet their
promises made to VC.

MongoDB is a great example of a company shooting itself in the foot because
they don’t meet the promises of growth and profitability the market is
expecting.

This fund is a great potentiel for dev tools and deep technology that needs
only a tiny amount of capital at start and then can remain profitable with
SaaS or Consulting.

This model would be somewhat unacceptable for VC because they expect every
company they fund to go public and cash out right after with 100% YoY growth ,
otherwise you’re not a good investment.

Congratulations on this launch !

~~~
kishinmanglani
How is MongoDB a great example of a company shooting itself in the foot? They
IPO'd in Oct 2017 and the stock has almost quadrupled.

EDIT: MDB will also probably get acquired in the next year too.

~~~
jasondc
This is what happens when you only read HN, you think MongoDB is going out of
business, yet the company is worth $5 billion.

~~~
nathan_f77
Wow, I don't think I heard that MongoDB had an IPO and that they were worth $5
billion. Maybe I was on vacation when the IPO happened, so I wasn't checking
Hacker News, because I'm sure I would have remembered that. All I see on HN is
horror stories about MongoDB, or posts about migrating from MongoDB to
Postgres.

------
j_shi
Awesome to see innovation from capital providers on the instrument in the
wild. As a niche market founder wish option like Earnest existed when we were
raising early financing.

Curious - to extent you're willing to share - what dynamics are like for LPs
(assuming raising outside). Since median vc fund return is barely 1x, and
traditional VCs sometimes blow up otherwise good niche companies by forcing
them to go big or bust, targeting 3-5x returns with way faster liquidity for
investors a super interesting alternative.

And if the niche market turns out to be a massive market, can still go in with
eyes wide open!

~~~
tylertringas
> As a niche market founder wish option like Earnest existed when we were
> raising early financing.

Can't tell you how often I hear this.

> what dynamics are like for LPs

Can't really say much on this because SEC. But yes, being better than the
average VC fund (not to mention better liquidity and lower concentration of
returns) is not a high bar IMHO.

------
kubeans
Do you believe there will be an industry of similar funds 5 years from now? If
you're able to share, what is Earnest Capital's return profile? Do you have
LPs?

Thanks for doing this AMA!

~~~
tylertringas
Yes, my goal (with transparency etc) is for there to be dozens of firms in
this space. Confident it will happen. Thanks!

------
a13n
> We agree on a Return Cap which is a multiple of the initial investment
> (typically 3-5x)

Why is this better than just taking out like a 20-30% APR business loan?

~~~
james-anthony
From a quick read of their agreement, it seems like the payments are only made
when you are actually making a net profit, whereas a traditional loan would
require mandatory payments or interest would accrue.

This seems like a middle-ground that is better suited to starting up companies
that most likely won't be unicorns. They only get paid once you get to a
"comfortable" spot, financially.

Another consideration may be that in the event of business failure, you'd
still owe money on the loan but the Shared Earnings agreement would
essentially go away since the business is no longer viable. Not sure about
this, but this is what I'd imagine would be the case.

~~~
JackFr
But it seems likely to me that their 'investment decisions' are going to be
made based on a run-of-the-mill small business credit model which will be
heavily revenue focused.

It's a small business loan with terrible terms.

~~~
tylertringas
We're more of a substitute for seed equity. Or at least that's the lens
through which we have structured our terms and strategy. Most of the co's we
are looking at would not be able to get a small business loan (zero
collateral, very limited financial track record by debt standards, etc)

------
lifeisstillgood
Rob Walling is launching something a bit similar (cannot remember the name
right now). But it's aimed at bootstrapped starters who aren't planning a
unicorn billionndollar exit.

Why is this now a model? Too much cash chasing too few unicorns ? Too much
money lost on unicorns that cannot fly or a realisation that chasing unicorns
leaves herds of perfectly good horses untended?

~~~
patio11
I'm a (tiny) LP in TinySeed (Rob's fund), another effort with similar thesis,
and am broadly supportive of these experiments generally.

Speaking solely for myself, but gesturing in the general direction of my peer
set: there exist some software entrepreneurs who have substantial operational
expertise and have made some money, but who do not feel like they'd add much
value in the unicorn hunt, partly due to access reasons and partly due to
different skills. There's a distinct body of practice between e.g. the things
a YC partner would tell you to do about fundraising, the things a growth stage
VC fund would tell you to do about organization building, and the things a
self-funded software founder would tell you to do about e.g. testing AdWords
copy. There is a certain degree of overlap, in the same sense that all of them
overlap someone whose business model is buy-and-hold apartment buildings in
Chicago, but there is a reason none of them buy-and-hold apartment buildings
in Chicago.

By comparison, I feel reasonably confident that "six figure SaaS business
trying to get to seven" is somewhere I understand pretty thoroughly, would
almost always enjoy a conversation with that founder, and (napkin math) looks
plausibly mutually interesting.

Why _now_ and not five years ago? It feels like a generation-of-business
thing: the reason everybody who made money at Google / Facebook didn't invest
five years before they started investing was because they hadn't made money at
Google / Facebook. Did the opportunity exist five years ago? Probably, as
evidenced by the successes from that generation. Is the opportunity better
now? Plausibly yes, as demonstrated by all of the people who were successful
writing down what they did, doing technology transfer on that to new operators
(often for free), the ecosystem radically improving (inputs, platforms,
employees, exit options all got a bunch better), etc.

