While other VCs seek Unicorns, Indie.vc is all about cashflow
pando.com
pando.com
Will the distribution requirements be a drag on growth?
How does the company decide between reinvestment or distribution of profits?
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.
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.
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.
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.
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.
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 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."
"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.
Can you clarify what distributions means? So if the founders pay themselves a salary, that counts as distributions?
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.
"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.
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.