
Indie.vc - jmduke
http://indie.vc/
======
bjorntastic
Back to the roots. This is very similar to how investing is done outside of
tech. Someone opening up a hotel/restaurant will probably not have a huge
exit, but promises his investors a payback either through dividends or loan
paybacks with interest.

~~~
seizethecheese
The interesting corollary to this is: what kinds of tech businesses are likely
to generate 1-3X returns w/ lower failure rate + cash flow vs. the typical 10x
returns + high failure rate seen in tech investing while also requiring
capital?

~~~
Negitivefrags
The kind of company where you have one or two founders who are going to take
6-12 months to personally create their product but have no savings and so
would need money to live during that time.

~~~
seizethecheese
You're describing the need for investment generally, I'm asking what companies
fit this model specifically. It's pretty well known that tech startups have an
extremely high failure rate and return rate and traditional VCs fit this model
well.

~~~
Negitivefrags
I think you might find that the failure rate goes down significantly with
business models that are targeting smaller market segments and intend to make
smaller businesses generally with the intention of just being profitable, not
selling.

To take my company as an example, we are a online game specifically targeting
players who were addicted to playing Diablo 2 for an extended amount of time.
This is because we felt we understood what that exact market wanted better
than anyone else and had a unique opportunity to deliver on it.

The intention from the start was to make a business that makes a profit, not
to make a company with the intention of selling out. Infact, when we did do a
capital raise at one point we were very clear in our pitch to investors that
the intention was to distribute profit via dividends.

We have been successful at doing that and the project felt like a reasonably
sure thing from beginning to end even when it took a lot more time and budget
than we were expecting. We were 100% confident that the exact market that we
were targeting existed and that they would give us money when we were done. In
our minds, the only thing that could go wrong was failing to finish the
product by running out of money.

Now admittedly this particular tale is probably just survivorship bias so you
should take it with a grain of salt.

However, my point is just that there are a lot of little markets that VCs will
not care about because they are too small. They are just waiting for someone
to walk in a grab the few millions of dollars a year of profit that are
sitting on the table.

~~~
TheSilentMan
Everyone thinks (or at least when pitching will claim) they have a unique
understanding that lead them to a product that fits the market they are
targeting better than anyone else. As an investor the problem is trying to
figure out who actually does have a potentially successful product and who
doesn't. That happens to be incredibly difficult, so when looking at a
business that doesn't have assets that are worth something even if the
business fails, generally an investor is going to want a high potential
payoff.

------
cturitzin
At first thought, this is very refreshing.

I know many founders who would love to build a sustainable business that does
something useful and not have to continually spin a tail of "being the next
IPO".

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7Figures2Commas
> A unique aspect of the IdVC funding model includes the option of cash
> distributions to investors.

> Traditionally, technology investors only get their money out when you sell
> out (another term for this is a “Liquidity Event”). An investment from IdVC
> doesn’t preclude you from selling, but in the event you stay independent,
> our investment will get paid out as distributions from cashflow over time.
> This is fairly common in most other industries, but we have not seen it
> applied to technology companies until now.

Are distributions required? How are they structured? When do they start? How
are distribution amounts determined? Does the founder have a say in any of
this? The attractiveness of this program depends a huge deal on the answers to
these questions so it's kind of surprising that interested parties are asked
to apply before any detail about the distribution terms are disclosed.

Incidentally, as for the suggestion about novelty, there are a number of
revenue based financing companies that are focused on SaaS businesses. They
function somewhat similarly but usually without an equity component. The
financing company provides the SaaS business with a loan. The amount and
repayment terms are tied to the recurring revenue the business generates. Some
of these are structured so that they function like a line of credit, and many
can be paid off early without penalty.

~~~
larrykubin
I attended a talk in Seattle earlier this year about distributions like this.
Here are the slides with some details on how it might work:

[http://www.element8angels.com/wp-
content/uploads/2014/04/Str...](http://www.element8angels.com/wp-
content/uploads/2014/04/Structured-Exits-David-Bangs.pdf)

------
ChuckMcM
Interesting pitch, but it is confusing to me. How is this different than just
getting a small business loan / line-of-credit? It seems like most financial
institutions can price into that an expected rate of return and price out the
loan appropriately. Does it "feel" less bad if you leave someone with
worthless equity than a worthless promissory note if the business fails to
take off?

