In this episode of Startups For The Rest Of Us, Rob interviews Bryce Roberts of Indie.vc about their unique approach to funding startups and their terms. Rob shares his opinions on raising funding and angel investments.
Items mentioned in this episode:
- Current terms in Github
- Bryce’s Medium post on his learnings and adjustments to their approach
- Ycombinator thread about Indie.vc
Rob [00:00:00]: In this week’s episode of “Startups for the Rest of Us,” I interview Bryce Roberts from Indie.vc. This is “Startups for the Rest of Us,” episode 310.
Rob [00:00:18]: Welcome to “Startups for the Rest of Us,” the podcast that helps developers, designers, and entrepreneurs be awesome at building, launching and growing software products whether you’ve built your first product, or you’re just thinking about it. I’m Rob, and I’ve given Mike the week off this week. I have a very special guest joining me on the show today. His name is Bryce Roberts, from Indie.vc. If you haven’t heard about Indie.vc, they’re taking a really interesting approach to funding companies, and it’s much more around this “fundstrapping” approach that I’ve talked about before. If you recall, fundstrapping, which – Colin from Customer.iO is the first person I ever heard use that term. The idea is to raise a single round of funding to get to profitability, or to help you grow faster, but not to have this implicit series A that you need to raise, as Bryce says during our interview. To be honest, I’ve never been anti-funding. I’ve always been anti people thinking the only way to grow a software business is through funding and then to raise that funding and have it require you to sacrifice your lifestyle, to relocate somewhere, to need to commit to growing a $100 million company with 200 people on the payroll, just all this stuff that never made sense. I always wondered why can’t you just raise a couple hundred thousand dollars to get to that seven-figure revenue mark faster, or get their more efficiently, and then just pay investors back like a normal business does; like when you start a carwash, or a restaurant, or a drycleaner, and you borrow money. You’re not looking for an IPO.
[00:01:33] That’s the approach that I’ve started to take with my angel investments. Last three, I think, have been into companies that I believe will all be seven- or eight-figure SaaS companies; and they’re not planning to raise a round from institutional investors, ever. That’s the premise. They needed some cash to get to growth and to go beyond that. Indie.vc is doing a similar thing. We talked in detail about their exact terms. Of course, they have their terms published on GitHub, which is super cool, because you can look through the docs that I think you’d sign if you were to take money from them. Just a fascinating conversation here with Bryce, who’s really going against the grain of traditional venture capital. I think it’s a good interview. I hope you enjoy it. Thanks so much for joining me today on the show, Bryce.
Bryce [00:02:15]: You bet. Super happy to be here.
Rob [00:02:17]: As I said in the interim, folks just heard you run Indie.vc. I first heard about Indie.vc probably close to two years ago, and it was on Hacker News. There was a big discussion of – at the time, you had a long-form letter at Indie.vc – that’s your URL – and it was basically explaining this new premise, or a new investing ideology. It was about not having to have this $100 million or billion-dollar exit to make money, but that you wanted to fund businesses that could achieve profitability and didn’t need to be a unicorn in order to be profitable for investors. This was really groundbreaking, and at the time, I think it was anonymous. Is that right, the way you published it?
Bryce [00:02:59]: It was anonymous unless you clicked the one – there were two links on that original letter. One of them was to sign up for a slack channel that we’d set up to answer questions. If you clicked on that, it would go to my inbox, so you would see that I was at OATV. Otherwise, there was no messaging, or branding, or anything else like that on it. So, yeah, that created a stir in that Hacker News thread as well.
Rob [00:03:21]: What was your thought process behind doing that anonymously?
Bryce [00:03:24]: Thought process was, just as we laid out in the original letter, that it was an experiment. So, if for any reason that just was a failure, we didn’t get anyone interested in it, no one wanted to apply, that we could have it set up completely separate from OATV. If it didn’t work out, we’d just take the site down, and we’d move on and go back to our day jobs. Wanted a little bit of that abstraction, but also I think it’s a little bit a part of our brand and marketing anyway, which is not intentional. It just is – it feels like you ought to have to do a little bit of work to get to know us and to get to know what we’re trying to do. I think it creates a little bit of scarcity, a little bit of intrigue and that, as a result, it drew people a little more closely in.
