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.
"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.
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.
I live in Montreal and intend to do a consumer oriented software startup. I would like to better understand what I would be getting into starting up here, vs. applying to YC. Can you suggest resources for understanding Canadian startup landscape, funding etc.?
Perceived Pros:
- Many STEM grads
- Gaming and AI industry, 2+ top AI schools
- Relatively little competition for engineering talent compared to SV
- Many engineers who are barred entry to US based on country of origin
- Easier work visas (to be confirmed)
- Free healthcare and other social services, and less violence
Perceived Cons:
- Cultural lack of ambition, entrepreneurial dreaming.
- Excessive reliance on government subsidy (the government is the customer)
- Risk averse VC
- Shallow bench of experienced operators to mentor, invest,
and manage
Remember in the SV costs are astronomical, so there's a kind of buy-in threshold necessary which won't make sense for most companies.
Shopify is a perfect company for Canada - they are not making 'tech for other techies' and don't require all the best devs in the world. It took a while to get going, so costs needed to be lower. They can make some income early on, thus 'proving the model'.
There is a reason that the nations top social network started at Harvard, which has an elite status among young people. There's a reason that Snap was started by an attractive young man from Cali, from a the top school in Cali. Glossier, a 'makeup company' is actually, truly a 'social network', and there's a reason it was founded by an ex-model/reality TV star with deep connections in LA/NYC.
On the technical side, there's a reason that certain companies really need to be in the Valley as well.
So if your business needs to be in the Valley, it might make sense to do that, but if it's a 2cnd-tier kind of thing, not something the FAANGS would ever look at, and doesn't require the best technical talent in the world, than you can do it other places.
Montreal a tier 2 cities, Ottawa/Vancouver, not really tier 2, Toronto is probably a solid tier 2. FYI that is actually not bad considering tons of American cities are not tier 2 either. Chicago, Toronto's 'twin' really might not even be Tier 2, there is a weird lack of entrepreneurial activity there for its relative size and power.
Montreal has cheap prices, decent AI grads, stable economy, supportive government, weak VC but the top could of firms are fine places to go for smaller up to round A, and if your business fits well into Quebec's strategy, following rounds can be supported by Desjardins and nationalist players.
The Canadian model for business isn't all that great.
It doesn't do a great job of serving the country's social needs, and it also doesn't do a great job of producing competitive businesses.
There's a fair number of public funds that get funneled into unproductive firms through things like innovation grants, and there's a lot of protectionism for incompetent incumbents. All of this seems to enrich a small class of elites, at the expense of the public purse. Most Canadians just shrug their shoulders at all this, and move on with life.
Can you share more on how this applies to Ballard Power? It's a name that just came up on my radar this weekend and I was planning on doing research on them, so thought I'd ask in case you have something specific to share
Ballard's been getting government grants and subsidies for over 20 years, and produced very little in terms of saleable product on the other end. They make fuel cells and related products, but their business model seems to be mostly taking government and investor money, and using it to produce units which they 'sell' at below-cost to companies trying to look green by 'testing' alternative fuels.
One of the worse offenders is North which is previously thalmic labs; Not a single product has reached the market with any revenue to show but remains a poster child for a successful organization.
Canadian banks are incredibly risk averse, and programs like CSBFP have so many strings attached that make it almost useless for certain sectors. Trying to fund infrastructure (rural FTTH) has been an exercise in futility with most Canadian banks. 75-85% loan to value ratio on fibre builds makes no sense considering the assets have 30+ years of life after being paid off in 3-4 years. But hey, we love real estate!
As a Vancouver-side Canadian I must say that the support for tech up here is pretty poor in a large part due to the labour laws being gutted by EA. Providing information on OT policies and OT compensation is one of the first rounds of questions you can expect to receive during hiring.
On the other hand - Canadian business expenses are still quite high, but quite a bit lower than US business expenses. Healthcare and cost of living are huge factors in labour costs.
> public funds that get funneled into unproductive firms
If they were productive firms, they wouldn't need government money. This is why free markets work better, because free markets allocate resources to the most productive uses.
I think both worlds can exist. You can have the "traditional" VCs going for the high-risk, high-reward model. And you can also have "new" VCs going for low-risk, medium-reward.
As an anecdote, in 2014 we looked for ~$250k investment. We had a business model that realistically took us to ~$5mm/year revenue in 5 years. We pitched various "traditional" VCs. The overwhelming feedback we got was that nobody doubted our team, the product, or the model. The problem was that the returns weren't big enough. The product was niche and could never become an "Uber" without really stretching the imagination. In the end, we found an angel investor in our space. We indeed did turn that $250k into $5mm/year revenue in 5 years and sold the company for 8 digits.