Would be interested in reading one of their typical term sheets and comparing
it to say a SAFE from YC or a simple business loan.

~~~
Negitivefrags
Nobody will give you a business loan against a startup company without a
stable existing revenue stream unless you provide a personal guarantee with
collateral that you personally own.

The difference between a loan and investment is that if your business fails
you don't lose your house.

~~~
mikeyouse
A pre-revenue biotech startup I worked for had a venture loan from SVB that
had some equity-like covenants but was primarily backed by our IP. I don't see
why something like that couldn't work with software companies as well if they
have IP worth protecting.

~~~
bjelkeman-again
How did they get to the point of having IP in the first place? Who paid for
that work?

~~~
dnautics
If it was biotech, the answer to that question is probably, "you", nih grants
at a university, or an SBIR, from some government entity.

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fivedogit
I really like this idea. There is no "right" way to start a business and, in
fact, there are many right ways. It all depends on what you're starting and
what you need to get to the end goal.

More importantly, I'm hoping that by looking at seed funding from a different
perspective, this can put another dent in the sometimes-fallacious "you need a
cofounding team to start a company" myth. Until now, accelerators have put an
outsized penalty on one-man-bands when there is a significant risk mitigation
benefit to letting one guy get traction and then _hire_ the founding team. In
such situations there is far less potential for messy (and almost always
fatal) startup "divorce". The cheaper and easier it becomes to start
potentially huge businesses, solo-founding _should_ become commonplace.

To clarify, I don't know if this is something the organizers of Indie.vc are
thinking about. I'm just glad to see fresh eyes on the current YC/TS/Angelpad
paradigm.

------
antics
One problem with traditional VC money is that (most?) major VCs seem to enter
the discussions with an idea of how much stake they want in the company
they're investing in. So, when you have a number of VCs with this idea in a
competitive round, the only thing that a VC can really change is the amount
they're putting in relative to what others are putting in, so they all put
more money in and the valuation goes way up and the amount of money ends up
ballooning to 2 or 3 times what the founders originally wanted to raise. Lame.

Likely or not to succeed, it's clear who the VC system serves right now, and
it's good to see the scene starting to shake up. If indie.vc can attract a
nontrivial number of good early-stage startups, then they have a legit shot
here. And good on them for taking that risk.

------
zackmorris
"Our investment is also structured as a line of equity; meaning, you only draw
down the amount of capital you need, when you need it."

This is revolutionary. Whether indie.vc works out or not, this is how funding
startups should work. The developers who draw the least funding and the
investors who provide the most funding should receive the most equity.

Does anyone know how much equity each startup receives if it draws the full
$100,000? Will it be 50% to developers and 50% to investors, or some other
ratio?

Hypothetically if they add a second round someday, could it work in a similar
fashion, where if the startup draws another $100,000, its equity falls to say
somewhere between 0 and 25%? This would probably be nonlinear and depend on a
lot of factors (which basically means don’t count on it!)

------
joshdotsmith
The "who" describes my situation perfectly, but at first blush the logic and
positioning both read as internal contradictions.

> Those who focus on raising outside capital and achieving fundable milestones
> have a very difficult time getting off that VC treadmill.

In other words, getting off the "VC treadmill" is hard because of structural
problems from deals and milestones, and psychological problems instilled in a
team now dependent upon outside money. While I see how Indie.vc addresses the
former, they seem to sweep aside the internal contradiction in the latter.

Anecdotally, those bootstrappers who have succeeded have not done so in spite
of their difficulties raising capital, but because of the attitudes those very
difficulties cultivated. You know, the ability to make tough choices on
product development, the urgency to prioritize customer development, the
clarity to cut costs and increase margins. As a casual observer of other
startups, I tend to see an inverse correlation between the strength of these
attitudes and their total capital raised. Maybe this is a non-issue when the
sum is just $100,000. I don't know. But it concerns me just enough to be
skeptical.

Assuming those concerns are unfounded, my next concern is with the
positioning.

> While it’s true that some companies really do need outside capital, there
> are many examples of great companies that have reached revenues of hundreds
> of millions of dollars, or even gone public, without ever taking in capital,
> or taking it in only at a late stage, when they’d already created a high
> valuation by bootstrapping the company.

