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While other VCs seek Unicorns, Indie.vc is all about cashflow (pando.com)
61 points by r0h1n on March 3, 2015 | hide | past | favorite | 31 comments

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?

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.

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.

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.

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.

thanks for the encouraging words.

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.

If you're making more than $200k in revenue check out revenue financing: 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.

Interesting, thanks for the link.

It certainly isn't for everyone. Perhaps it can grow to larger companies over time, but we wanted constraints on the initial experiment.

People who are applying seem to be equally split between those looking for cash and those looking to be part of the peer group and programming we have planned for the year.

I'd be happier if there was a way to pay back early, say to reduce end cost to 3x return, in the case that you bring in investment.

our assumption is that we'd need to wave our rights to distributions should an equity financing come together.

Remainder converts to equity somehow then?

we convert at the pre-determined equity amount.

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.

It's worth reading indie.vc's response to this article: http://bryce.vc/post/111385165695/the-biggest-misunderstandi...

Thanks, that was a good read. I found this part interesting:

"It is no coincidence that much of the new money flooding into the startup world is coming from the same banks, hedge funds and financial institutions who flooded into the housing market last decade.

With their capital and this dangerous narrative, we’re not unicorn hunting; rather, we’re becoming the subprime lenders of the internet economy funding digital McMansions built on increasingly questionable foundations."

[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.

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.

I think a misconception I am seeing people have, please correct me if I'm wrong, is with the understanding of distributions. You could re-invest 100% of what isn't going to founder salaries into the business, however if $100k is going towards founders then they receive $20k and Indie.vc receives $80k. Is that correct?

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?

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

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.

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

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 [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.

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.

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.

Hopefully the application and interview process will help us weed out the scammers.

Banks are dumb money (no support), and if you don't pay them back bad things happen. They're great for conservative investments, not for riskier ones.

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.

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

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