7 ms·

Indie.vc: Unicorns Are Out, Profits Are In

181 points by BobbyH 6y ago

Peteris 6y ago
Paywalled.
lawrencevillain 6y ago
So VC's are out, bootstrapping is in?
- qppo 6y ago
  Debt convertible to equity is in.
burtonator 6y ago
@Indie.vc ... you spent a ton of time writing this post only to have it paywalled by medium. I can't read it... Ditch medium as they aren't compatible with your business model :-P
- derekdahmer 6y ago
  It's not paywalled. You can read it with a free account.
  - eitland 6y ago
    Or in a private tab. But the point still stands: they are using a medium that hurts the message, and in a way we are paying - with our time and patience.
  - ProAm 6y ago
    There is no such thing as a free account, just like there is no such thing as a free lunch
  - Pfhreak 6y ago
    That's a paid account. It's just paid with Metadata rather than dollars.
  - rleahy22 6y ago
    "[redacted], get unlimited access. You've read all of your free stories this month. Become a member to keep reading."
- toomuchtodo 6y ago
  Yeah! Substack > Medium.
  - blocked_again 6y ago
    Ghost > Substack
    - ClumsyPilot 6y ago
      Wordpress > Ghost. Its 2020 and ghost does not support a table, as in normal table copy-pasted from excell. Or audio. Or a gif, or comments. Sure you can host them elsewhere, but how many secondary services am I meant to use for a personal blog? As i get older, I seem to be growing respect for legacy software: if people are still using it after 30 years, it probably got something right.
      - willcipriano 6y ago
        Ghost supports tables via markdown. You can embed SoundCloud and YouTube natively for audio. As for gifs and comments here's a link to my ghost blog with a gif as well as comments(disqus) https://thoughts.willcipriano.com/weird-python-tricks/ https://thoughts.willcipriano.com/weird-python-tricks/ Embedding third party services may go against the values of some Richard Stallman types, for me however it enables me to host behind cloudflare with a $5 a month digital ocean droplet and not have to worry about getting hugged to death. I can live with the tradeoff.
        ClumsyPilot 6y ago
        I stand corrected, not sure why i was under impression gifs dont work. But as I said, it's unfortunate that comments sound and video have to be hosted externally. In my mind , my domain is where I make the rules. I do not want my self-hosted blog to be subject to flavour-of-the-month demonetisation, copyright and censorship of like 5 different teams. Think of youtube banning any video mentioning corvid.
  - gnicholas 6y ago
- deleted 6y ago
  [deleted]
- andygcook 6y ago
  Agreed the Medium paywall is not good. But technically, I don't think Indie.vc wrote this post. It's on the marker.medium.com publication and was written by a freelance journalist: https://marker.medium.com/@jennifer_7809 https://marker.medium.com/@jennifer_7809
- julianeon 6y ago
  I didn't expect to have this irritating Medium problem come up in a VC discussion, but it's relevant here, and I 100% agree that companies shouldn't post behind the paywall because it's counterproductive. Presumably, they want every single person to see their posts, and don't care about making $0.40 on a Medium post. To the companies: make sure that when you post, distribution setting is OFF. This is a kind of dark pattern by Medium, which is why it's confusing, on purpose. What it really means is, distribution exclusively for paid Medium subscribers is off - meaning any person, anywhere, can view it.
- tonystubblebine 6y ago
  The medium paywall is what paid for the author to write it. It's not written by Indie.vc. And so to the degree that people want to read this article and talk about it, the paywall is what made that possible.
halite 6y ago
Alternate: https://docdro.id/ueWWcKf https://docdro.id/ueWWcKf
- eitland 6y ago
  I think that site just popped me a scareware scam?
troughway 6y ago
So this is initial seed/angel venture capital without huge ROI expectations? Is that the idea? If so, how is it different from what VCs are doing now?
- ryanSrich 6y ago
  VC without huge ROI expectations doesn't work. Like the actual economics don't work. I don't really understand the point of any of this. VCs need massive outsized returns because 99% of the companies they invest in will return $0 to the fund. You need that one company that returns the entire fund (ex: $500m) + some percentage. Also, from the article "And founders can even buy back the stakes (ranging between 10% and 15%) by hitting certain revenue targets" 10-15% interest on a crazy high-risk loan makes absolutely no sense to me whatsoever.
  - troughway 6y ago
    How do you figure this won't work? The article mentions the indie.vc "mortality rate" is 10% whereas for VC-backed ventures it's 44%. Granted, just because a company is alive doesn't mean it's making the investors much money. I imagine having more companies around for longer would ultimately mean a lot of little payoffs that cover their own investments rather than one big payoff that covers every other investment.
    - ryanSrich 6y ago
      > five years, Indie.vc has backed 34 companies That's hardly enough time or data to tell what the actual mortality rate is full cycle. A lot of startups will fail in year 6, 7 or 8 after years of pivots and trying to grow. > On average, they’re growing 100% in the first year, and 300% the second year Assuming $0 in rev on day 1, of course they grow 100% in Y1. These numbers don't mean anything. Philosophically I agree with Indie.vc. I think there is untapped potential in smaller companies/markets that mostly is overlooked by traditional VC. But I don't think VC is the answer to that problem. There needs to be some other funding vehicle that can withstand smaller returns over longer periods of time (like a loan, which this seems to be closer to).
