Large shifts in culture will change any industry - startup fundraising is no different. 2020 was one such jump (shocking, we know). We’ve entered growth in remote-first work, living during a pandemic, and see the increasing prevalence of Gen Z in various industries. And, we have been subject to several streaming phenomena, ahem - Hamilton and Love Is Blind.
In this massive adjustment and culture of change, it’s no surprise that the fundraising landscape would be impacted too. If anything, in a market geared towards driving innovation, it’s more of a question why drivers of capital hadn’t been fully embraced sooner? To be clear, VC is currently showing no signs of slowing down, but we are also seeing increasing interest in alternative financing options. Alternative venture capital (Alt VC) is one such option presenting a massive opportunity for founders and investors alike.
At FundBoard, we think it’s important to recognize the changing VC landscape and lesser-known opportunities for startup founders seeking funding. One remarkable aspect of altVC is that it can be great if you’re a rocketship or great if you’re a jet engine or hot air balloon. It allows a founder to optimize for optionality and profitability if that’s where their heart lies. It opens new doors to growth for companies to achieve and define their levels of success.
So why would a founder raise capital, anyway? In a recent blog post by Earnest Capital, Tyler Tringas explains that money can allow the founder to focus 100% on their business at an early stage. They can quit their day job, hire exceptional talent to take the product or service to the next level, and make long-term bets they otherwise might not be able to drive without accepting outside capital (i.e., make mistakes that spur growth). Earnest Capital joins the ranks of Indie.VC and Collab Capital as some of the top emerging altVC players.
How altVCs fit in where most VCs can’t
There are a few key ways that Alt VC differs from traditional VC, and as a founder, it’s essential to understand the differences to determine what is right for your startup.
Earnest Capital noted a limitation with the traditional VC approach: “Venture capital firms invest with the intent of placing many bets, hoping that a few of their portfolio companies grow into enormous hits–the theory is that even though 80% of the businesses may fail, the few home runs will return the fund.” In this model, only massive growth and outlier outcomes qualify as a success and even thriving, profitable businesses can be a “failure” for the fund.” This approach isn’t inclusive and flat out leaves many founders unable to access growth capital. Earnest Capital wants to help founders build profitable and sustainable businesses even with no intention of selling: “Success for founders might be raising a single small round and growing to a sustainable business that throws off millions a year in profit.” Their goal, similar to many other altVCs is a fund that brings the best parts of investment (i.e. resources, mentorships, community), without the unicorn-hunting baggage of the venture capital model.
One of the most prominent firms in the Alt VC landscape is Indie VC. Indie VC strives to help their companies become profitable. A goal of Indie VC is to be “to be the last investment our founders need to take.” In what they dubbed permissionless entrepreneurship. Indie.VC does not have target or minimum revenue thresholds to receive funding. They also do not require companies to be profitable at the time of seeking investment. While if your company requires extensive R&D before you’re on the market, you’re probably not a good fit for Indie VC. Tech and Tech-enabled companies are encouraged to apply. They are looking for ‘Real Businesses’ who simply put “make products and sell them for a profit.” Companies pursuing growth at all costs or at a loss are not good fits for Indie VC’s model.
Collab Capital is focused on connecting Black founders with the social, human, and financial resources they need to be successful. They not only provide the capital but also provide wrap-around services so that founders not only receive investment but also support. Collab Capital notes that “We are investing in founders who are black, who are seeking optionality in their journeys, who are building profitable, innovative businesses, and who want to maintain ownership so that eventually they can give back to their own communities.”
AltVC doesn’t necessarily mean small investment or outcomes. Indie.VC, Earnest Capital, and Collab Capital all have the ability to write significant checks ($75K - $1M per deal in some cases). If you’re a founder that doesn’t want to be locked in to grow at all costs in an effort to sell or IPO within a stringent amount of years, altVC can be a more flexible financing option.
So what does an altVC deal look like?
SAFE, meet S.E.A.L and S.P.A.C.E. AltVCs are creating new (and dare we say exciting) financial agreements. Many altVCs feel these types of agreements provide a benefit to both their portfolio companies and investors. Let’s take a look at a few of these options below.
Earnest Capital is using a new quarterly subscription model, called a Shared Earnings Agreement (SEAL). The SEAL financing structure is very different from SAFEs, convertible notes or other investment structures. It’s not debt, doesn’t have a fixed repayment schedule, doesn’t require a personal guarantee. Per Earnest Capital, the SEAL better aligns with the kind of LPs they work with: “the goal is to align the interests of investors and founders in a wide variety of outcomes, while giving founders full control of their business and keeping as much optionality as possible open for the business. A SEAL is a long-term commitment that in most cases lasts for the lifetime of the business.”
Collab Capital uses a Shared Profit and Collaborative Endorsement (SPACE) Agreement that optimizes financial and social capital to help Black founders build profitable and sustainable businesses. As part of this, Collab Capital implements profit sharing 6 to 12 months after the investment. This allows Collab Capital to offer its investors earlier access to venture-level returns without forcing a sale, IPO or crippling the business. “Our goal is to create, grow, and sustain wealth in the Black community by building successful technology, direct-to-consumer, and tech-enabled companies through effective connections between Black innovators, investors and influencers.”
IndieVC created an open source term sheet for founders to get familiar with the structure even before beginning an official conversation. They aimed to create a streamlined financial instrument similar to the convertible note which allows redemption to be provided via revenue or for the equity to convert in the event of a sale or raising a later round of capital.
Alt VC sounds exciting! What’s the best way to approach these organizations?
Each organization has great information available on their websites and social media. Interested founders should review the site and FAQs, read recent social media recent posts, and reach out via the links listed here:
Indie VC FAQ for founders: https://www.indie.vc/faq
Indie VC on Twitter: @indievc
Earnest Capital for founders: https://earnestcapital.com/start/for-founders/
Earnest Capital on Twitter: @earnestcapital
Collab Capital FAQ for founders: https://collab.capital/fund/faq-for-founders/
Collab Capital on Twitter: @collab_capital
How does FundBoard fit into the big picture?
FundBoard seeks to provide a better fundraising future for all. We recognize that this changing landscape continues to evolve, and we’re committed to identifying interesting funding models that may appeal to different types of startup founders. Come find the investors that you’re missing, run your fundraise like a pro, and get back to what you love. Check out https://www.fundboard.co/ for more information, to stay in the loop, and try our Alpha.