> We pitched various "traditional" VCs. The overwhelming feedback we got was that nobody doubted our team, the product, or the model. The problem was that the returns weren't big enough.
Sahil @ Gumroad has talked about this in good detail. The VC idea that "yes, your business/idea is/will be profitable but you shouldn't waste your time making money when you could be working on changing the world"
The "changing the world" business will also hopefully be profitable and make money down the road but they are looking for outsized returns from a market disrupting unicorn.
--
Regarding the "new VCs" concept. Alex Danco and others have discussed this and the funding model ceases to be VC when it is low-risk, medium-reward.
It's possible that many areas of tech are maturing to a point where VC will no longer be the optimal funding model, outside of high innovation specialties. As the industry matures, there are many businesses that might provide stable returns and have a risk profile that is different from that of the unicorn VC-startup. These businesses might be better served by debt funding and a debt-based investment vehicle/product might attract more investors and allow for greater de-centralization of tech funding.
Linking Alex's blog post below instead of rambling in this comment.
Is there any existing term for "funding for business that will never be a unicorn but can clearly become profitable and provide good returns"? Is there an equivalent of VC for "lifestyle businesses"?
If not, if someone can establish a term it'll be easier to talk about this.
There’s tons of existing finance infrastructure for this already, it just doesn’t reach tech. Small business loans, traditional banks, franchisors, local business investor groups, etc all facilitate these sorts of businesses today.
They just don’t do tech. This is because their risk models are built on 30+ years of priors and the financing is very often business sector specific. Tech is too much of an unknown for this model.
Differentiating between "small tech businesses" and VC-style startup tech might be useful here.
There are many tech businesses that can and do qualify for traditional financing/funding. The difference is that banks aren't interested in funding high-risk moonshots.
Simplified examples:
Tech Biz #1: Founder identified a niche, has a few customers, and has been working on making the consultant -> product jump. They're paying the bills but see an opportunity to offer their product to many more customers and would like to work on the business instead of working in the business. They want to hire a programmer and invest in marketing but need to borrow money to make it happen.
Tech Biz #2: Founder wants to build X for Y and change the way people do Z. It's going to take many programmer-months to build the product and a sales and marketing team to change consumer behavior. There's no guarantee that they'll find product-market fit but, if they do, the business has the opportunity to scale rapidly with strong margins.
VCs need to have a chance of "returning the fund". If they are investing out of a $200m fund, and they own 15% of your company at exit after 5 years and subsequent dilution, that 15% has to have a chance of being worth $200m.
This is an important point. It's not about what VCs want to fund, it's about the types of businesses that founders want to build. Founders have a lot more choices than they realize.
But isn't it a scale problem? If you happen to have Softbank-sized cash heaps to administrate and you try to invest them by the single million in almost bootstrapped companies you will inevitably become a handout machine. You can't industrialize investment decisions without exposing exploitable patterns and they will be exploited. Survival rate won't stay at .44 for long once people learn how to push your buttons. Unicorn-scale investments are far from immune to exploitation as well (what happened to Wework anyways?), but at least they can't hide in the masses.
Planetary scale finance is FUBAR literally everything; all of civilization, resource allocation, etc needs to be rethought (re-evolved) for a world that is post light-speed communication. Power is now liquid and can be transferred from any random node in the human mesh to any other node instantly. Robinhood bailing out Hertz, Trump, Startup Not-Bubble, all the same root cause and it's barely getting started.
I think it's a bit short sighted to say that the high risk high reward model is superior to this model. While that may be true in a theoretical sense, you have to take into account market conditions and competition.
As an analogy, you can have an investment thesis that vending machines with bottled sugary water have extremely high ROI... but you are missing the elephant in the room which is you'd have to compete against Coke and Pepsi's infrastructure and brand.
Similarly, if you are raising a fund and want to play the high risk, high reward game, you need to consider what the market conditions are.
First, it's definitely not an even playing field. Connections and brand mean a whole lot. The leading VCs have all the best deals coming to them and have a bunch of management consultants in the backroom trained to spot large market opportunities. The volume of deals and strong connections allows them to pick and choose the best opportunities, and everyone else is left with scraping the bottom of the barrel.
Second, there's only around 15-30 billion dollar companies created per year in the US, and there's probably 30-100x the amount of incubators or venture firms. It's just a limited market overall.