georgeecollins 6y ago
What I take away from this is that soon it may make sense to invest in unicorns! Initially investing in money losing companies was a contrarian investment strategy. Then everyone piled in, making it an even better investment strategy as assets became overpriced. Think Uber. And authentic opportunities became scarce, think Zume. The Indie.vc model is contrarian and probably doing well. It will continue to do well as it becomes imitated. And then the cycle will repeat. So keep your eye on unpopular unicorns!
manfredo 6y ago
In short: this author is endorsing a funding model focused on low initial investment and faster profitability. The benefits key benefits are that this funding model results in more women and minorities getting funding, as well as higher rate of companies surviving (10% vs. 44% [1]). The former is good, but probably isn't sufficient to motivate most investors. The latter doesn't necessarily translate into better returns on investment. Throughout this whole piece I was looking for a comparison on the net return on investment of the traditional VC model and this Indie.vc model. This comparison is never done. A high-risk high-reward investment model may still produce higher rates of returns than a low-risk low-return model. Right now we're seeing a trend of larger companies taking an ever larger piece of the market share, and the total number of firms decreasing. While encouraging founders to form smaller companies with shorter time to profitability undoubtedly results in more companies surviving 3, 5, and 7 years after founding, that's not what we're optimizing for. An investment strategy with high rates of failure, but producing larger companies with those few successes is still yields the potential for larger overall returns. 1. What does it mean by 10% vs. 44% of companies surviving? Presumably it means that 10% of traditionally funded companies exist X years after founding versus 44% of Indie.vc founded companies. But this is a strange metric to give without specifying how many years we're talking about.
- adamgravitis 6y ago
  "In short: this author is endorsing a funding model focused on low initial investment and faster profitability." -> so basically, Canadian "venture" capital. They don't even want to talk to you unless profitability is there or within a few months. So, basically, it distills to a barely riskier than usual bank loan, except you pay the loan with equity.
  - Hongwei 6y ago
    A cause or symptom (I'm not sure about causality here) is that the Business Development Bank of Canada (BDC) directly funds most private Canadian VCs. VCs now have public money as part of their LP base, with some strings attached. Most of these strings (eg. don't waste taxpayer money doing anything unethical or overly negligent) will nudge VCs to be more conservative. Plus, the VCs are guaranteed 20%+ of their 2% carry from BDC taking up that much of every fund and don't need to swing for the fences to make a good income.
awinter-py 6y ago
in a recession it's better to be a cockroach than a unicorn
foobar_ 6y ago
This is probably silly but I have often wondered why you don't get straightforward loans in Software. If I were to open a restaurant I would hardly go for a VC. Do banks have something against software businesses ? Are there software companies that have bootstrapped themselves with loans (not friend/family loans) as opposed to VC ?
- kelvin0 6y ago
  You can always use Indie Gogo, Kick Starter, Patreon or any other similar platform to fund your project. Banks are risk averse. Lending to a restaurant they can always recoup a lot of material and other physical assets as collateral. Not necessarily so for most software dev. That's my perspective.
- samfisher83 6y ago
  If your startup fails then you software is harder to value. If the bank have ovens at least they can resell them. If you have a piece of software it's much harder to value or sell.
  - foobar_ 6y ago
    Interesting, in that sense software is like making an art piece where value is uncertain. That definitely opens a viable case for public funded software. Plenty of movies are produced with the help of Govt for example.
    - nickff 6y ago
      Government often supports investors making movies; likewise, governments could try to get on board with good venture capitalists in funding software, and this does happen in some places. Government panels or individuals selecting which software to fund runs into the principal agent problem, due to lack of skin in the game.
- nostrademons 6y ago