This seems to contradict the pitch that I need money. Others before me have
bootstrapped without it. So remind me: why do I need to raise capital?

My fear is that this pitch will attract founders who couldn't figure out how
to get $100,000 of working capital, rather than those who'd rather be building
than running on the bootstrapping treadmill. I'm guessing this is a concern
for them, as well, since their application asks:

> How have you been funding your company until now?

I feel you need to dig that knife deeper on the pains shared by my fellow
bootstrappers. What pains are you hoping we'll avoid? Early death by cash flow
problems? Lack of dedicated focus? Sputtering growth? And why is your approach
right vs other options?

I hate being a wet sock on HN about potentially innovative things. I just hope
my 2¢ helps clarify their vision. I really want to see something like this
succeed.

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dwightgunning
I'm curious to see what factors will drive their investment decisions. Typical
"exit oriented" investors are taking very high risk for high reward.

This significantly changes the potential upside ROI although it is probably
still interesting to some investors. It's cheaper/faster to start up nowadays
but there is also far more people doing it. So what I don't see is how they
tangibly reduce the risk of failure?

~~~
xg
I think the biggest qualification factor of a cash flow positive business
mitigates quite a bit of risk (as long as there's some minimum bar of >= $50k
/ year).

The part that's tough is: what's the use of raising additional capital?

Is it to go full time on the product? Is it for marketing?

~~~
dwightgunning
Positive cash flow is a great indicator although with early-stage companies
that haven't achieved meaningful scale or been in the game very long it still
seems a tricky sell. That said I like the idea and hope the model proves
success for people.

Sidenote: is $50k/year a generally accepted figure or were you just
demonstrating the point?

------
zaroth
The model is a fairly quick development cycle, fast early adopter sales, quick
conversion to cash flow positive. Well, that's a lot of things that have to go
right all in a row with only $100k to start.... It may be enough to start some
kinds of businesses, but many will require significantly more in startu
pcapital to brave even an accelerated road to break-even.

As to the _model_ , the question is does it fully factor in the risk level?
The idea is lower the goalpost and manage the cash burn more carefully, to
ultimately obtain a faster break-even and then ride growth through reinvesting
profits, to some point in the future when you can actually start making
distributions. The premise, possibly flawed, is that by not shooting for the
stars you should be less likely the fail. They don't need to win as big each
time, because they will win more often?

Businesses need capital to grow. It's that simple. $100k is a bare minimum
startup fund for a sole founder for less than 6 months. It's not a serious
amount of money. You can't expect that $100k to buy enough revenue to sustain
full-time employees and also be paying out a meaningful dividend.

If the idea is to really, truly, avoid VCs and institutional investors.... I
think you need to be able to seed about $2m. For example, structured as a Line
of Credit, drawn over 48 months, but with warrants to convert into common
stock at some ratio. The conversion ratio in the warrants adjusts to provide
anti-dilution as needed.

That would provide a real amount of money for a 2-3 person team to potentially
solve a real problem. And that would give the investors a meaningful
percentage of the company and choice between a cash payoff or taking shares.
That would be a really appealing alternative to VC funding which some strong
founding teams might take notice.

~~~
asanwal
$2M just to get started?

If that is what one needs to just seed a company, then entrepreneurship has
just become another career path with little risk (still get a decent salary)
with a call option on some upside attached.

The reality is that capital is not a requirement for success although we do
tend to celebrate it needlessly (1)

There are real tech companies out there (many mentioned in the indie.vc post)
that built a solid initial product, sold it, got customer feedback, made
improvements, and sold some more. They didn't have the luxury of $2 million or
necessarily even $100k.

If you're selling the shoot-for-the-moon, billion dollar IPO, "change the
world" dream from day 1, $100k may be immaterial, but I know of many solid
tech companies (ours included) that are growing quickly (we're doubling
headcount in 2015 from 25 to 50) who grew the old-fashioned way -- by funding
out of revenue and who started with no outside capital at all.

(1) Best article about the myth of VC - [http://recode.net/2014/09/11/the-
myth-of-venture-capital/](http://recode.net/2014/09/11/the-myth-of-venture-
capital/)

~~~
zaroth
$2m seed is definitely on the high end, but if the entire concept is foregoing
future VC rounds, then I think that does raise the bar on the size of the
initial raise. On the other hand, if you're going to suffer the burden of
investors, it's simply not worth it for $100k. That doesn't really
meaningfully change the equation or risk profile from the point of view of a
founder committing 5 years to a project.