That's the game. In a theoretical sense, yes high risk, high reward opportunities have better ROI, but only if you are at the top of the game. So I'd hesitate to say that this is an objectively inferior model because for some investor's positions, this strategy would probably yield a much higher return.
I found the point about minorities and women curious, is that perhaps due to the fact that profitable-ish business can be assesed more rigorously on the foundamental, rather thsn on VC's opinion of the founders?
Less is riding on personal promotion and networking, both of which men tend to have advantages in. Instead, the focus on business performance allows a less biased selection criteria.
> A high-risk high-reward investment model may still produce higher rates of returns than a low-risk low-return model.
So, this isn’t really my area, but if the market is efficient shouldn’t these come up about the same over a long enough period? In other words if one or the other has dramatically better returns that just means the risk was mis-priced to begin with.
The immediate objection I can see to this (without expertise) is assuming that private markets are at all efficient. But that would point to a fundamental problem with pricing in private markets, not the merits of one strategy or another.
Behavioural economics dominates the messy real world. Especially when we are talking about startups, new technology that is poorly understood, etc. These are the leading edges of the markets, they are the least efficient of all.
Cue theranos on one hand and probably many companies with potentially profitable innovations that never got funded and we never heard of.
This is one thing that the left social justice crowd does get right - Never forget that at the end of the day, the system runs on wetware - people with faulty ideas, preconceptions, biases and limited knowledge.
In an efficient market, investments that are more risky will produce higher returns. If they didn't, no rational investor would invest in them. Why invest in a venture that is more risky, unless you're compensated via higher returns.
You can already see this playing out in the public markets. Stocks produce far higher returns than corporate bonds, which produce higher returns than treasury bills.
There's further nuance here around systematic risk vs unsystematic risk, but I don't think it's as relevant to VCs since their number of investments is too small to diversify away all unsystematic risk.
The point is that risk = higher return is an oversimplification. What that risk means is a significant chance of a much lower return. So if a basket of risky assets predictably overperforms... it isn’t actually that risky. Prices should rise in that case (and returns fall).
Having a higher potential return and actually being +EV aren’t the same thing. Just ask any bookie.
> The point is that risk = higher return is an oversimplification. What that risk means is a significant chance of a much lower return.
Well yes. This is exactly why higher risk generates higher EV in an efficient market. Because of the significant chance of lower returns.
> So if a basket of risky assets predictably overperforms... it isn’t actually that risky
Depends on your time horizon. The S&P 500 predictably generates higher returns than T-Bills, over a 100-year time horizon. But it is still very risky to a 70 year old retired pensioner. This risk is why the S&P 500 generates higher average returns than T-Bills
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.
Once you're already profitable, it's probably not that attractive. I've explained it to myself in the past by thinking about the would-be founder who's bootstrap-inclined, but who'd rather "go for it" now rather than doing nights and weekends for 18 more months before quitting their job. This person might not want or have access to traditional VC, and wouldn't be able to get a traditional loan. If all goes according to their plan, when that 18-36 months is up, they've paid back this "really expensive" loan and own 100% of their now profitable company.
This is the model for pretty much every new venture that's 'main street' and not 'VC'. There are many times more main street businesses than tech startups. While it's reasonable to bootstrap a sole proprietorship tech services firm from nothing, restaurants need buildouts, HVAC companies need trucks, retail stores need inventory, etc. Equity is absolutely the most expensive form of financing, but the bank ain't touching your new restaurant concept so there's the equilibrium.
When I was fundraising, we talked to a few of these type of funds (IIRC, this exact fund was one of them). It just seemed like worse terms for less money. It's a valid model, but I don't understand the self-righteous marketing.
Why pay for a loan with equity when you can pay cash? The interest rate on equity payment is exponentially higher than it is for cash.
Plus, if you already have attractive traction, why do you need the "premium features" a VC offers versus a bank which are extra experience, some networking effects, and maybe some insider info on acquisition opportunities? So you can be forced into expedited aggressive growth and turn into WeWork or make less money if the company is acquired? No thanks, the business is already proven and working!
Traction for VC money makes no sense to me.
...Unless you secretly have ZERO intention of ever selling and just want to pocket some play money for the business.
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?
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.)
I think its pretty attractive if it reduces risk on the founder but gives the founder freedom to do whatever they want with the company at whatever time frame.
After experiencing it myself, I think that the push to grow big is a very big deterrent for me to take on VC money. The lifestyle is just not worth it.