  The market structure is pretty different. Restaurants have geographic barriers to entry - your restaurant is probably only serving customers within a ~20 mile radius. And the economics and business model are well-known: you know exactly how much rent is going to cost, how much labor is going to cost, how much food is going to cost, and how many tables you can turn over a night, and so you can build reasonable financial models for how much you might make. Software is global, and is fundamentally an innovation business. Once you've written a piece of software that does something useful, you can sell additional copies at zero marginal cost. This tends to make software into a winner-take-all market: there is realistically only one Google, only one Facebook, only one Salesforce, one Amazon, etc. If you try to get into a known market, you are almost certain to fail, because you have to pay all the R&D costs that your competitor has already paid and they can just sell to the customers you would otherwise have gotten at close to zero cost. That means that successful software businesses are almost always doing something fundamentally new - either selling into a new market, or selling a new and different product into an existing market that has changed in some way. Banks are really bad at forecasting the success of new business models that have no financial data to go on - their whole core competency is evaluating financials, so if a company has no revenue but lots of expenses and an uncertain prospect of ever making money, it looks like a universally bad bet for a bank loan. The venture capital industry is all based around answering "How do we finance businesses where success is binary and information about whether the company will be successful is scarce?"
wiremine 6y ago
I remember this being a theme during the 2001 recession. I can't find the link right now, but I remember more than a few articles about this trend back then. I was able to find VC capital investment. [1] Clearly there was more silly money being throw around in the late 90s and into 2000, but by 2002 the mantra in was "ROI, ROI, ROI!" [1] https://en.wikipedia.org/wiki/Dot-com_bubble#/media/File:US_VC_funding.png https://en.wikipedia.org/wiki/Dot-com_bubble#/media/File:US_...
tommilukkarinen 6y ago
Let's say the model is to get 3X return in 5-7 years - 10% mortality. Sounds like a great instrument to me. It also sounds like it could work, if there's enough demand = enough obvious good apples, which are willing for the deal because of not enough supply in financing instruments. I can understand that investing in unicorns can also work. As many unicorns fail after their initial hype, investing in these normal companies sounds less like gambling on hype than investing in unicorns.
a13n 6y ago
As a founder of a bootstrapped & profitable company, I don't really get what's so attractive about this funding model. It seems like it's just a really, really, really expensive loan. They make it sound nice with their anti-VC, pro-founder marketing angle. But at the end of the day, they are charging you 3x what you're borrowing.
- dcolkitt 6y ago
  I agree. This isn't quite an apples-to-apples comparison. But middle-market companies with okay-ish financials can easily get covenant-lite leveraged loans from the gigantic private credit market, for well under LIBOR + 1000 basis points. The current yield-to-maturity on the leveraged load index is 5.64%[1]. 3X in 7 years implies a yield-to-maturity of 17%. Why would any company pay more than three times the cost of capital they can get from much larger, more liquid, and established Wall Street financing? [1] https://us.spindices.com/indices/fixed-income/sp-lsta-us-leveraged-loan-100-index#overview https://us.spindices.com/indices/fixed-income/sp-lsta-us-lev...
  - a13n 6y ago
    I would guess they would tell you "because it isn't personally guaranteed", which absolves you as an individual of financial risk. Personally I'd be really excited to see better loans being offered to startups, but this isn't it. EDIT: Also you're assuming a 7 year payback period, and I would guess it's a lot shorter than that for the average indie VC customer.
  - smachiz 6y ago
    Virtually no startup can get loans without a PG at any non-loanshark rate. This would be very attractive to someone who wants to grow their business without taking (more) personal risk than they have already.
    - dcolkitt 6y ago
      The historical default rate for leveraged loans is 2.9%. This VC program claims a mortality rate of 10% over a 5+ year horizon. I.e. a 2% annualized default rate. Now I'm sure they're not using exactly the same definition. Plus we have to take into account recovery rates. But the point is that this VC program almost certainly is not funding the "average startup". To achieve those low levels of default, their investment pool has to be significantly safer and more stable than the typical Valley startup. So either their typical investment is safer in obvious ways, like interest coverage and EBITDA multiples. In which case they should be able to access traditional credit markets at much more favorable rates. Or the VCs in question have a unique ability to identify sure bets in opaque ways. Ways that other investors just can't see. In which case the secret sauce isn't the funding structure, but the preternatural giftedness of the firm's general partners. (Or there's a third option, which is that the fund's track record has just represented a string of good luck. They've been fooled by randomness and future returns will not live up to past history.)
gigatexal 6y ago
in my humble and unwarranted opinion (see also not having run a vc company or a company for that matter) profits should have been the idea from the get go: all of this effort to get large and then use economies of scale to defeat rivals and then start making a profit is just wrong
- shuntress 6y ago
