[a13n]

As a founder of a bootstrapped & profitable company, I don't really get what's so attractive about this funding model.

It seems like it's just a really, really, really expensive loan. They make it sound nice with their anti-VC, pro-founder marketing angle. But at the end of the day, they are charging you 3x what you're borrowing.

[abuehrle]

Once you're already profitable, it's probably not that attractive. I've explained it to myself in the past by thinking about the would-be founder who's bootstrap-inclined, but who'd rather "go for it" now rather than doing nights and weekends for 18 more months before quitting their job. This person might not want or have access to traditional VC, and wouldn't be able to get a traditional loan. If all goes according to their plan, when that 18-36 months is up, they've paid back this "really expensive" loan and own 100% of their now profitable company.

[cjlars]

This is the model for pretty much every new venture that's 'main street' and not 'VC'. There are many times more main street businesses than tech startups. While it's reasonable to bootstrap a sole proprietorship tech services firm from nothing, restaurants need buildouts, HVAC companies need trucks, retail stores need inventory, etc. Equity is absolutely the most expensive form of financing, but the bank ain't touching your new restaurant concept so there's the equilibrium.

[woah]

When I was fundraising, we talked to a few of these type of funds (IIRC, this exact fund was one of them). It just seemed like worse terms for less money. It's a valid model, but I don't understand the self-righteous marketing.

[ambicapter]

I mean, all marketing is a little bit narcissistic.

[bryanmgreen]

Seriously!

Why pay for a loan with equity when you can pay cash? The interest rate on equity payment is exponentially higher than it is for cash.

Plus, if you already have attractive traction, why do you need the "premium features" a VC offers versus a bank which are extra experience, some networking effects, and maybe some insider info on acquisition opportunities? So you can be forced into expedited aggressive growth and turn into WeWork or make less money if the company is acquired? No thanks, the business is already proven and working!

Traction for VC money makes no sense to me.

...Unless you secretly have ZERO intention of ever selling and just want to pocket some play money for the business.

[dcolkitt]

I agree. This isn't quite an apples-to-apples comparison. But middle-market companies with okay-ish financials can easily get covenant-lite leveraged loans from the gigantic private credit market, for well under LIBOR + 1000 basis points. The current yield-to-maturity on the leveraged load index is 5.64%[1].

3X in 7 years implies a yield-to-maturity of 17%. Why would any company pay more than three times the cost of capital they can get from much larger, more liquid, and established Wall Street financing?

[1] https://us.spindices.com/indices/fixed-income/sp-lsta-us-lev...

[smachiz]

Virtually no startup can get loans without a PG at any non-loanshark rate.

This would be very attractive to someone who wants to grow their business without taking (more) personal risk than they have already.

[dcolkitt]

The historical default rate for leveraged loans is 2.9%. This VC program claims a mortality rate of 10% over a 5+ year horizon. I.e. a 2% annualized default rate.

Now I'm sure they're not using exactly the same definition. Plus we have to take into account recovery rates. But the point is that this VC program almost certainly is not funding the "average startup". To achieve those low levels of default, their investment pool has to be significantly safer and more stable than the typical Valley startup.

So either their typical investment is safer in obvious ways, like interest coverage and EBITDA multiples. In which case they should be able to access traditional credit markets at much more favorable rates. Or the VCs in question have a unique ability to identify sure bets in opaque ways. Ways that other investors just can't see. In which case the secret sauce isn't the funding structure, but the preternatural giftedness of the firm's general partners.

(Or there's a third option, which is that the fund's track record has just represented a string of good luck. They've been fooled by randomness and future returns will not live up to past history.)

[a13n]

I would guess they would tell you "because it isn't personally guaranteed", which absolves you as an individual of financial risk.

Personally I'd be really excited to see better loans being offered to startups, but this isn't it.

EDIT: Also you're assuming a 7 year payback period, and I would guess it's a lot shorter than that for the average indie VC customer.

[spyckie2]

I think its pretty attractive if it reduces risk on the founder but gives the founder freedom to do whatever they want with the company at whatever time frame.

After experiencing it myself, I think that the push to grow big is a very big deterrent for me to take on VC money. The lifestyle is just not worth it.

Bootstrapping a company from the ground up works if you have the necessary skills and idea, but some ideas need access to capital, especially if they are operationally intensive. So I could see this model being pretty attractive in those situations.

[not2b]

From what I'm reading, The founder can choose to let the "anti-VC" keep its shares, or it can buy them back at 3x the investment. That's not equivalent to a loan, since it doesn't have to be paid back. With a conventional deal, if things turn out well, the VC doesn't have to agree to sell its shares to the founders at any set price.

[mifeng]

Agreed, angels are a much better financing path for founders building profitable startups.

[imtringued]

It's not a loan because there is no expectation for you to pay the money back.