Rob [00:04:15]: I remember feeling when I read the letter, because if I recall, it was in Courier font and stuff. It gave me the hacker ethos. It made me feel like the DIY ethic of, “This is really cool. It’s grassroots.” It was just a neat feeling. You’ve mentioned OATV a couple times. For folks who aren’t familiar with that, could you let them know what that is?
Bryce [00:04:32]: To be clear, the DIY is really important to us, that kind of really raw, bare bones. Everything you saw in that first iteration and most of what you see now is still – that’s just me writing, posting. That’s something that’s important to us and always has been. In terms of OATV, OATV is a venture fund that I helped co-found back in 2005 with two partners. One is my partner Mark Jacobsen, and the other is someone who’s pretty well known in technology, my partner Tim O’Reilly. “OATV” stands for “O’Reilly AlphaTech Ventures.” It was a seed fund that Tim and I and Mark started in 2005, when seed investing really didn’t have a name. It wasn’t necessarily a category yet; but we were probably one of the first, I would say, handful – maybe five – institutionalized seed funds that got going back then.
Rob [00:05:27]: Very cool. Could you talk people through the premise? I guess you had the experiment that went out a couple years ago in terms of the letter and vetting people. I know you started with a cohort approach, and I think you’re no longer doing that. I think you had a fixed amount you invested up front, and now you’re more flexible, based on the business. Could you tell people about where you’re at today, just so they have an idea of what is Indie.vc? How is it different than just a traditional venture fund in terms of from the entrepreneur’s perspective?
Bryce [00:05:55]: The history is 2005, we set up a seed fund to introduce a new kind of optionality for entrepreneurs, not necessarily just bridge between seed and VC, but actually create some options for folks looking to run cash efficiently. As you can appreciate, part of the whole premise and the whole opportunity around seed was that the cost for getting these businesses online, up and going was dropping significantly. So, whether it was open-source software, hosted infrastructure – you name it – all of those things were starting to drive costs down and making it more accessible to entrepreneurs, which is kind of conventional wisdom right now, but back then it was just some wild, wild thinking.
[00:06:35] So, part of what Indie.vc was a response to was ten years into running OATV, it had become clear that some of those options that we had hoped seed investing would introduce to folks had kind of fallen by the wayside. Those options, as we saw them, were you could take a small amount of seed funding and then go raise from traditional VCs. That was one option. The other two we thought were just as important for founders were you could raise a little bit of money, make a tremendous amount of progress, and without having to raise more money, without having to take on more of that dilution and oversight from VCs. You could sell relatively early for a smaller acquisition, say, sub-$100 million type of acquisition; and it would still be a meaningful return – likely a life-changing outcome for the founder, but a meaningful return to a small fund, which is what we got started with.
[00:07:29] The third was, given how little capital these types of businesses take to get going, and given how strong and just wide the potential for profit margins are, given how efficient these things are, there ought to be a path where you just raise a little bit of money and then you just run that business as long as you want to, based on your profits and revenue. So, ten years into OATV and this whole seed investing experiment, we were looking back and just saying, “Okay. Part of that promise we’ve delivered on,” and that was filling the gap between angel investors and VCs, but those two other options seemed to have fallen by the wayside as fundraising has become the business model for so many of these companies that are getting started right now. When we started, a seed round was 250k, $500,000. A seed round now can be up to $5 million, whether you include their pre-seed or their post-seed, or their A2, or whatever these things are, right? Fundraising was intended to be a pain reliever, but the way we’ve looked at it is that it’s now become this gateway drug to this larger, unicorn culture that’s been built up around startups. So, Indie.vc in some ways is a response to that to try to capture some of that optionality again.
[00:08:46] I think part of your question was how we get our returns. As you can appreciate, we are still a venture fund. We raise a pool of capital. We put that to work. Our investors expect a return on that investment, and I think the one dimension that was pretty unique to Indie.vc-style investing is that not only can we make a return in the event that a company goes public, or gets bought in an acquisition; we can also make a return if founder decides they want to run that business indefinitely and profitably. We can take our return out in something that we call “distribution.” So, if a founder wants to keep running that business, wants to be paying themselves, really reaping the benefits of running a large, profitable, growing business, we just take our return out in cash as that business continues to grow. That’s kind of – plain vanilla as that sounds, that was at the time, and continues to be, a fairly radical concept, given that the venture-funded model suggests that any dollar you take in you’re reinvesting in growth. The idea that founders would be taking money out to put into their own pockets seems to run counter to so much of what’s already happening in that venture-funded world.