  For some products, this is just not possible. Consider that you want to make an App store where you add value by manually validating every app available through your store and build trust with your customers by only serving the best apps. How can you compete with the Apple App store? You can't. At least, not without creating a hardware/software ecosystem with millions of users. You could shortcut that buildup of scale by only targeting android users but then your competition against the Apple App store will be entirely dependent on the strength of Android ecosystem.
digitaltrees 6y ago
Let’s see how long that lasts when follow-on financing doesn’t materialize and limited partners pull capital and give it to Unicorn.VC because their results are more “exciting”. I say this as a founder that prioritized profitability and outlasted many VC backed competitors and was sick of VCs telling me to increase burn and growth and ignoring my warning of the long term perspectives and risks. We decided not to take VC and are smaller but killing it. I am glad to see this perspective but it only lasts during a financial crisis then it’s right back to fetishized hyper growth. As far as I am concerned go ahead and keep your hyper growth VC dollars, I’ll buy your bankrupt portfolio company in a few years with our profit. As YC says, get to ramen profitability as early as possible and be a cockroach that will survive.
EGreg 6y ago
Oh really! I would like to see the day. Our company, Qbix, is a poster child for the preaching of the Basecamp folks. We raised $107,000 from friends and family and then generated revenues, then another $135,000 and generated more revenues. We are up to almost $1MM in revenues now. Also we have attracted 8 million users and growing. But many VCs have turned us down because they look for hockey stick growth and zero friction, and don’t like “the agency model” companies which make money. Actually, they’re just applying pattern-matching to reject the vast majority of startups unless they are hockey stick growing.
- yowlingcat 6y ago
  If your firm is making money (especially to the tune of $1MM -- is that per month or per year?), it might be a perfect match for the more old-fashioned form of non-dilutive fundraising: lending. There are a lot of firms out there which capped revenue based funding, but the biggest one I know is Lighter Capital [1] (no affiliation), and I believe there's a good amount of competitors [2] which do the same thing. Why not consider reaching out to them and seeing if you're a fit? [1] https://www.lightercapital.com/ https://www.lightercapital.com/ [2] https://www.owler.com/company/lightercapital https://www.owler.com/company/lightercapital
loceng 6y ago
Does anyone know a VC similar to Indie however that doesn't convert to equity if more funding occurs from another party? Give me $100k and sure I'll pay you back $300k, however let me use that $100k to see how much more valuable I can make my company and therefore leverage its new metrics including revenues. These current models don't only want the icing (their returns on initial investment) but they want to eat their cake too; they're currently doing this because they can get away with it because their current competition, traditional VCs, is far worse - but once a new competitor comes in that only wants the icing but not the cake from the transaction, they'll lose out on potentially a lot of this deal flow.
- thatthatis 6y ago
  https://techcrunch.com/2019/08/19/who-are-the-major-revenue-based-investing-vcs/ https://techcrunch.com/2019/08/19/who-are-the-major-revenue-...
jiofih 6y ago
Poor independent founder who spent $1M out of pocket on his first startup. Let’s hear his story.
gnicholas 6y ago
> Just four months after closing a $7 million funding round for his first startup RetraceHealth in 2016, Aderinkomi was pushed out of the startup by the new board. This was after he had spent three years and taken on $1 million of his own personal debt to build the company. Seems like you're doing something wrong if you raise seed and A rounds[1] and have given away enough board seats that they can push you out 4 months later. Also, why would anyone take out a million dollar personal loan to fund a startup? I have heard of founders spending their own money to get things off the ground, but usually it's $50k or so, and it's never a bank loan. I'd agree that this guy is rightly wary of going back to VCs, but his experience seems like an edge case (which is perhaps why it's featured in this article). 1: https://www.crunchbase.com/organization/retracehealth#section-overview https://www.crunchbase.com/organization/retracehealth#sectio...
gnicholas 6y ago
> the companies that receive Indie.vc funding seem to be much more robust than their peers, especially in a challenging economic climate. On average, they’re growing 100% in the first year, and 300% the second year, says Roberts. Is this measuring revenue, users, profits, or something else? If it's revenue or users, I would guess that most VC-backed startups grow faster than this. If they're looking at profits, then probably the VCs do worse. > Plus, the fund’s mortality rate is 10% — compared to about 44% with traditional VC-backed companies. Are they looking at the same time period? If Indie.vc's portfolio is younger, then they would obviously have fewer deaths than traditional VCs. Basically, it looks like the author wanted to put down impressive-looking numbers without the context that would make clear if the underlying facts are actually impressive or not.
remotists 6y ago
TLDR: Advocating for fundraising that at its core is a less risky bank loan except here you part with equity.

