A couple weeks ago I had the opportunity to speak at the XOXO Festival in Portland Oregon. The Andyies asked me to talk about our Indie.vc experiment and I was more than happy to oblige. A video of the talk is not online, but I did find a transcript which I’ve edited a bit here:
Like Andy said, I’m not really supposed to be here. And that’s not a joke. Last year I applied to come to XOXO, and I got denied.
I wasn’t supposed to be at the conference.
They actually didn’t want me at the conference.
I did get a very nicely written e-mail saying they would love to take my money with a the link to buy the festival pass. So I clicked through and when I got to shopping cart I felt like I was getting away with something because there was a conference pass it!
So, of course I bought it and went to Twitter so excited to tell everyone I was going! only to be told I wasn’t supposed to be at XOXO because my kind (VCs) aren’t supposed to be here.
We weren’t welcome here.
But, I came anyway and loved it.
Funny thing is I’m not supposed to be here (a VC) either.
I don’t have an M.B.A. from Stanford, I don’t come from an influential family, I haven’t started a company and sold it for piles and piles of cash. I’m actually just a Mormon dad who has five kids and lives in Salt Lake City Utah, not the Bay Area.
But I think there’s something that comes with being an outsider in an insider’s game. I think that being an outsider gives me an opportunity to have a different perspective maybe than some VC who come out of central casting.
Today I want to talk about this thing. I’m not sure what to call it. It’s clearly a contradiction, right? I know it’s an uncomfortable contradiction because every time I talk to Andy Baio about it, the conversation starts with, oh, that name. Are you really going to use that name? Because that name.
He doesn’t like the name.
I get that he doesn’t like the name but that’s the point.
It’s supposed to be uncomfortable.
It’s supposed to not go together. These notions of an independent ethos don’t map that well to what we know about venture capital, which is a very staged and formulaic way of building a company. As a venture funded startup, you’re supposed to operate a certain way.
Most people who want to build something independently make this trade-off: they give off pieces of independence to access to the capital and networks that venture capital can provide. Because venture does provide a lot of good things to a bunch of really great companies.
But there is a bit of a trap in venture capital. Once you start taking other people’s money, it becomes very difficult to stop taking other people’s money. So, you start by taking a little bit of money from your friends and your family so you can build a product so that you can go raise your seed round so you can show that people want to use this product so you can raise an A round to show that lots of people like to use the product so you can raise your B round so scale the team to build the product. And that’s kind of how venture capital works.
It’s this interesting cycle to watch as an outsider where the things that people are building, they are building for investors and not necessarily building for customers.
So we can’t talk about venture capital without talking about Unicorns, right? But there’s actually a reason we talk about Unicorns that might not be obvious.
When I got started in venture capital conventional wisdom said there are really six companies a year that mattered. What that meant is that six companies a year could achieve a hundred million in revenue or a billion in valuation. And, that those six companies drove 95% of the returns for our industry. So you could make the case that those were really the only companies that matter.
Having one, or multiple if these billion dollar businesses became job one in venture. Quite literally, nothing else matters. You will never be able to pay back your funds if you do not have one of these 6 companies a year.
At least, that was the belief but there wasn’t a lot of data to support it.
So last year Eileen Lee, did this amazing study where she dug into data going back to 2003. And what her data shows is actually that the number wasn’t six, it was four. Four companies a year matter. Which represents .07% percent of the companies funded in a given year end up fulfilling the promise of venture capital.
Put another way.
99.93 percent of companies are using a product, venture capital, that really doesn’t work for them.
As a VC, I’m in a position where I have a product that doesn’t work for 99.93% of my customers. And that has been grating on me.
The fascinating thing as I stepped back was how, rather than try to create new ways or approaches to potentially double or triple the number of these types of companies a year we’ve ended up creating and entrepreneurial industrial complex bent on finding the four.
