Back to the roots. This is very similar to how investing is done outside of tech. Someone opening up a hotel/restaurant will probably not have a huge exit, but promises his investors a payback either through dividends or loan paybacks with interest.
To take my company as an example, we are a online game specifically targeting players who were addicted to playing Diablo 2 for an extended amount of time. This is because we felt we understood what that exact market wanted better than anyone else and had a unique opportunity to deliver on it.
The intention from the start was to make a business that makes a profit, not to make a company with the intention of selling out. Infact, when we did do a capital raise at one point we were very clear in our pitch to investors that the intention was to distribute profit via dividends.
We have been successful at doing that and the project felt like a reasonably sure thing from beginning to end even when it took a lot more time and budget than we were expecting. We were 100% confident that the exact market that we were targeting existed and that they would give us money when we were done. In our minds, the only thing that could go wrong was failing to finish the product by running out of money.
Now admittedly this particular tale is probably just survivorship bias so you should take it with a grain of salt.
However, my point is just that there are a lot of little markets that VCs will not care about because they are too small. They are just waiting for someone to walk in a grab the few millions of dollars a year of profit that are sitting on the table.
In regards to the latter, EdTech is a good example. Time to exit is at a minimum double what it is in the enterprise or consumer space. This is driven by the bureaucratic nature of the sales process which in turn leads to much longer sales cycles (think 6-18 months to close a deal). The upside of course are things like high customer retention / low churn and almost guaranteed collection rates.
Companies that operate in industries like these reach a point where they have a proven product and real product, but profit may not be high enough or is not growing fast enough for the founders to make the investments they KNOW will generate additionally growth.
Large VCs are turned off by these companies because the industries they operate in are not big enough to sustain the large 9-10 digit exits they seek, while smaller VCs looking for smaller exits are equally turned off because the ROI comes too slow.
For these companies, oftentimes the only option is either private Angels who are personally vested in the space or bank loans. It's hard to find the former and even then they can't offer much $$$ and the latter tends to be unworkable because of either the lack of assets, misunderstanding of the business models, or established (5+ years) historical revenue track.
Just my $0.02
I'm citing from W. Draper III's book, the Startup Game, "Tim Draper's First Six Investment": "... Tim intoned the name and and fate of each company. The first five, as I recall, were as follows: 'dead, dying, bankrupt, probably won't make it, and not so good'." Investment No. 6 was "Home run!".
A VC (or LP of a VC) would describe a venture as a success, when it brings a multiple of its initial investment 10x, respectively a better IRR the LP would get in other markets (e. g. real estate, money lending).
They also would take the risk to invest in companies with zero cash flow and only a chance of having revenues at some point. So that's high risk, while comparing it with targeting small companies with a positive cash flow and with none to small growth, prevented from growth by cash, network or experience of the founders, that would be a nice target for an investor who wants to see a ROI in the next five years and everything which comes on top makes his (paid) investment more valuable. It's more like a traditional investment approach. I don't only think there is a niche for this kind of investments I would even say that more "companies" / founders are fitting in that description than in the VC criteria.
Which is also why it's hard to raise $10 mil, but it's pretty much impossible to raise $10 thousand.
The truth is, life is messy. Everybody has things come up. Heck, even some of the greatest entrepreneurs have found themselves dead broke at one time or another. It's hard to say that it's an indicator of success or failure though. Due diligence could weed out the financially-irresponsible, but it's not always as simple as looking at a bank account.
But for these tech companies, traditional banks are not good funding sources. They don't understand these cos (no hard assets)
The Venture Industrial Complex as I've heard some describe it makes you think that tech companies require outside capital and are either 10x or bust. That's b.s.
The company I co-founded is 25 strong (growing to 50 this year) and is a real company. It's possible. Don't believe the hype.
BTW, I think this Indie.vc experiment is an indication of where the world of tech investment is going.
That's just what LPs expect of this asset class. If they need to allocate capital for illiquid equity with some cashflow kicked back and solid (but not spectacular) IRR a few years down the road, why not just invest in real estate?
Reality is most VCs don't generate spectacular IRR (or any IRR at all) outside of the top 5%.
Revenue-based financing to tech companies is one model that is quite interesting.
Right, which is why a VC selling such product (low return but same as before high risk of failure) would have a tough time. They are essentially selling the ROI similar to that of real estate (or some similar asset class), but with higher risk of failure, lower resale value in case of a bust, and lower probability of being able to wait a crisis out by sitting on assets and not selling during a market downturn - what a deal.
> Reality is most VCs don't generate spectacular IRR (or any IRR at all) outside of the top 5%.
I don't think it matters for large LPs, as they diversify across a bunch of VCs anyways, and even those VCs have a collection of funds with wildly different returns (the KPCB fund that did an early investment in Google, e.g., did great, the KPCB cleantech fund was a bust, you ask two different KPCP investors and you'll get two very different opinions depending on their exposure).