Rob [00:10:04]: Yeah, for sure, and that’s what I liked initially about the Indie.vc model and what you’re still doing today. In a second, I’ll run through your terms, which are published on GitHub. You have the exact terms that you give everyone. I was having a number of conversations right as I started doing a couple angel investments a few years back, and my interest has never been in the unicorns. I would much rather have a smaller business that has a much, much higher chance of success. Typically, right now it’s going to be B-to-B SaaS, because that’s what I know. I want to be able to put a small amount of money to work. You know, “small amount”: 5, 10, 20, 25 grand – whatever gets money in – and not have to swing for the fences and not have to swing for an acquisition. I kept looking for models to do this, and the only one that I stumbled upon was the way that carwashes and brick-and-mortars are funded. Then when I saw that you guys were doing this, my head exploded, like, “Yes! Someone is trying to apply this to startups and software companies.” We know that, if they’re smaller, they can just throw off a ton of cash, you know?
Bryce [00:11:05]: Yeah. It’s interesting, because despite the original letter that was posted – it was actually posted January 1, 2015. That’s when that Indie.vc site went live, but the buildup to that was really probably five or six years of conversations. I remember having a conversation with a friend of mine who’d invested in a couple of restaurants, and I was wrestling with a lot of these ideas and asked how they structured that. Given a local restaurant isn’t likely to IPO, and it’s not likely to be their ambition to IPO or even get bought, I was asking how they structured their return. In having that conversation and a bunch subsequently with other types of businesses, I thought, “Man! The margins in a restaurant business are just so paper-thin, in general. Why couldn’t we be trying this with tech businesses?” where your margins are oftentimes 60, 70, 80 – I’ve even seen 90, 95 percent in the investments that we’ve been looking at.
[00:12:02] It feels like a real opportunity to pursue that model for returns; and, yet, it just runs so counter to the business model of VC investing at this time, that very, very few people would really consider executing that, at least at a fund level, like you said. There are some people who are trying to find those for angel investments, but from a fund level, it hasn’t been necessarily as attractive or as accepted, just because the model hasn’t been proven out just yet.
Rob [00:12:35]: Right. As listeners know, my startup Drip was acquired a few months ago by Lead Pages; and we had hit a point a few months before that where we were really having internal conversations about the possibility of raising a small round, because our growth was being hampered or dampened by the lack of cash. It was the first business I’d ever run where that was the case. All the other ones, I always had ample cash to grow them, because they were smaller businesses. But we were really talking about that, and there was no chance I was going to go down the traditional VC route. It just was not – I never saw Drip – even though it had the market potential to be large, it wasn’t in my interest to be the CEO of some –
Bryce [00:13:12]: Why is that? Why didn’t you think the venture path was the path for you?
Rob [00:13:16]: Because I honestly value my lifestyle a little too much. I didn’t want to have to relocate. I didn’t want – I have my wife and kids, and we have a pretty good life. I didn’t want to feel the constant pressure of, “Get to $1 million.” “You should be hiring more.” “Hire, hire, hire.” My friends who’ve raised VC, that seems to be the thing: you need to get head count up. The idea of running even a 30 – well, 30 was reasonable, but when I started thinking about a 50-person team, it was just not appealing. I think that – I know you don’t necessarily lose control with your first round, but I looked down the line and thought, “Boy, you raise a series A and then a B. If that’s the path, then eventually are you still running your company?” Have you pushed into the center of the table and said, “I need to get to $100 million, or I go bust”?
