Venture Capital and Its Discontents | Hacker News Reader

Venture Capital and Its Discontents

wsj.com

40 pointshodgesrm29 comments

*Just type the title into google and click on it to read the article.

Anyway, the article talks about how this company didn't take VC money, but took money from Indie.vc (backed by traditional VC money).

And then describes the economics which is almost identical to the economics of taking money from a VC firm.

The big difference is the apparent lack of pressure, but that pressure is internal. Its not like the VC forces you to spend money a certain way.

To put it another way, if the advantage of indie.vc is that they don't pressure you, its a difference in management style, not a difference in deal structure.

But there is a difference in deal structure. If you want to, you can pay back the investment via profit sharing, which is unheard of in traditional seed/early stage VC deals.

(Disclosure: My current company, Tapster Robotics, is one of the first Indie.vc investments. I would have happily remained self-funded/bootstrapped if it wasn't for Indie's alternative deal structure.)

Wouldn't that be a version of venture debt?

Venture debt is really just a loan you can get from a bank that is "backed" by the reputation of a VC you've already raised money from. Normally the bank gets some warrants as well, but it's just a loan. And it's not accessible to companies with the $10k/mo in revenue that indie.vc looks for.

That's true, but it doesn't sound too different. Are you saying that this money is not "just a loan," that can be paid off at liquidity or through monthly cash.

$10k/mo is very small for a loan. Does that mean that indie.vc has some other way of doing diligence? That's the main reason the bank won't lend to such a small company.

There are two pretty big differences. The first is that venture debt is usually only available to very established companies, as far as startups go, and have restrictive covenants (regarding cash balance, profitability, other indebtedness, etc). The second is that most venture debt comes with warrant coverage, so the lender ends up taking equity as well.

I have had a couple of runs at venture financing and the terms in Silicon Valley can be pretty onerous, especially if you don't have a lot of cash and revenues less than $10M per annum. Silicon Valley Bank for example effectively won't loan you money you don't already have in your balance with them.

This can be a disillusioning experience but if you flip it around the bankers providing the financing don't get anywhere near as much upside as a traditional VC. Their caution is understandable.

But in this case, it sounds like indie.vc gets the equity kicker as well at a liquidity event.

The covenants could be a big difference. Surprised that Indie.vc doesn't have any.

The instruments is essentially a modified SAFE with a clause for distributions (which keys off a multiple of the founder's salary) and no expiration date. The intent was to keep it simple, clear and relatively toothless.

Its not like the VC forces you to spend money a certain way.

Unless the terms of the VC dictate you only get access to tranches of money when you hit certain goals (for example, a revenue target will make you do very different things compared to a user acquisition target), or the VC will only co-invest with an established investor who has industry experience so you can't be really disruptive, or the money comes with a requirement that the VC company gets a seat on the board. And so on.

VC money often has very controlling strings attached.

Meta:

>Just type the title into google and click on it to read the article.

This is exactly the function of the "web" link below the title.

FYI you can click "web" under the title and it takes you straight to the Google page

> A recent report from the Kauffman Foundation found that less than 5% of all startup funding comes from venture capitalists, and only 6.5% of high-growth startups take venture funding. However, 37% of companies that had IPOs between 1980 and 2005 had VC funding.

Wow, if that's true I'm very shocked by those numbers! To be fair I haven't ever considered the macros of the industry, but perhaps this points out just how much of a bubble (perhaps echo chamber?) I live within!

“Venture capital can be like a mortgage you can’t afford,” says Atlassian co-founder Scott Farquhar. “It sounds great at the time, but you regret it when your mortgage payments overwhelm you and you realize you didn’t really need a big house in the first place.”

No, venture capital is not at all like a mortgage. There are no payments due, unlike a small business loan, which is very much like a mortgage.

I guess Scott Farquhar perhaps meant that 'payments due' are the growth numbers that one has to meet periodically (monthly, quarterly, annually) - to which one had agreed on during the VC funding.

I believe that's why that particular figure of speech is called an analogy...

I couldn't have said it better myself.

This is similar to revenue sharing agreements that many investors enter into with startups. Many angels at least bake this option into their Seed Stage investment if they fear that the company could turn into a "lifestyle" business.

"many angels" Can you name a few? The difference with Indie is that paying back via cash distributions is not something to fear and is not considered a failure.

Whenever I see an article about a single company that only quotes its leadership and customers, I'm always reminded of http://paulgraham.com/submarine.html ... Not that this pattern is bad per say, but caveat emptor.

Candidly, I thought the piece was going to be a broader look at VC alternatives. I was as surprised as anyone to see that Indie.vc WAS the story.

Me too. I figured I was about to see problems with and alternatives to current VC models. Instead, the site is an advertisement for an unusual VC. Title should probably reflect that.

You have a good point. I was following the submission guidelines on the title.

Anyway, it's sometimes hard to figure out an a propos title until after reading all the insightful HN commentary. :)

Are you saying a PR firm planted this story?

Blocked by a paywall when I try to read the article. :-(

Access it via Google and there is no paywall. (It's stupid) https://www.google.com/#safe=off&q=Venture+Capital+and+Its+D...

The reason:

First click free: We've worked with subscription-based news services to arrange that the very first article seen by a Google News user (identifiable by referrer) doesn't require a subscription. Although this first article can be seen without subscribing, any further clicks on the article page will prompt the user to log-in or subscribe to the news site. https://support.google.com/news/publisher/answer/40543

That what the "web" link is for under the article.

Small Business Financing, Black People and Venture Capital https://youtu.be/gXGBEUoxHHs

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