I think the vast majority of companies will fail before break-even with only
$100k to start if the founders don't have the personal savings to allow fully
sweating equity (a.k.a effectively a 3 person founding team contributing their
own $1m over 3 years).

Obviously it depends what you're building, but if you're spending even just 2
work-years (a fairly trivial amount of development) developing the first core
product, $100k isn't going to get you very far. Throw in startup costs, maybe
a patent filing, a few trade shows, SG&A expenses...

To put it another way, what ROI do you expect from a $100k investment? S&P 500
will get you around 8% ARR. If you're happy getting ~$10k of dividends
starting in year 5 on your $100k, I guess that's fine then. To me that's a
small percentage of a small business, and the employees will rightly own 95%
of that company since they will have effectively paid-in about 10x as much.

At a $100k with the expectation that's your solitary raise, it's barely worth
the overhead that comes with it.

------
ykumar6
Is bootstrapping really a viable path to an exit in 2015? Most of the
companies indie.vc mention were founded in the early or mid 2000s, so these
are bad examples to follow.

Back then, there was much less competition for eyeballs, resources,
developers, etc. You _could_ grow slowly, without worrying about VC-funded
company X or Y or Z catching up.

Today, that seems much much harder.

~~~
yesimahuman
Incredibly viable. If you make something people want, companies will want to
buy that. The plus side is you could make the bulk of the return due to lack
of dilution. The downside is the valuation could be lower (though I might be
totally wrong about that) due to lack of formal valuation in the financing
market, and lack of social pressure to make investors happy.

~~~
joshdotsmith
I'm very curious to hear others' insights on the valuation issues with
bootstrapped companies. I share your concerns here.

------
hv23
Interesting concept. Who's behind it?

~~~
kbody
Looks like Bryce Roberts, Managing Director & Cofounder of OATV ( O'Reilly
AlphaTech Ventures - [http://oatv.com/are.html](http://oatv.com/are.html) )

------
karamazov
I'm curious to know how they plan to compensate for the failure rate of
startups.

If half of the portfolio fails (a good outcome), the cashout option would need
to be 2x the original investment for them to break even. More if failing
companies are likely to use up the entire line-of-credit and successful
companies are not.

Setting the payout to be a percent of revenue might work, but could also kill
a company with thin margins. Setting it to be a percent of profit will
encourage companies to post zero profits. I'm not sure what the other options
are.

~~~
Negitivefrags
I think you might be missing how a traditional company works.

Nobody sets an arbitrary percentage of anything and forces dividends.

When the companies directors think that there is enough spare money in the
bank account, generated from profits, they distribute those profits to the
people who own the company.

The founders and investors of the company get the actual profits that the
company generates. A strange concept I know!

~~~
karamazov
First, this sidesteps the question. The writeup implies owners will be able to
buy out indie.vc, rather than feed them a perpetual stream of dividends.
Regardless of how they do this, what is the buy-out amount? It will have to be
an integer multiple of the money invested to reach breakeven.

Second, many companies, especially tech companies, do not pay dividends.

In particular, a growing company would be foolish to distribute dividends;
dividends are for companies that have reached a steady-state. Waiting for a
company to hit steady-state from inception can take a very long time.

~~~
rtwn
> Second, many companies, especially tech companies, do not pay dividends.

My interpretation is that indie.vc is trying to change that from being status
quo. There is a largely forgotten type of business that is not covered in tech
media, which is highly profitable and pays dividends.

------
forsaken
This is really interesting. I have been having conversations with a bunch of
folks in the Portland area about trying to find funding with a very similar
model.

Glad to hear that other folks are thinking, and doing things, along these
lines.

I love the fact that it is offered as a line of equity. Being able to get
money when you need it, but not take it if you don't, makes it a lot easier to
keep your spending low, and not have a pile of cash burning a whole in your
pocket.