Bryce [00:14:06]: Well, it’s interesting, because that’s actually a conversation I had recently with a good friend of mine who we spun up our seed funds at roughly the same time. We were talking about this model, and he was expressing frustration around what he termed the “implicit A,” right? Even at a seed round – like you said, you want to believe that that first round of funding really isn’t going to alter your course all that much, but the reality is there’s an implicit A as soon as you take that seed round these days. Most of the advice and most of the effort and most of the incentives around that seed round of funding end up pushing you towards another round of funding and another round of funding. So, as harmless as it may feel like it is, it’s really become, like I said, this implicit A at the tail end of any round of funding; and that’s something we wanted to be a counter to. We wanted to, hopefully, present a different set of options for a founder.
[00:15:02] And it’s something we’re seeing now. That same situation you found yourself in at Drip, we’re finding there’s a large number of companies who have grown. They could really unlock a lot of value in their business with an extra $250k, or $500k, or whatever it is. There’s a couple of hires they can’t make out of cash flow; or, there’s a new line of business they can’t fund out of cash flow; or, there’s a new product that’s additive to what they’re already doing that they want, but they can’t fund it out of cash flow. It’s within that group of founders we really found a lot of resonance and, for us, a lot of potential investment opportunities. I think what we can offer to them is – it’s funny. We just had one of our quarterly retreats in Chicago this last weekend, and one of the founders who’s a part of the Indie.vc group of companies said something along the lines of, “This is just enough VC b.s.” It’s like we haven’t bought all of it, but there’s still a level of accountability. You still have a partner in the business that isn’t with you day to day. There’s still a much broader network for folks who maybe aren’t in the Bay Area that we can provide to them, that they can access.
[00:16:10] That’s really what we’re trying to provide: just enough of that VC oversight without necessarily the levers that so many VCs have, which are voting rights. They become shareholders, but they become shareholders of a preferred class of stock. There’s a lot of layers of control that you give up and also optionality that you take off the table when you go that route. Hopefully, what we’ve tried to do in structuring the terms of Indie.vc is address those in a hard-coded way, where everybody’s playing all their cards face-up so that we can offer to an entrepreneur a certain level of service and a certain level of capital, and they can play their cards up in terms of what it is they’re trying to build. As your audience my appreciate, when you go out to pitch that round of funding to investors, even – you’d mentioned you really value your lifestyle. You mentioned that you may not be the right CEO to be running a 50+ person team. If you walk into an office of an investor and make that presentation, you can’t honestly tell them that, right? You have to tell them about how this is going to become a multi-hundreds-of-millions-of-dollars business.
[00:17:24] We think that’s a real opportunity for us, and we think that the more founders are empowered to build the business they’re best suited to build, and that we can support in doing that, we think that those returns for us will still be every bit as compelling as the returns we’d be seeing in the traditional seed investments that we’ve been making.
Rob [00:17:43]: Yeah, that makes sense. That’s the key, is something you just touched on, which is there’re a lot of businesses that are really great businesses that I think raise funding and get run into the ground because they would be great 5, 10, 15, $20 million ARR businesses, but highly profitable; and they just go for the $100 million thing, and then they implode because they just can’t get there for whatever reason.
Bryce [00:18:05]: There was a fascinating post written – I think it was last week – by a VC, saying, “Here’s how you end up in a bad position with your board.” The scenario he gave was a founder who’d raised two or three rounds of funding. Their business was doing about $5 million a month. The founder couldn’t raise any more money. The founder couldn’t sell the business. Now they’re locked horns with their VCs. I think most people who aren’t in that unicorn echo chamber would say, “Wow. If I had the opportunity to run a $5 million-a-month software business? Sign me up for that!” right? But it’s that type of misalignment with the kinds of companies some founders are best suited to build and the things that oftentimes – I think the other disconnect, too, is just timelines, right? There may be a timeline in which that entrepreneur, if given that opportunity, could grow from $5 million a month and become that massive outcome, but not on the timeline that a VC really needs it to happen in, which is typically five years. So, they would much rather see that founder crash and burn and sell that business for parts, because for every month or quarter that goes by that they have to sit on that board and that business is consuming its time, it’s time that’s taken away from the potential unicorns that are already in their portfolio – if that makes sense.