181 points by BobbyH 6y ago

Peteris 6y ago

Paywalled.

lawrencevillain 6y ago

So VC's are out, bootstrapping is in?

qppo 6y ago
Debt convertible to equity is in.

burtonator 6y ago

@Indie.vc ... you spent a ton of time writing this post only to have it paywalled by medium. I can't read it... Ditch medium as they aren't compatible with your business model :-P

derekdahmer 6y ago
It's not paywalled. You can read it with a free account.
- eitland 6y ago
  Or in a private tab. But the point still stands: they are using a medium that hurts the message, and in a way we are paying - with our time and patience.
- ProAm 6y ago
  There is no such thing as a free account, just like there is no such thing as a free lunch
- Pfhreak 6y ago
  That's a paid account. It's just paid with Metadata rather than dollars.
- rleahy22 6y ago
  "[redacted], get unlimited access. You've read all of your free stories this month. Become a member to keep reading."
toomuchtodo 6y ago
Yeah! Substack > Medium.
- blocked_again 6y ago
  Ghost > Substack
  - ClumsyPilot 6y ago
    Wordpress > Ghost. Its 2020 and ghost does not support a table, as in normal table copy-pasted from excell. Or audio. Or a gif, or comments. Sure you can host them elsewhere, but how many secondary services am I meant to use for a personal blog? As i get older, I seem to be growing respect for legacy software: if people are still using it after 30 years, it probably got something right.
    - willcipriano 6y ago
      Ghost supports tables via markdown. You can embed SoundCloud and YouTube natively for audio. As for gifs and comments here's a link to my ghost blog with a gif as well as comments(disqus) https://thoughts.willcipriano.com/weird-python-tricks/ https://thoughts.willcipriano.com/weird-python-tricks/ Embedding third party services may go against the values of some Richard Stallman types, for me however it enables me to host behind cloudflare with a $5 a month digital ocean droplet and not have to worry about getting hugged to death. I can live with the tradeoff.
      - ClumsyPilot 6y ago
        I stand corrected, not sure why i was under impression gifs dont work. But as I said, it's unfortunate that comments sound and video have to be hosted externally. In my mind , my domain is where I make the rules. I do not want my self-hosted blog to be subject to flavour-of-the-month demonetisation, copyright and censorship of like 5 different teams. Think of youtube banning any video mentioning corvid.
- gnicholas 6y ago
deleted 6y ago
[deleted]
andygcook 6y ago
Agreed the Medium paywall is not good. But technically, I don't think Indie.vc wrote this post. It's on the marker.medium.com publication and was written by a freelance journalist: https://marker.medium.com/@jennifer_7809 https://marker.medium.com/@jennifer_7809
julianeon 6y ago
I didn't expect to have this irritating Medium problem come up in a VC discussion, but it's relevant here, and I 100% agree that companies shouldn't post behind the paywall because it's counterproductive. Presumably, they want every single person to see their posts, and don't care about making $0.40 on a Medium post. To the companies: make sure that when you post, distribution setting is OFF. This is a kind of dark pattern by Medium, which is why it's confusing, on purpose. What it really means is, distribution exclusively for paid Medium subscribers is off - meaning any person, anywhere, can view it.
tonystubblebine 6y ago
The medium paywall is what paid for the author to write it. It's not written by Indie.vc. And so to the degree that people want to read this article and talk about it, the paywall is what made that possible.

halite 6y ago

Alternate: https://docdro.id/ueWWcKf https://docdro.id/ueWWcKf

eitland 6y ago
I think that site just popped me a scareware scam?

troughway 6y ago

So this is initial seed/angel venture capital without huge ROI expectations? Is that the idea? If so, how is it different from what VCs are doing now?

ryanSrich 6y ago
VC without huge ROI expectations doesn't work. Like the actual economics don't work. I don't really understand the point of any of this. VCs need massive outsized returns because 99% of the companies they invest in will return $0 to the fund. You need that one company that returns the entire fund (ex: $500m) + some percentage. Also, from the article "And founders can even buy back the stakes (ranging between 10% and 15%) by hitting certain revenue targets" 10-15% interest on a crazy high-risk loan makes absolutely no sense to me whatsoever.
- troughway 6y ago
  How do you figure this won't work? The article mentions the indie.vc "mortality rate" is 10% whereas for VC-backed ventures it's 44%. Granted, just because a company is alive doesn't mean it's making the investors much money. I imagine having more companies around for longer would ultimately mean a lot of little payoffs that cover their own investments rather than one big payoff that covers every other investment.
  - ryanSrich 6y ago
    > five years, Indie.vc has backed 34 companies That's hardly enough time or data to tell what the actual mortality rate is full cycle. A lot of startups will fail in year 6, 7 or 8 after years of pivots and trying to grow. > On average, they’re growing 100% in the first year, and 300% the second year Assuming $0 in rev on day 1, of course they grow 100% in Y1. These numbers don't mean anything. Philosophically I agree with Indie.vc. I think there is untapped potential in smaller companies/markets that mostly is overlooked by traditional VC. But I don't think VC is the answer to that problem. There needs to be some other funding vehicle that can withstand smaller returns over longer periods of time (like a loan, which this seems to be closer to).

