Today we cover Part 2 of Reinventing Venture Capital with Bryce Roberts of Indie VC. In this segment we address:
- What are your filters, what level of traction are you looking for and what else do you like to see in prospective applicants?
- Many VCs target 100x+ exits for success… what does winning look like for Indie and how do you measure success for the fund?
- Do you expect faster returns and liquidity, which will drive better IRRs w/ your model?
- Why do you think others have not employed a similar strategy?
- If we could address any topic in startups/venture, what topic do you think should be addressed and who would you like to hear speak about it?
- What startup investor has inspired and influenced you most and why?
- What’s the best way for listeners to connect with you?
- Indie VC
- Bryce’s Blog
- Bryce on Twitter
- What is Indie VC
- Indie VC version 2 release notes
- Github link to C Corp term sheet
- Github link to LLC term sheet
- Part 1 of the interview
1- The Role of Seed Capital
When Bryce first launched O’Reilly AlphaTech 10 years ago, he asked himself; “What is the objective of seed investing? Should it just be a bridge between angels and series A investors? Or should it create optionality, where the capital can afford different types of options to the founders.”
Those options, as he described them were:
1. The traditional path which is to get momentum, hit the milestones and then raise a subsequent round from traditional VCs.
2. Build something of value quickly and take advantage of early acquisitions from strategics or
3 The ability to continue running the company, as long as the founder would like, if it achieves healthy profitability.
However, what Bryce found is that instead of creating optionality, seed capital actually got startups hooked on this perpetual capital raising path; which reduced instead of increased optionality.
2- Profile for companies that are a good fit for Indie
1. Revenue: Startups with growing monthly revenues. At least 10-20k and even better at 50k. Companies that, when they bring in cash, they know where to invest it to grow
2. Sectors that can be cash efficient… but not sectors that require winner-take-all businesses
3. Primarily software tech or tech-enabled businesses
3- Indie VC’s New Terms & Structure
The standard convertible note anticipates another round of funding. And due to this they have interest rates, maturity dates, discounts and triggers. Indie, on the other hand, came up w/ a note that is indefinite. It does not convert as w/ the traditional convertable.
Indie VC has three main features to their investments:
1. They choose to sell the company, then Indie converts to common stock at a previously agreed upon percentage.
2. If they ever do a fundraising round, then Indie converts to preferred stock at a previously agreed upon percentage.
3. Cash distributions that a founder decides to make will be split between the companies employees and Indie VC, until a return multiple is reached. The way that this works is that a standard industry-rate salary is agreed upon upfront, at the time Indie invests. Then, if the founder ever decides to take more than 150% of that salary, it will be considered a cash distribution. And Indie participates in cash distributions. They will take 80% of all profit distributions made to the founding team and employees, until they’ve recouped 2x of their investment. And they’ll take 20% of profit distributions up to a 5x return on investment. And, finally, if the startup hits that 5x distribution within the first four years, Indie will cut their equity option in half.
Fortunately, Bryce walked us through a hypothetical example:
In this example…
Indie invests $500k in a business.
They agree that Indie receives 10% in the event of a sale or subsequent fundraise
They also agree that an industry standard salary for the CEO is $100k
Now, a few years later the founders want to bonus out $1M to theirselves & employees
Indie VC will receive 80% of that $1M profit distribution, which is $800k for Indie and $200k for the employees. And they will continue receiving this 80/20 split until 2x of the original investment is recouped.
In this case, the original investment was $500k. So, once Indie receives a $1M return, then the percentage flips to a 20/80 split. Then, assuming the $1M is recouped, a future profit distribution of $1M would result in $200k to Indie VC and $800k to employees.
And remember, once Indie as recouped 5x the original investment, there are no more distributions to Indie VC. So, in this case, once $2.5M is returned to Indie, 100% of profit distributions go to founders and employees.
And the last feature, in this example, is if that 5x return is achieved in the first four years, then the equity option is cut in half. So, assuming this business returns 5x to Indie in year three, their equity option, in the event of a fundraise or sale, drops from 10% to 5%.