We’ve create archetypes for entrepreneurs and narratives about ambition for what these Unicorns are supposed to look like. And, if you don’t fit the profile you don’t get venture capital because you have no chance of delivering that kind of return. So, you have entrepreneurs building companies, building customer bases, designing interactions with their users in order to make themselves appealing to venture capital.
I think that’s dangerous.
Back in 2005 we started a venture firm called OATV, O’Reilly Alpha Tech Ventures, myself, my partner Tim O’Reilly, and my partner Mark Jacobson.
We were seeing things that used to take $5M to launch were now $500,000. What an explosion of entrepreneurship this could be if we were in a position to fund people who didn’t need access to traditional venture capital. Maybe, just maybe, we could derail a little bit of this entrepreneurial industrial complex.
It took us two years, but we eventually got our first fund off the ground.
Turns out when you invest in things that VCs won’t, you end up with a bunch of companies that VCs don’t want to invest in. Unless the VCs could see them as potentially one of those four companies a year, they just candidly weren’t interested in.
We’re still in business. Don’t worry, we actually did invest in a bunch of things that worked. But, it became clear quickly that other people’s money is a really really addictive substance. And once you’re hooked, it’s a very tough habit to break.
As an investor, advisor and friend to many of these companies I have mixed feelings about this.
I remember specifically one of the founders that we’d backed, when we kind of shook hands on our first investment said they were never going to raise anymore money and keep the team close and small.
That founder has now raised almost $200M in funding. They have a board full of VCs, and all the people they started the company with are gone.
Even though financially that’s been a fantastic investment for us, spiritually it’s been hard.
So fast forward to 2012 and we’re raising our new fund and I was having this major midlife crisis about the work I do. We’re those things we believed when we started our firm any less true today? Is it more expensive to start something now?
Resoundingly that was not only still the case but more so than ever.
That being the case, what if we surrounded our founders with other people who weren’t focused on fundraising and valuation, but focused on revenue and customers?
What would that do to change the social dynamic among our founders and their ability to achieve what they set out to build? What if we changed the archetype of success and ambition both in terms of faces and in terms of how they talked about what it was they were trying to build? What if we gave those who didn’t fit the traditional mold to the networks we had? What if we could provide people who didn’t live in the Bay Area, who didn’t go to Stanford and Harvard, who were every bit as ambitious as those grabbing Techcrunch headlines all these things.
And what if instead of trying to force everyone in this mold of being a billion dollar company or collateral damage, what if we focused all of our energy on helping them create independent, stand-alone businesses that could fulfill their promise on their terms. Then we just kind of let scale figure itself out. What if we didn’t focus on that but just focused on helping people get to some sense of profitability.
After three years of talking about this stuff publicly and privately, I was having a chat with a friend, Marc Hedlund, who finally stopped me and he said-
It’s exactly what I needed to hear. I had so many reasons not to do it, so many questions that didn’t have answers, and I was so so nervous about whether anybody would care.
Despite all of those insecurities, on January 1, 2015 I sent a note to five people and I said hey, this is super low key, but we are going to try this thing. If you know anybody who is interested in it, please forward it on. I sent those e-mails out about 8am, nine in the morning.
At 10:42, buzz tweets:
“Excited to see @Bryce and @OATV kick off 2015 by trying an experiment with a different approach to funding.”
Then it just went bananas. We were at the top of Hacker News all weekend.
My expectation was that 20 or 30 people would apply. We ended up having hundreds apply in the first couple of days. We had more interest than answers, so we started to build the airplane while we were flying it.
First thing we started with was trying to come up with a new type of financing document. So, we developed a new kind of investment instrument. For $100,000 we actually don’t take any equity in your company unless you raise more venture capital, at which point we’ll convert into that round of funding or if you sell the company, we’ll have a small piece of that acquisition.