georgeecollins 6y ago

What I take away from this is that soon it may make sense to invest in unicorns! Initially investing in money losing companies was a contrarian investment strategy. Then everyone piled in, making it an even better investment strategy as assets became overpriced. Think Uber. And authentic opportunities became scarce, think Zume. The Indie.vc model is contrarian and probably doing well. It will continue to do well as it becomes imitated. And then the cycle will repeat. So keep your eye on unpopular unicorns!

manfredo 6y ago

In short: this author is endorsing a funding model focused on low initial investment and faster profitability. The benefits key benefits are that this funding model results in more women and minorities getting funding, as well as higher rate of companies surviving (10% vs. 44% [1]). The former is good, but probably isn't sufficient to motivate most investors. The latter doesn't necessarily translate into better returns on investment. Throughout this whole piece I was looking for a comparison on the net return on investment of the traditional VC model and this Indie.vc model. This comparison is never done. A high-risk high-reward investment model may still produce higher rates of returns than a low-risk low-return model. Right now we're seeing a trend of larger companies taking an ever larger piece of the market share, and the total number of firms decreasing. While encouraging founders to form smaller companies with shorter time to profitability undoubtedly results in more companies surviving 3, 5, and 7 years after founding, that's not what we're optimizing for. An investment strategy with high rates of failure, but producing larger companies with those few successes is still yields the potential for larger overall returns. 1. What does it mean by 10% vs. 44% of companies surviving? Presumably it means that 10% of traditionally funded companies exist X years after founding versus 44% of Indie.vc founded companies. But this is a strange metric to give without specifying how many years we're talking about.

adamgravitis 6y ago
"In short: this author is endorsing a funding model focused on low initial investment and faster profitability." -> so basically, Canadian "venture" capital. They don't even want to talk to you unless profitability is there or within a few months. So, basically, it distills to a barely riskier than usual bank loan, except you pay the loan with equity.
- Hongwei 6y ago
  A cause or symptom (I'm not sure about causality here) is that the Business Development Bank of Canada (BDC) directly funds most private Canadian VCs. VCs now have public money as part of their LP base, with some strings attached. Most of these strings (eg. don't waste taxpayer money doing anything unethical or overly negligent) will nudge VCs to be more conservative. Plus, the VCs are guaranteed 20%+ of their 2% carry from BDC taking up that much of every fund and don't need to swing for the fences to make a good income.

awinter-py 6y ago

in a recession it's better to be a cockroach than a unicorn

foobar_ 6y ago

This is probably silly but I have often wondered why you don't get straightforward loans in Software. If I were to open a restaurant I would hardly go for a VC. Do banks have something against software businesses ? Are there software companies that have bootstrapped themselves with loans (not friend/family loans) as opposed to VC ?

kelvin0 6y ago
You can always use Indie Gogo, Kick Starter, Patreon or any other similar platform to fund your project. Banks are risk averse. Lending to a restaurant they can always recoup a lot of material and other physical assets as collateral. Not necessarily so for most software dev. That's my perspective.
samfisher83 6y ago
If your startup fails then you software is harder to value. If the bank have ovens at least they can resell them. If you have a piece of software it's much harder to value or sell.
- foobar_ 6y ago
  Interesting, in that sense software is like making an art piece where value is uncertain. That definitely opens a viable case for public funded software. Plenty of movies are produced with the help of Govt for example.
  - nickff 6y ago
    Government often supports investors making movies; likewise, governments could try to get on board with good venture capitalists in funding software, and this does happen in some places. Government panels or individuals selecting which software to fund runs into the principal agent problem, due to lack of skin in the game.
nostrademons 6y ago
The market structure is pretty different. Restaurants have geographic barriers to entry - your restaurant is probably only serving customers within a ~20 mile radius. And the economics and business model are well-known: you know exactly how much rent is going to cost, how much labor is going to cost, how much food is going to cost, and how many tables you can turn over a night, and so you can build reasonable financial models for how much you might make. Software is global, and is fundamentally an innovation business. Once you've written a piece of software that does something useful, you can sell additional copies at zero marginal cost. This tends to make software into a winner-take-all market: there is realistically only one Google, only one Facebook, only one Salesforce, one Amazon, etc. If you try to get into a known market, you are almost certain to fail, because you have to pay all the R&D costs that your competitor has already paid and they can just sell to the customers you would otherwise have gotten at close to zero cost. That means that successful software businesses are almost always doing something fundamentally new - either selling into a new market, or selling a new and different product into an existing market that has changed in some way. Banks are really bad at forecasting the success of new business models that have no financial data to go on - their whole core competency is evaluating financials, so if a company has no revenue but lots of expenses and an uncertain prospect of ever making money, it looks like a universally bad bet for a bank loan. The venture capital industry is all based around answering "How do we finance businesses where success is binary and information about whether the company will be successful is scarce?"