------
liquimoon
This is called "loyalty capital". See this Clayton Christensen interview video
for more detail
[https://www.youtube.com/watch?v=KYVdf5xyD8I](https://www.youtube.com/watch?v=KYVdf5xyD8I)
(starts around 23:40)

~~~
fudged71
This is the only reference to the term "Loyalty Capital" that I can find
online. Strange.

------
zacharycohn
My biggest question... who are you?

~~~
MrAlmostWrong
If you check the bottom of the site there is an email address that you contact
to get invited into the slack. It belongs to
[http://oatv.com/](http://oatv.com/) so I would assume that is who is behind
this.

~~~
dhimes
OT: how does slack make money? What's the tradeoff for using them?

~~~
detaro
[https://slack.com/pricing](https://slack.com/pricing)

------
mtgentry
"Each successive quarter will involve a 3 day weekend to be held in various
startup cities including Austin, LA, Portland, NYC, Salt Lake City, Chicago
among others."

So are distributed teams frowned upon?

------
dmor
This is great for niche SaaS that can get recurring revenue going within 6
months but might have market size challenges that would make it difficult to
get venture backing.

But if all you need to do that is $100K, there are a lot of ways to get that
(like saving money for a couple years).

------
pcarolan
It would be nice to get some more info on the VCs behind this. Who are you,
and what have you made?

~~~
xasos
I would love this as well. Looks like it's Bryce Roberts and OATV spearheading
the effort[1] and they will probably reveal more soon.

[1]
[https://twitter.com/bryce/status/551206219885473792](https://twitter.com/bryce/status/551206219885473792)

------
pkrefta
Would love to see something like this available for European entrepreneurs.
Great idea :)

------
kenshiro_o
Are you guys planning to do something similar in Europe, say London, anytime
soon?

------
jonbarker
How is this different from a convertible bond?

------
loceng
Canadian companies accepted?

~~~
curiously
well why would you need to when canadian government funds tech startups with
amounts greater than what YC offers?

~~~
loceng
I hear of some money sometimes being given out, however unsure of how fast of
a process it is, and what state your company needs to be at to qualify - or
what types of companies qualify.

~~~
eswat
Here’s a very brief gist of the Canadian government programs applicable to
startups.

You’re looking at either IRAP or SR&ED (aka SHRED), the former being a <$50k
grant and the latter being tax credits. Because one is finite cash and the
other being credits, there’s less competition with getting into SR&ED than
IRAP. For both you need to be developing a tech-driven product in Canada that
has the potential to drive growth and earn revenue, so side projects are a no
go. IRAP is for new-ish projects while SR&ED can be for new or existing teams.

I’m not sure about SR&ED but to get IRAP funding you need to talk to a
representative who will assess the project you’re pitching. Depending on the
person you get they can be brutal with expectations, expecting a business
model canvas, strategies for driving growth and revenue, clear details of why
you need the $30k being offered, the technical aptitude of the team executing
the idea, etc.

Hope my chicken scratch clears some things up. Getting both is not a quick
process but shouldn’t take more than a couple months to go from contacting
your CRA representative to getting the money.

------
javery
Doesn't Lighter Capital do this? Or other royalty based investments?

------
zkhalique
This is run by Bryce.vc, right? O'Reilly Media?

------
hongquan
I think I'm going to apply. Anyone else?

~~~
mhluongo
Why not? It's a quick application.

------
BillFranklin
Is Aral Balkan involved in this?

~~~
mindcrash
No, and this has nothing to do with [https://ind.ie](https://ind.ie) nor its
non-VC backed business model.

~~~
kolektiv
My first thought on this was "wow, that name couldn't clash any more with the
ethos of ind.ie". I would hope they'd think about changing it, as it's really
a bit insensitive at the least.

------
curiously
Yes and Yes a thousand Yes for this intiative.

But how will you compete with the government of Canada who gives $50k to $500k
in grant money for new startups?

~~~
dataminer
Can you provide more information about Canadian government grant?

~~~
MichaelGG
Last I checked, these startup grants were for 29 and under or for less
populated areas (like Northern Ontario). Although one friend got $80k to write
some open source software. It may have been Ontario specific.

~~~
curiously
what are the requirements?

