[leesalminen]

> I would also be skeptical of the potential of a startup that can't convince normal VCs to fund them. If people who do this for a living don't think a startup is worth investing in, why should I?

There are plenty of SaaS companies that are naturally limited in revenue potential.

In my experience, VCs are not interested in a company with a conservative forecast of 10MM ARR in 5 years. These are still viable businesses that need capital to actualize the plan.

Alternative lending sources are crucial to these companies. While the terms of this particular idea are not ideal, I think we will see a lot of new ideas in this realm over the coming years and some will be great!

[mdorazio]

How is an investor in such a company supposed to actually get a return? Unless the company is paying dividends or something similar, the only payout comes from selling your shares or if the company is acquired at a premium. But who is going to buy these companies with a conservative "slow and steady" growth rate and market share?

[rlucas]

There are lots of ways to get a return. I helped start Lighter Capital (originally "RevenueLoan"), which invests a lump sum that gets repaid as a percentage of revenue (like a royalty). That model, Revenue-Based Financing, is harder to game than dividends (management can and often does make profit "disappear" but rarely has any incentive to make revenue disappear).

You can also have redemption rights or dividends. Depending on tax treatments these can be reasonably lucrative.

Of course, if you tautologically declare that the only payout is from an "exit" then no exit, no returns. But historically speaking "exits" are the exception, not the rule -- yet businesses have been aggregating capital and rewarding investors for centuries.

[mdorazio]

I totally agree, but in cases like Republic with a Crowd Safe, none of those options seem to apply unless I'm missing something. My question was for crowd funded smaller companies that have low potential of an exit - in those cases how is a crowd funding "investor" going to realize a return?

[rlucas]

Very fair critique. The SAFE for all its merits is an exit-centric security.

[leesalminen]

Agreed 100%. Financial instruments are interesting- if you can dream up the structure, there's likely a (legal) way to make it work. After all, it's just a record in a database at this point :).

[leesalminen]

For small-cap companies, debt instruments can be a perfect way to raise capital. Investors hold a promissory note promising to re-pay the capital loaned, with interest, over a specified period of time.

[scott00]

If a company can get debt financing, it's a great choice for them. But there's not a lot of investors interested in loaning money to a company with no assets and little to no revenue. At least not at reasonable interest rates. And unreasonable interest rates can be problematic due to usury laws. The rigid repayment timing can also be problematic for the borrower. Equity is really a better fit for companies that have greater than, say, a 10% chance of not being able to repay their investors.

[leesalminen]

I used to think so as well. Anecdotally, my company has experienced the exact opposite.

Likely rare (and requires luck) but it can be done.

[twblalock]

I think you have to get in early and hope for an IPO. But anyone who buys after the IPO is probably a sucker.

[brianwawok]

10 million dollar companies don't IPO

[Animats]

The idea of the JOBS act mini-IPO was to let 10 million dollar companies IPO. There are dollar and number of investor limits, but they're generous. ($1BN and 2000 investors, I think.) Above that, the regular IPO rules apply.

TrueCar, Zoës Kitchen, GlycoMimetics, ChannelAdvisor, and Malibu Boats all went public via this route, but on a larger scale, around $100M each. They did a proper IPO, where investors got publicly tradeable shares, not this weird "SAFE" thing.