~~~
kinkora
probably a loaded question (so I apologise?) but why are you reasonably
confident for growing a 6 -> 7 figure businesses? what about 7 -> 8 figure
busineses?

context: i ask because i have this problem right now and find this is a harder
hurdle (trying to double a 7 figure business without VC money)

~~~
rficcaglia
My history is 3x 7->8 and 1x 8->9, 3 with VC, 1 with no VC...we definitely
found it easier to go 6->7 in all four as the “early adopter” set all talked
to each other and that was enough to get momentum and small enough that bigger
players take no notice. 7->8 you start to get noticed which is both good and
bad. Convincing enough buyers to “cross the chasm” and not go to a competitor
is an entirely different org challenge. Also the expectations of the larger
buyers adds cost and complexity (ie channel sales vs outbound vs inbound)

If you are in SF area happy to host 7->8 beers/coffee meetup!

~~~
kinkora
interesting background you have there and yep, i agree on that it is an
entirely different challenge trying to restructure the business to handle the
bigger spending customers.

Anyway, thanks for offer but I'm not in SF!

------
tobiasszarowicz
I really like this concept. First Investors often face the follow up dilemma
when they cant join a follow up round and get squeezed out with much a lower
valuation. Am I right that this wont happen to you because your earning share
is basically just a position on cost side? Or could that even be an obstacle
for follow up rounds?

------
rajacombinator
If anyone is looking for a blog post writing prompt, I would love to see
something written from a founder's perspective breaking down when one should
consider this form of funding, vs. YC/VC, vs. "grinding it out" and continuing
to bootstrap. Or taking personal loans, etc. This could include some analysis
of the total cost of each option, the benefits, etc. Specify numbers about you
should use X amount to pay your own salary, Y to hire people, Z for
marketing/other spend, etc.

I think the YC/VC pre-market-fit-hoping-for-billions model is well understood.
But I find it difficult to understand when a bootstrapped cashflow positive
business should consider any of these options. If one has a bootstrapped side
business making $X/mo and a job making $150k+Y per month, when should one go
all in on the business?

------
friendly_chap
Wow, very interesting. My only question is about the 3-5x cap: given how many
companies fail/never turn a profit, how is that going to give a return?

They must be really confident in their ability to spot good companies.

Very happy to see alternatives to giving away equity however.

~~~
seibelj
They do take an equity stake but it only converts in a future funding round or
acquisition. If you stay independent forever they can't provide any pressure.
This is basically like normal equity but a weaker form I guess.

~~~
tylertringas
Yes, by default we don't take equity (shares, board seat, none of that). If
you decide to raise a round of equity financing (ie VC) we could convert into
equity alongside them and if you sell the company we get a % of that. There's
a spreadsheet here that lays it out: [https://earnestcapital.com/shared-
earnings-agreement-digging...](https://earnestcapital.com/shared-earnings-
agreement-digging-into-the-numbers/)

------
danschumann
This is great stuff.. I've been waiting for a VC firm for a while that
wouldn't just push me to pump and dump. I'm making a company for the long
haul.

------
desireco42
Honestly, this looks perfect for my case, I am too early for Indie.vc for
example, but overall, I love what is happening in this space. Pretty much, you
get to prove your business model somewhat and you will get support. Most of
the time, this will result in much better growth and focus, and few of times
things don't work out, it will not be as often as it would be without business
being proven.

It is great time to be bootstrapper.

------
gnicholas
Do startups that raise from you tend to have other investors come on at the
same time? If so, do they use similar terms or something completely different?
If this doesn't happen now, would you hope that it would in the future (that
is, that people would want to follow a round led by you)?

------
throwaway-1283
Income Sharing Agreements are super interesting. Definitely an opportunity to
building a SaaS for managing agreements from contract to facilitating the
payments over the lifetime of the agreement...

------
sumitsrivastava
A quick question for everyone: Is remote that big? Most indie projects I read
about these days are something related to remote.

~~~
tylertringas
Uh huh. [https://earnestcapital.com/request-for-
startups-1-remote/](https://earnestcapital.com/request-for-startups-1-remote/)

~~~
sumitsrivastava
Yup, I already read that before asking, hence the question. Is remote really
that big?

------
elliekelly
So the SEA functions as a sort of hybrid preferred shares/convertible note?

~~~
tylertringas
Not really either of those. A closer version would be profit-share + a SAFE.
The primary function is for us to share in the profit (or more specifically
"founder earnings") of the business alongside the founder(s). _If_ you sell
the business or decide to raise a big equity round later, we convert a lot
like a SAFE.

------
JackFr
This looks a lot like a loan.

I would look at OnDeck or Kabbage before going this route.

~~~
tylertringas
Founders should def consider all their options. It's very much not a loan
though. There is no repayment schedule (we get paid as the founders generate
Founder Earnings) and there's no personal guarantee. On average I think it's
more likely that we would fund a business earlier that might use a number of
cool new debt products to continue growing once it hits a level of revenue and
business maturity.

------
shafyy
This is amazing. Good luck!

------
bfritton
Love this