But, if you choose not to raise any more venture capital and you build a long-term sustainable business, we give you a release valve from the pressure to sell out or go public. In that case, if you want to pay yourself more than 150% of a market salary, we would consider that a distribution. And for the first 2X of our investment, we take 80 percent and you keep 20%. If you continue to make those distributions it flips- 80 percent to the creator and then 20 percent to us.
Then we put a 5X cap on the distributions.
We published all the termsheets we used and made a version available for C corps and for LLC. They are all up on Github right now.
We’re also developing something we call a Declaration of Independents.
We think that independent businesses have an opportunity to become more interesting and, potentially, a competitive advantage. As customers, if you knew that someone was an independent business and they weren’t looking to sell you might have a different attitude towards giving them your money if you knew they we’re looking to sell out to Yahoo! or someone else. There’s space for a different kind of company to exist who’s independence is valued as highly if not more so than the unicorn valuation of their venture funded peers.
Because we were open to new archetypes, we ended up with some different archetypes. Of the nine companies, five were started by female founders.Of those 5, 2 are founded by black women. The nine teams we have people in San Francisco, New York, Los Angeles, Chicago, Austin and Atlanta. Rather than make people move, we decided to let people bloom where they are planted.
The best way to convince people this is a really good idea is to show results. So we have. In the five months since licking off the program 5 of the 9 participating companies have increased their revenue at least 2x and, in some cases we’re seeing companies that will finish the year up 6x or greater. Another interesting thing- how many of the teams haven’t spent the $100,000 we invested.
Now, let’s talk about a few of the companies.
One is called Storq.
Storq makes products for expectant moms and new parents.
Early on in thinking about the program I e-mailed a friend to get his feedback. He responded that he has to recuse himself because his wife was “flipping out when she read about what we were planning to do”. She was excited about the direction we were headed and was interested in participating.
One thing that resonated with Courtney early on was that when she sought out advice from friends and other entrepreneurs in the Bay Area, they were told to raise more money to solve whatever problems they were wrestling with. Because, apparently, you can solve all of your problems with money.
Another Indie.vc company is Tapster Robotics in Chicago.
Jason is a former Google engineer, worked on healthcare.gov rescue team and had started a traditionally VC backed company the last time around. He’s been tinkering with robots in the basement as a side project for years but hand’t been able to make the jump.
I think what we were able to provide Jason was some capital and a network that he could be accountable to. In 5 months since the program began his revenue is growing, he’s moved out of his basement and has hired his first employees.
Last one I’ll talk about is The Shade Room.
At the time we invested it more of a project than a company.
Angie had a website and fast growing Instagram account for news and gossip relevant to the Black community. Jenna Wortham profiled her in The New York Times and put us in touch. Angie was not part of the mainstream startup community and had not heard anything about what we were doing before our call.
Yet, she’s the one who seems to be benefitting the most from the program. Her revenue is up more that anyone in the group right now. We’re just so proud of what she’s done and what she’s been taking, and adding, to the project.
Now, it’s not all good news.
Over the last few months we’ve been talking to our investors about what to do with all of this enthusiasm about what it is we built. I was hoping we could stand a stage today we have a dedicated fund and investors all excited about it!
The reality is we tried and weren’t able to pull it off.
For the last two funds we have been turning away new investors, and now our investors are the one’s saying no. Just last week, our largest investor passed. After seven years of telling other people no, hearing it was really hard. I’ve spent the week wrestling with how to talk to my team about it, how to talk to my family about it, and how to talk to you all about it because I was really hoping to have more for you.
But I know the story doesn’t end here.
And we can’t let it end here. With what we’re seeing with the program so far, there is a need and there is a want, and there is an opportunity encourage and support founders who to go about building their companies in different ways.
When we were starting OATV, we weren’t supposed to be doing it. We weren’t VCs. We didn’t have a lot of experience, didn’t have a lot of connection in that world. So we had this catchphrase- OATV wanted to happen, we just needed to not screw it up.
And, that’s how I’m feeling again.
So, this is me trying to not screw it up.