But for these tech companies, traditional banks are not good funding sources. They don't understand these cos (no hard assets)
The Venture Industrial Complex as I've heard some describe it makes you think that tech companies require outside capital and are either 10x or bust. That's b.s.
The company I co-founded is 25 strong (growing to 50 this year) and is a real company. It's possible. Don't believe the hype.
BTW, I think this Indie.vc experiment is an indication of where the world of tech investment is going.
That's just what LPs expect of this asset class. If they need to allocate capital for illiquid equity with some cashflow kicked back and solid (but not spectacular) IRR a few years down the road, why not just invest in real estate?
Reality is most VCs don't generate spectacular IRR (or any IRR at all) outside of the top 5%.
Revenue-based financing to tech companies is one model that is quite interesting.
Right, which is why a VC selling such product (low return but same as before high risk of failure) would have a tough time. They are essentially selling the ROI similar to that of real estate (or some similar asset class), but with higher risk of failure, lower resale value in case of a bust, and lower probability of being able to wait a crisis out by sitting on assets and not selling during a market downturn - what a deal.
> Reality is most VCs don't generate spectacular IRR (or any IRR at all) outside of the top 5%.
I don't think it matters for large LPs, as they diversify across a bunch of VCs anyways, and even those VCs have a collection of funds with wildly different returns (the KPCB fund that did an early investment in Google, e.g., did great, the KPCB cleantech fund was a bust, you ask two different KPCP investors and you'll get two very different opinions depending on their exposure).
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.
In regards to the latter, EdTech is a good example. Time to exit is at a minimum double what it is in the enterprise or consumer space. This is driven by the bureaucratic nature of the sales process which in turn leads to much longer sales cycles (think 6-18 months to close a deal). The upside of course are things like high customer retention / low churn and almost guaranteed collection rates.
Companies that operate in industries like these reach a point where they have a proven product and real product, but profit may not be high enough or is not growing fast enough for the founders to make the investments they KNOW will generate additionally growth.
Large VCs are turned off by these companies because the industries they operate in are not big enough to sustain the large 9-10 digit exits they seek, while smaller VCs looking for smaller exits are equally turned off because the ROI comes too slow.
For these companies, oftentimes the only option is either private Angels who are personally vested in the space or bank loans. It's hard to find the former and even then they can't offer much $$$ and the latter tends to be unworkable because of either the lack of assets, misunderstanding of the business models, or established (5+ years) historical revenue track.
Just my $0.02
I'm citing from W. Draper III's book, the Startup Game, "Tim Draper's First Six Investment": "... Tim intoned the name and and fate of each company. The first five, as I recall, were as follows: 'dead, dying, bankrupt, probably won't make it, and not so good'."
Investment No. 6 was "Home run!".
A VC (or LP of a VC) would describe a venture as a success, when it brings a multiple of its initial investment 10x, respectively a better IRR the LP would get in other markets (e. g. real estate, money lending).
They also would take the risk to invest in companies with zero cash flow and only a chance of having revenues at some point. So that's high risk, while comparing it with
targeting small companies with a positive cash flow and with none to small growth, prevented from growth by cash, network or experience of the founders, that would be a nice target for an investor who wants to see a ROI in the next five years and everything which comes on top makes his (paid) investment more valuable. It's more like a traditional investment approach. I don't only think there is a niche for this kind of investments I would even say that more "companies" / founders are fitting in that description than in the VC criteria.
Which is also why it's hard to raise $10 mil, but it's pretty much impossible to raise $10 thousand.
The truth is, life is messy. Everybody has things come up. Heck, even some of the greatest entrepreneurs have found themselves dead broke at one time or another. It's hard to say that it's an indicator of success or failure though. Due diligence could weed out the financially-irresponsible, but it's not always as simple as looking at a bank account.
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".
> 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.
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.
The difference between a loan and investment is that if your business fails you don't lose your house.
> 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.
Looking at it cynically, it could be a great Goldman Sachs instrument - no exit we win! exit we win! But from a founder perspective, it would be helpful to have a couple of worked examples.
The part that's not a small business loan, I'm guessing, is that these are venture capitalists acting on longshots.
5-10% won't let you tolerate any misses.
It seems the financial terms are clear as cement too. I'm really interested in this model for my business (sounds perfect for where we are) but clarity of terms makes me hesitate.
You would strike a deal of how many dollars per share just like any other investment.
The part that a few people in this thread don't seem to be getting is that distributing money via dividends is something a founder wants to do, not something they are forced to do.
Why? Because the founder gets their percentage of the money!
Normal VCs don't want you to distribute because they only want you to grow. Any money that you have they want you to spend on growth so that you can do a big exit. This is a totally different mindset then making a normal company that just earns money and gives that money to it's owners.
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.
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.
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!)
> 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.
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?
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?
Sidenote: is $50k/year a generally accepted figure or were you just demonstrating the point?
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.
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/
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.
You can get there with $100k in many cases in 12-18 months if not sooner. Might not be a huge VC business, but still a sustainable growing SME.
We've raised $200k with Weekdone (https://weekdone.com/) but are taking a similar path currently. 5 persons, around break-even, growing month by month. Not really looking at additional investment for now, but might consider someone like Indie.vs if there's a good fit.
A company I know did annual revenues of 0, 50k, 250k, 750k, 1.2m, 1.8m and over 2m this year. Pays good dividends. No outside investment. Some of the financing in early days was generated by custom software dev work. Have seen quite some similar ones around.
Your 0-50k-250k-750k-1.2m-1.8m-2m+ progression sounds like a great starting point for analysis. If that's a 3 - 4 person founding team, assuming these are top notch employees that could earn $100k/yr on the open market, that's at least $150k fully loaded per employee, 12 person-years before break-even, that's $1.8m for payroll, taxes, and benefits. Throw in another $500k for company expenses at least.
Now, to some extent (ignoring the legal/tax issues) you can ask the founding team to contribute that $1.8m out of their own pocket in the form of foregone salary/benefits and say it's a bootstrapped company with "no outside investment" but in reality it's just the team absorbing that $2m+ of required startup capital.
You must keep in mind though that for $400-500 per month you can rent a luxurious 1-2br apartment and all the services cost also a fracture of what they cost in the US. The spending habits and lifestyle of someone making what seems really low here is much much higher than someone in SF Bay Area.
The argument of what someone would make in the US does not count. Because of the lifestyle and love for your own country most tend to stay in their EU countries. Moving to US and making $120k per year would be a downward spiral for many.
That 1.8m company probably has a headcount of 25-30 people, all world class top notch people, and the company is still hugely profitable and dividend-paying.
To the same extent these types of companies succeed the H1B program also becomes less relevant. To your point, coming to the US would be self-defeating since it would change the entire economics of the situation.
I think there are still very large barriers to entry; many industries where you still can't close sales fully remotely and personal networks / connections you miss out when selling to a foreign country. And in case of TFA I think it implies this is finding a US startup so your points are valid and important but perhaps OT.
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.
Academic startups where the technology is based on research are bootstrapped until the commercial viability of their ideas is demonstrated, wherein they sell their patent portfolios. Is this an exit?
In many ways it's easier today because of so much open-source software, and so much to disrupt :)
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.
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!
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.
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.
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.
So are distributed teams frowned upon?
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).
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.
But how will you compete with the government of Canada who gives $50k to $500k in grant money for new startups?