When VC isn’t right (to start with)

Venture capital is often the most founder-friendly way to fund a startup (normally highest valuation, most founder friendly terms, lowest company and founder risk). But it is still not always the best or most appropriate option, as a company might not fit the venture capital model of very rapid growth and global expansion.

One model that isn’t widely used that I find interesting is the indie.vc model, created by Bryce Roberts and others of OATV (O’Reilly AlphaTech Ventures). Bryce wrote a longer post about it called We’re Selling Entreprenuership Short.

I understand the model as a strategy to get venture-like returns on a portfolio level without decacorn (10 billion dollar) outliers. After six years indie.vc has performed very well with a 51 % IRR and 4.3x TVPI (value of fund investors paid-in capital, i.e. investors have made 4.3x). That is likely to a quite some extent the result of OATV being very good investors as much as the indie.vc model applied by more investors.

Basically what indie.vc does was to combine the mechanics of a convertible note with a revenue-based loan (before they became popular).

If a company indie.vc has invested in raises capital, the convertible note converts into equity and things are the same as with traditional fundraising.

If a company does not raise capital, it starts to buy back the convertible note with revenue. Indie.vs asks for a 3x return (so the company will pay 3x the amount invested to buy back its shares, limited to that it can buy back 90 %).

Like traditional venture capital the indie.vc model isn’t for everyone, but it is interesting to compare alternatives.

Author: Henrik Torstensson

Partner at Alliance VC. Investing in Nordic early-stage tech startups.

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