Bootstrapping a company from the ground up works if you have the necessary skills and idea, but some ideas need access to capital, especially if they are operationally intensive. So I could see this model being pretty attractive in those situations.
From what I'm reading, The founder can choose to let the "anti-VC" keep its shares, or it can buy them back at 3x the investment. That's not equivalent to a loan, since it doesn't have to be paid back. With a conventional deal, if things turn out well, the VC doesn't have to agree to sell its shares to the founders at any set price.
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.
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
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.
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.
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?
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!"
> 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).
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.
> 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.
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!
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.
@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
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.
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
The question is: will Substack continue to be better than Medium, or are they just temporarily better than Medium because they haven't been around long enough to have to face some of the medium-run (no pun intended) challenges that made Medium what it is today?
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.
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.
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.
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 ?
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?"
To add to this, a significant portion (I think) of opening a restaurant goes into purchasing physical assets: fridges, grills, safety equipment, tables/chairs, etc, and banks know how to liquidate those assets if your business fails. Taking a failed software company and selling off its assets is a much harder proposition.
can all be quantifiable in numbers. Again I don't know how loans operate.
To be a cynic, I think the software free lunch is over. Data will be increasingly localised. More draconian laws to come, let's hope they are stupid. Algorithms have also become "scary" for normal folks.
Sure, and once you have those in place you have a startup that eats money and doesn't necessarily make any money. The vast majority of software startups end up building something that nobody wants anyway, because if there's something that lots of people want, somebody has already built it.
Whereas if you open a restaurant, you can make solid projections where "If we fill every table, we make $Y. If we're 1/3 full, we make $X. We're unlikely to be less than 1/3 full", and these are typically completely reasonable because you can see how other similar restaurants have done. For a restaurant, having a similar restaurant be successful is a very positive indicator. For a software company, having a similar software company be successful is an indicator that the market niche is already filled.
Thats a simplistic view of restaurants. From a purely market perspective, people already do this with personal loans, credit card or otherwise. I do agree that evaluating the final software's value is difficult but for a loan lender, it's only a matter of credibility rather than success.
As long as market actors don't do anti-competitive practices, I still don't see why a successful software can't be replicated and you can't compete in the same market niche. The user interfaces are one area which can obviously be different. Enterprise software is full of replicas.
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.
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.
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.
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.
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.
Another part of VC economics to understand is to look at Uber. Total disaster, right? Softbank and retail investors got totally screwed by the IPO due to questionable economic assertions made by Uber. But the angel and early series investors, circa 2011? Still made out like bandits. An IPO price of $72, when you paid pennies per share, times several hundred thousand shares equals a cool $10mm, easy. Perhaps not as much as they would have liked, but that's still a pretty good payday considering later investors lost money.
WeWork entirely failed to IPO, so early investors not named Adam Neumann got screwed. Thus, on the spectrum of gregarious companies, with WeWork and one end and Uber at the other end, a company just needs to be on the Uber level of gregarious.
I don't think you mean gregarious. Not sure what other word would fit; nefarious doesn't quite. Victorious? Voracious? Sagacious? Rapacious? Vexatious?
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.
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).
Why don't current traditional VC funding vehicles scale down? Like if you took hypothetical paperwork that says the VC invests $10mm, at a $50mm valuation for Series-A, and just swapped in the numbers $10k and $50k?
I'm assuming the overhead of vetting a deal is a mountain of toil for the VC firm, and there are going to be some fixed costs - eg filing fees for S or C-Corp paperwork, lawyer time. But outside of that, I'm not familiar enough with what a VC does to understand why current vehicles can't scale like , and why a different type of funding vehicle is necessary for $10k investments to become the norm instead of $1mm or $10mm?
Could a tech company automate the shit out of all the toil involved with VC deals and do VC-funding-as-a-service? Stripe Atlas already makes it trivial to spin up a company so further automation doesn't seem unrealistic.
I Have no experience in the US, but at least for Germany, that won't work because the fees for lawyers, notaries etc will eat that investment completely. You can usually calculate 5-10k€ in external fees only, never mind the time and energy you spend on the talks. Doing a very small round just doesn't work.
> Could a tech company automate the shit out of all the toil involved with VC deals and do VC-funding-as-a-service?
At least for Germany: no. Things like notary fees are pretty fixed, and you can't do that stuff without them (well, you can, but than it'll basically be "here's money, please don't screw me as I have zero ability to enforce anything").
I agree with you here wholeheartedly. The figures shown here are not really all that revealing. It sounds like someone who has some money to invest and is trying to drum up a bit of marketing for themselves by being contrarian.
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.