[leesalminen]

I think both worlds can exist. You can have the "traditional" VCs going for the high-risk, high-reward model. And you can also have "new" VCs going for low-risk, medium-reward.

As an anecdote, in 2014 we looked for ~$250k investment. We had a business model that realistically took us to ~$5mm/year revenue in 5 years. We pitched various "traditional" VCs. The overwhelming feedback we got was that nobody doubted our team, the product, or the model. The problem was that the returns weren't big enough. The product was niche and could never become an "Uber" without really stretching the imagination. In the end, we found an angel investor in our space. We indeed did turn that $250k into $5mm/year revenue in 5 years and sold the company for 8 digits.

[molsongolden]

> We pitched various "traditional" VCs. The overwhelming feedback we got was that nobody doubted our team, the product, or the model. The problem was that the returns weren't big enough.

Sahil @ Gumroad has talked about this in good detail. The VC idea that "yes, your business/idea is/will be profitable but you shouldn't waste your time making money when you could be working on changing the world"

The "changing the world" business will also hopefully be profitable and make money down the road but they are looking for outsized returns from a market disrupting unicorn.

--

Regarding the "new VCs" concept. Alex Danco and others have discussed this and the funding model ceases to be VC when it is low-risk, medium-reward.

It's possible that many areas of tech are maturing to a point where VC will no longer be the optimal funding model, outside of high innovation specialties. As the industry matures, there are many businesses that might provide stable returns and have a risk profile that is different from that of the unicorn VC-startup. These businesses might be better served by debt funding and a debt-based investment vehicle/product might attract more investors and allow for greater de-centralization of tech funding.

Linking Alex's blog post below instead of rambling in this comment.

https://alexdanco.com/2020/02/07/debt-is-coming/

[epicureanideal]

Is there any existing term for "funding for business that will never be a unicorn but can clearly become profitable and provide good returns"? Is there an equivalent of VC for "lifestyle businesses"?

If not, if someone can establish a term it'll be easier to talk about this.

[teej]

There’s tons of existing finance infrastructure for this already, it just doesn’t reach tech. Small business loans, traditional banks, franchisors, local business investor groups, etc all facilitate these sorts of businesses today.

They just don’t do tech. This is because their risk models are built on 30+ years of priors and the financing is very often business sector specific. Tech is too much of an unknown for this model.

[grumple]

Are you saying banks won't provide loans to small tech businesses, but they will to things like restaurants?

[molsongolden]

Differentiating between "small tech businesses" and VC-style startup tech might be useful here.

There are many tech businesses that can and do qualify for traditional financing/funding. The difference is that banks aren't interested in funding high-risk moonshots.

Simplified examples:

Tech Biz #1: Founder identified a niche, has a few customers, and has been working on making the consultant -> product jump. They're paying the bills but see an opportunity to offer their product to many more customers and would like to work on the business instead of working in the business. They want to hire a programmer and invest in marketing but need to borrow money to make it happen.

Tech Biz #2: Founder wants to build X for Y and change the way people do Z. It's going to take many programmer-months to build the product and a sales and marketing team to change consumer behavior. There's no guarantee that they'll find product-market fit but, if they do, the business has the opportunity to scale rapidly with strong margins.

[bsder]

For a running restaurant, sure.

The issue is that the banks will pretty much provide loans for anything with consistent cashflow. This includes tech companies.

The problem is getting investment when you have no cashflow.

[airstrike]

Getting a loan when you have no cash flow to service it doesn't usually work well

[rapnie]

Zebras instead of Unicorns. Maybe you've heard of https://www.zebrasunite.com/

They have a manifesto on what a zebra is, that contains a nice image comparing with unicorn approach: https://medium.com/@sexandstartups/zebrasfix-c467e55f9d96

[tick_tock_tick]

You can get a loan from a normal bank.

[mrnobody_67]

Sounds like a good outcome.

VCs need to have a chance of "returning the fund". If they are investing out of a $200m fund, and they own 15% of your company at exit after 5 years and subsequent dilution, that 15% has to have a chance of being worth $200m.

Otherwise the math does't work.

[imtringued]

The math works out because a fund is investing in multiple companies.

[mifeng]

This is an important point. It's not about what VCs want to fund, it's about the types of businesses that founders want to build. Founders have a lot more choices than they realize.

[adriand]

Another fund in the "new" category is TinySeed: https://tinyseed.com/

Also, congrats on your success!