Rob [00:19:23]: It does, yeah. I want to switch it up just a little bit here and dig deeper into the specifics of how you guys work. I’m on GitHub right now, and I’m going to link your website. You have a [medium?] post, and you have the GitHub repo, where you have all your docs. My understanding is that you invest typically between $100,000 and $500,000 into each startup, and you don’t actually take equity in the business up front. It’s only upon an acquisition that that would happen. Then the repayment – and this is where you’re based more on cash flow than on exit or liquidity [event?]. The repayment is 80 percent of distributions until you’re paid back two times your investment. Then it flips to – what does it flip to after that? Does it flip 20-80?
Bryce [00:20:08]: Yeah, 20-80. That’s right.
Rob [00:20:10]: Okay, perfect. So, that’s 80-20 to your fund until you get 2X back. Then it goes 20-80 to your fund versus the founders, and that’s up until 5X your investment. Then it stops. Is that correct?
Bryce [00:20:22]: That’s correct.
Rob [00:20:23]: Okay. So, the idea is if someone – there’s a bunch of Hacker News threads if folks search it, but there’s a conversation where you actually address specifically – someone says, “What if a founder comes on, and then they just raise their salary up to a bazillion dollars or whatever instead of taking out dividends?” Because it’s when the dividends are distributed when the 80-20 stuff kicks in. You have clauses that help with that, right? They can only raise their salary up to a certain amount, or by a certain percentage, based on from when you guys invest.
Bryce [00:20:47]: That’s right. There’s a bunch of different models that people have tried out around how to trigger these types of distributions. Several of those have been – they’ll tie it to profitability. They’ll tie it to revenue. There’s a whole industry that’s forming now around revenue-based financing, where they immediately start to take a percentage of the revenue that comes in every month, and they get paid back up to a certain return as well. What we tried to do was tie it to incentives, right? So, as you mentioned, when we make an investment, we aren’t a shareholder in your business. It’s structured essentially as a loan with no maturity date, so there isn’t an interest accruing, and there isn’t a date at which that note will be called back. The unique element to the one we’ve structured, as you touch on, our repayment is really tied to the incentives of the founder. If the founder wants to start taking a significant amount of cash out of the business, we share in that. We tie it to total compensation. If a founder’s total comp – let’s say it’s $100,000 when we make the investment. We allow them to continue, we want them to continue to grow and to pay themselves and be able to reap the rewards of growing their business. So, we say up to 150 percent of that initial baseline that we set, that’s yours. Once you start to pay yourself above and beyond that, that’s what we consider a distribution. That’s when the splitting, the 80-20 and then flipping to 20-80 occurs, is once they’ve decided that maybe they do want more of a cash-flow lifestyle business. We are fully in line or aligned with them around them being able to grow and run that kind of business. We just want to be able to share as that cash flow starts coming out of the business.
[00:22:26] In the case where we do become a shareholder, there’s really only two scenarios where that happens. One, the founder decides to raise a more traditional round of VC funding. If someone is running the business profitably for years, but they decide to end up going and raising an additional – bringing on VCs to really scale up because they now see their outsized opportunity, we just convert in as part of that round at a pre agreed-upon percentage of whatever that is. Then if they sell anywhere in there, we convert into common shares and go through as part of that acquisition.
Rob [00:23:00]: Very cool. There’s a comment on Hacker News from someone who is obviously an Indie.vc portfolio company, and he says – there’s a whole discussion of it, but he says, “This is why I enjoyed being part of Indie.vc: zero emphasis on pitching or raising the next round, no demo day. All the focus was on growing a real business.”
Bryce [00:23:19]: It’s like I said. We just did a meet-up in Chicago this last week. What we’re doing now is – we did our first cohort last year, where we invested $100,000 into eight companies, and each quarter we would get together with those eight companies and not work on their pitches, but actually work on their business. We would bring in subject matter experts for things that they were wanting to build expertise around. At the end of that year, we said, “We can continue to do this or not.” It was unanimous within the group that they’d like to continue to have these meet-ups, so this was our first opportunity to start folding in new members, new investments that we’d been making since the beginning of the year. The response from a lot of the new folks was really positive. They were really taken back by what it meant to just focus on revenue and growth and profitability.