wiremine 6y ago

I remember this being a theme during the 2001 recession. I can't find the link right now, but I remember more than a few articles about this trend back then. I was able to find VC capital investment. [1] Clearly there was more silly money being throw around in the late 90s and into 2000, but by 2002 the mantra in was "ROI, ROI, ROI!" [1] https://en.wikipedia.org/wiki/Dot-com_bubble#/media/File:US_VC_funding.png https://en.wikipedia.org/wiki/Dot-com_bubble#/media/File:US_...

tommilukkarinen 6y ago

Let's say the model is to get 3X return in 5-7 years - 10% mortality. Sounds like a great instrument to me. It also sounds like it could work, if there's enough demand = enough obvious good apples, which are willing for the deal because of not enough supply in financing instruments. I can understand that investing in unicorns can also work. As many unicorns fail after their initial hype, investing in these normal companies sounds less like gambling on hype than investing in unicorns.

a13n 6y ago

As a founder of a bootstrapped & profitable company, I don't really get what's so attractive about this funding model. It seems like it's just a really, really, really expensive loan. They make it sound nice with their anti-VC, pro-founder marketing angle. But at the end of the day, they are charging you 3x what you're borrowing.

dcolkitt 6y ago
I agree. This isn't quite an apples-to-apples comparison. But middle-market companies with okay-ish financials can easily get covenant-lite leveraged loans from the gigantic private credit market, for well under LIBOR + 1000 basis points. The current yield-to-maturity on the leveraged load index is 5.64%[1]. 3X in 7 years implies a yield-to-maturity of 17%. Why would any company pay more than three times the cost of capital they can get from much larger, more liquid, and established Wall Street financing? [1] https://us.spindices.com/indices/fixed-income/sp-lsta-us-leveraged-loan-100-index#overview https://us.spindices.com/indices/fixed-income/sp-lsta-us-lev...
- a13n 6y ago
  I would guess they would tell you "because it isn't personally guaranteed", which absolves you as an individual of financial risk. Personally I'd be really excited to see better loans being offered to startups, but this isn't it. EDIT: Also you're assuming a 7 year payback period, and I would guess it's a lot shorter than that for the average indie VC customer.
- smachiz 6y ago
  Virtually no startup can get loans without a PG at any non-loanshark rate. This would be very attractive to someone who wants to grow their business without taking (more) personal risk than they have already.
  - dcolkitt 6y ago
    The historical default rate for leveraged loans is 2.9%. This VC program claims a mortality rate of 10% over a 5+ year horizon. I.e. a 2% annualized default rate. Now I'm sure they're not using exactly the same definition. Plus we have to take into account recovery rates. But the point is that this VC program almost certainly is not funding the "average startup". To achieve those low levels of default, their investment pool has to be significantly safer and more stable than the typical Valley startup. So either their typical investment is safer in obvious ways, like interest coverage and EBITDA multiples. In which case they should be able to access traditional credit markets at much more favorable rates. Or the VCs in question have a unique ability to identify sure bets in opaque ways. Ways that other investors just can't see. In which case the secret sauce isn't the funding structure, but the preternatural giftedness of the firm's general partners. (Or there's a third option, which is that the fund's track record has just represented a string of good luck. They've been fooled by randomness and future returns will not live up to past history.)

gigatexal 6y ago

in my humble and unwarranted opinion (see also not having run a vc company or a company for that matter) profits should have been the idea from the get go: all of this effort to get large and then use economies of scale to defeat rivals and then start making a profit is just wrong

shuntress 6y ago
For some products, this is just not possible. Consider that you want to make an App store where you add value by manually validating every app available through your store and build trust with your customers by only serving the best apps. How can you compete with the Apple App store? You can't. At least, not without creating a hardware/software ecosystem with millions of users. You could shortcut that buildup of scale by only targeting android users but then your competition against the Apple App store will be entirely dependent on the strength of Android ecosystem.

