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?<p>Will the distribution requirements be a drag on growth?<p>How does the company decide between reinvestment or distribution of profits?
I own a bootstrapped start-up that seems to fit their profile, but their numbers seem way off to me.<p>They take 80% of all distributions until they're paid back 2X, then 20% until they're paid back 5X.<p>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.<p>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.<p>The idea of taking 100K today so we can pay 500K tomorrow just isn't very appealing.
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.<p>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.
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.<p>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).<p>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".<p>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.<p>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.<p>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.
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].<p><i>"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."</i><p>[1] <a href="https://news.ycombinator.com/item?id=9129911" rel="nofollow">https://news.ycombinator.com/item?id=9129911</a>
[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.<p>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.
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.