Alt-VC: How the Shine is off Venture Capital and New Models of Startup Financing

As a practitioner it’s been really fun watching the evolution and revolution of the startup ecosystem and its funders. One of the weirdest things (at least to me) in Silicon Valley is the veneration of Venture Capital & love hate relationship between investors and founders.

Venture capital and its practitioners have been held up on this bizarre pedestal. And further influenced by the media (ahem Techcrunch) of celebrating fundraising, founders seem to think this is the only path for building their companies. But this thankfully is changing fast.

In many cases, founders do need a little bit of capital to get started. Yes, there are always “Friends and Family” money as well as angels. But from an institutional perspective this has been a gap for a long time. In the last few years there have been lots of new financing options arising for founders.

Investment Optionality:

Definitely seeing a new movement heralded a few years back by Bryce Roberts over at Indie.VC with a new model of funding. Their investment will convert like normal in case you as founder decide to go down the VC route. If you choose to go down bootstrap/ profitability path, you can repurchase their ownership with a fixed percentage of their gross revenue.

Earnest Capital takes this further. They invest but through their Shared Earnings Agreement.

Once the business hits a certain agreed upon threshold of founders earnings, revenue is shared with the investors until the cap is hit. Same with Indie.VC if the company decides they want to go down the Venture Capital route, the SEAL converts into equity at the next VC round.

Debt/Accounts Receivable Financing:

Basically Accounts Receivable financing where they give you money based on your subscription and revenue. I might add this is debt and non-dilutive financing. Ie. not equity. Which is an option for founders who care about ownership.

Pipe is the leader when it comes to subscription businesses, Founderpath for SaaS specifically. Pollen.vc is tops when it comes to mobile apps.

Crowdfunding:

There is Republic which is a crowdfunding platform where consumer focused startups can raise money directly from their customers. I love this as it leads to better alignment and several of my portfolio companies have gone this direction.

Private Equity-like Capital (but much less mean):

We’ve also seen Tiny Capital, Enduring Ventures, Fork Equity act like Berkshire Hathaway for small software businesses and acquire cash flowing software companies. They provide a very attractive exit option for founders who want to move on.

Bootstrapping:

And let’s not forget that Bootstrapping (or self funded) entrepreneurship has always been a thing. A highly underrated thing at that. Microconf, the conference and community of self-funded software entrepreneurs have been around for ages. I am a fan of how they have galvanized and educated their bootstrapping founder community. I should add that Atlanta based Mailchimp is doing over 700M usd a year in revenue and estimated to be worth at least $4B dollars. Completely bootstrapped. Also our favorite scheduling tool Calendly which is making $60M in annual revenue is also self-funded. Would love to see more high profile examples of these kinds of companies in the media.

The point I am trying to make is that there are so many paths forward for founders these days. Venture capital is not always the most suited for what you are trying to build. So I hope founders take their time to consider the right path for them. Think for yourself and do not mindlessly follow what is the “supposedly” predominant route that Silicon Valley & the media praise.

Listen to this Newsletter: https://listencat.com/the-hard-fork-by-marvin-liao-podcast/