Launching Impact Companies into Optionality
A few months ago, Maria and I drove over to Chicago to watch Bryce Roberts give a presentation on Indie.VC’s latest alternative investment vehicle for startups (see V3 here). The talk did not disappoint and we got the extra benefit of hearing Jason Fried, CEO of Basecamp, also speak about alternatives to building the typical Silicon Valley startup.
We’ve been thinking a lot about these alternative investment structures for a while now, really since the beginning of INVANTI. There are a few reasons that this conversation has caught our attention:
- We are so early in the investing process (literally pre-idea/pre-team/pre-company) that it’s hard to know what the most appropriate funding path for these ventures is going to be (bootstrapping, VC, or one of the many other hybrids and combos). We are more concerned with building companies that solve an important problem than pre-defining the investment structure, so there is tension from the get-go of taking a straight equity stake.
- We are specifically trying to create for-profit companies that focus on creating impact. We want to create companies with what we call “aligned business models”, where what’s best for increasing revenue is directly aligned with what’s best for increasing impact. In other words, the more impact you make, the better the business performs. A few issues arise when this is a governing factor:
Founder Intent — Most of our founders want to build a business to see a problem solved at scale. Their interest is not in necessarily exiting the business (although it may happen), which could quickly pit our interests against theirs. Not a spot we want to be in.
Impact Venture Exit Market — The world of impact ventures and impact investing is still relatively young. Depending on the sector and the venture, it’s not clear that, even if a founder builds a great business that may warrant a valuation that’s advantageous to investors (e.g., INVANTI), there is an exit market for those ventures. A lot of factors go into this including the point above (Founder Intent), the acquisition market for impact ventures, etc. This could put us in the position of doing exactly what we set out to do, with no light at the end of the tunnel for a liquidation event that would allow us to recycle capital and do it all over again.
As I walked out that night, a thought struck me. If accelerators have come to be a system of screening for downstream VCs, what is the analogous entity that could provide upstream value to the Indie.VCs of the world? Or put more directly, if accelerators are to VC, could generators (INVANTI) be to alt VC (Indie.VC)?
One of the biggest value propositions to founders and investors of instruments like Indie.VC’s model is its optionality. Investors can be happy with multiple paths to success for the founder. Want to grow organically from profits? Go for it. Want to raise VC and scale quickly, and look for an exit? We are structured for that too. While giving this freedom to the founder to build the business that excites them, the investors are still able to exert a healthy pressure to make their own business model work and see a return (and liquidity) on their capital.
For our model, when you look at the points made above about why typical VC paths might not work so well for INVANTI’s model, it seems that the antidote is optionality. With so much unknown around what these ventures are going to grow up to be when they leave the program, the more paths available to success is a win. That being said, the question becomes, how do you structure for that?
At the event in Chicago, I asked Bryce if they had thought about applying their model to earlier stages and/or later stages and what the thought process has been if they have. (They currently invest post-revenue, with average annual revenue of their portfolio companies of ~$250k.) He said that he thinks the model can make a lot of sense at later stages as well — obviously controlling for risk/reward. On the other hand, they tried going earlier with one company (pre-revenue) and it did not work out so well. He mentioned that because that company was still pre-product/market fit, and didn’t yet fully understand the dynamics of their business model, the Indie.VC instrument wasn’t a great fit.
So this sparks the question — what is the upstream investment instrument to Indie.VC? Y Combinator invented the SAFE Note as a way to solve some of the issues with early stage traditional venture capital (valuation, speed, etc). Is there an analogy in this part of the venture investing world? Is there something that could work well upstream in a program like INVANTI, where we might be investing on the order of $30k-$75k, that would naturally give the founder the optionality to raise capital or bootstrap the business, while still giving us a path toward returns?
I don’t know the answer yet, although I have a lot of ideas. I’d love to hear if anyone else has thought about this. I think the unintended benefit of leadership in this alternative startup investment conversation is that it is opening up a whole new space for the impact investing sector to innovate on how we build scalable impact companies of a different flavor.
Dustin Mix is a co-founder of INVANTI, a startup generator in the midwest. They invest in talented people before they have ideas and spend six months helping them find an impactful problem to solve and launch a new venture.