digitaltrees 6y ago

Let’s see how long that lasts when follow-on financing doesn’t materialize and limited partners pull capital and give it to Unicorn.VC because their results are more “exciting”. I say this as a founder that prioritized profitability and outlasted many VC backed competitors and was sick of VCs telling me to increase burn and growth and ignoring my warning of the long term perspectives and risks. We decided not to take VC and are smaller but killing it. I am glad to see this perspective but it only lasts during a financial crisis then it’s right back to fetishized hyper growth. As far as I am concerned go ahead and keep your hyper growth VC dollars, I’ll buy your bankrupt portfolio company in a few years with our profit. As YC says, get to ramen profitability as early as possible and be a cockroach that will survive.

EGreg 6y ago

Oh really! I would like to see the day. Our company, Qbix, is a poster child for the preaching of the Basecamp folks. We raised $107,000 from friends and family and then generated revenues, then another $135,000 and generated more revenues. We are up to almost $1MM in revenues now. Also we have attracted 8 million users and growing. But many VCs have turned us down because they look for hockey stick growth and zero friction, and don’t like “the agency model” companies which make money. Actually, they’re just applying pattern-matching to reject the vast majority of startups unless they are hockey stick growing.

yowlingcat 6y ago
If your firm is making money (especially to the tune of $1MM -- is that per month or per year?), it might be a perfect match for the more old-fashioned form of non-dilutive fundraising: lending. There are a lot of firms out there which capped revenue based funding, but the biggest one I know is Lighter Capital [1] (no affiliation), and I believe there's a good amount of competitors [2] which do the same thing. Why not consider reaching out to them and seeing if you're a fit? [1] https://www.lightercapital.com/ https://www.lightercapital.com/ [2] https://www.owler.com/company/lightercapital https://www.owler.com/company/lightercapital

loceng 6y ago

Does anyone know a VC similar to Indie however that doesn't convert to equity if more funding occurs from another party? Give me $100k and sure I'll pay you back $300k, however let me use that $100k to see how much more valuable I can make my company and therefore leverage its new metrics including revenues. These current models don't only want the icing (their returns on initial investment) but they want to eat their cake too; they're currently doing this because they can get away with it because their current competition, traditional VCs, is far worse - but once a new competitor comes in that only wants the icing but not the cake from the transaction, they'll lose out on potentially a lot of this deal flow.

thatthatis 6y ago
https://techcrunch.com/2019/08/19/who-are-the-major-revenue-based-investing-vcs/ https://techcrunch.com/2019/08/19/who-are-the-major-revenue-...

jiofih 6y ago

Poor independent founder who spent $1M out of pocket on his first startup. Let’s hear his story.

gnicholas 6y ago

> Just four months after closing a $7 million funding round for his first startup RetraceHealth in 2016, Aderinkomi was pushed out of the startup by the new board. This was after he had spent three years and taken on $1 million of his own personal debt to build the company. Seems like you're doing something wrong if you raise seed and A rounds[1] and have given away enough board seats that they can push you out 4 months later. Also, why would anyone take out a million dollar personal loan to fund a startup? I have heard of founders spending their own money to get things off the ground, but usually it's $50k or so, and it's never a bank loan. I'd agree that this guy is rightly wary of going back to VCs, but his experience seems like an edge case (which is perhaps why it's featured in this article). 1: https://www.crunchbase.com/organization/retracehealth#section-overview https://www.crunchbase.com/organization/retracehealth#sectio...

gnicholas 6y ago

> the companies that receive Indie.vc funding seem to be much more robust than their peers, especially in a challenging economic climate. On average, they’re growing 100% in the first year, and 300% the second year, says Roberts. Is this measuring revenue, users, profits, or something else? If it's revenue or users, I would guess that most VC-backed startups grow faster than this. If they're looking at profits, then probably the VCs do worse. > Plus, the fund’s mortality rate is 10% — compared to about 44% with traditional VC-backed companies. Are they looking at the same time period? If Indie.vc's portfolio is younger, then they would obviously have fewer deaths than traditional VCs. Basically, it looks like the author wanted to put down impressive-looking numbers without the context that would make clear if the underlying facts are actually impressive or not.

remotists 6y ago

TLDR: Advocating for fundraising that at its core is a less risky bank loan except here you part with equity.