[00:24:09] One comment I remember from the weekend was someone lead off their answer to a question by saying, “Back when I used to think raising money was cool, I did X,” right? At its most basic, part of what we wanted to really see is this idea that you become who you hang around, right? So, you have a group of companies now who all are focused on fundraising, and you plug into that group, guess what you’re going to start focusing on? You’re going to start focusing on fundraising. You’re going to start solving your problems with going and raising another round. What we’re seeing now within the group – and, knock on wood, a year and-a-half in, all of those eight companies are all still in business. Some of those have gone from standing starts to profitable. We’re seeing that there’s real value in having a group of like-minded founders who want to build their company in the same way that you’re trying to build yours, so that’s support in that network. So, we think that’s a pretty – it seems subtle, but as the Hacker News commenter mentioned, it’s actually a pretty powerful undertone to create within a group. In fact, we’ve now done five of these, and I can count on one hand the number of times we’ve ever even talked about investor presentations, or talking to VCs.
Rob [00:25:21]: That’s super cool. It does become an amazing sight now when I go to – I grew up in the Bay Area. I grew up in the East Bay, so the Silicon Valley culture was very much part of me, growing up. But when I go back now – I haven’t lived there for 20 years, almost. When I go back now, when I go to a conference or whatever, I’m struck by just the one-track mind. Everyone is just talking about the pitching and talking about the raising and talking about raising money. I keep thinking, “People are focusing on building slide decks rather than building businesses.” That’s kind of been my quote.
Bryce [00:25:54]: No, exactly. Like I said, fundraising is the business model of this new, unicorn-obsessed, startup cohort. I think there’s a real opportunity for us. We have some investments in the Bay Area, but I tried living in the Bay Area, and I know live in Salt Lake City, Utah. We aren’t geographically focused. We don’t just invest in the Bay Area. We don’t make people move to the Bay Area to be a part of what it is we’re doing. I think a line that really resonated in that original piece that I wrote at Indy.vc was, “Bloom where you’re planted.” We try to embody that both in the support we provide for our companies, but like I mentioned, we did our last retreat in Chicago. We try to expose our companies – one, visit the companies in their local markets and support them there – we have a couple companies that are in Chicago – but also give exposure to people who aren’t from Chicago to the way local founders, [the] local start-up community there works so they can see that it’s different from their home states, but it’s also different from how the Valley works as well.
Rob [00:26:55]: Yeah, yeah. I like the idea from your perspective as someone running a fund that you then have diversification across geographies, right? All of your eggs are not in the Bay Area basket and all not pulling from the same talent pool and all not getting in the same group thing. I think there’s advantage to the diversity you have there.
Bryce [00:27:13]: It’s been great, and it was fun because one of the folks who came to a dinner we hosted while we were in Chicago tweeted out after they’d left – this is a person who’d done the VC-funded startup thing. They’re a pretty well-known name in the startup community, and they’re just totally burned out after their last venture-fueled startup experience. They tweeted out after the dinner how energized they were, that it was so refreshing to be around these kinds of founders who’re actually building real businesses and how that reinvigorated them to be thinking and working towards their next company. I think there really is something to that. I think there’s a group of people who really want to have an impact, who want to build something that doesn’t necessarily rely on getting permission from an investor to be able to have it exist and have it to impact people in the world in a meaningful way. So, I love that that person at the dinner picked up on the energy, and we hope that there’s a lot more of that energy we can help unlock through Indie.vc.
Rob [00:28:13]: Sounds great. Well, thanks again, Bryce, for coming on the show. I really want to be mindful of your time today. If folks want to learn more about Indie.vc, they can obviously go to www.indie.vc. If folks want to keep up with you, is it maybe Twitter? What’s the best place?
Bryce [00:28:28]: Yeah, indie.vc is the best place. It’s kind of a jumping-off point, and you’ll also see a unicorn that’s burning, and so you might enjoy seeing that. For me, I’m @Bryce on Twitter. You can add-reply me. We also have a Twitter account that’s pretty active for Indie.vc @Indievc – one word – on Twitter. I’m not great at email, but if you want to email me, I will definitely see it. If it’s interesting, there’s a high likelihood I will reply to it. I’m just Bryce, B-R-Y-C-E, @OATV.com.
Rob [00:29:01]: Sounds great. Thanks again for coming on the show.
Bryce [00:29:03]: Thank you, Rob.
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