How We Think About Returns

Bryce Roberts
Nov 10, 2017 · 3 min read

About 5yrs ago the team at Basecamp (fka 37Signals) stopped editorial work on a section of their site they called Bootstrapped, Profitable and Proud (BPP). The stated purpose of the site was to “profiles companies that have over one million dollars in revenues, didn’t take VC, and are profitable”.

Today, many view profitability as limiting or the acknowledgement that a founder has lost interest in hyper growth and has been lulled into the ease of running a mere “lifestyle business”.

This page, and the 28 companies it profiles, tell a story we often relay when founders, VCs and LPs ask us how in the world we will ever generate returns for Indie.vc. They infer that since we are focused on getting founders to profitability rather than their next round that we, too, are focused on backing “lifestyle businesses”. And, since we limit our cash distributions from these companies to 3x, we are also capping our possible upside.

Viewing our strategy through this lens, I can understand their confusion about our approach and the ability of our fund to generate meaningful returns.

But, if you dig into the BPP page you’ll start to see a story emerge that we think is quite compelling from a fund returns perspective.

Though many of the 28 companies remain off the radar, unfunded, profitable and private there are a few notable exceptions. For instance, listed among the companies profiled you’d find Braintree which raised only late stage growth capital before selling to Paypal for around $800M. Next you’ll note Github, a company who profitably boostrapped for years before raising their first round of funding at nearly a $1B valuation. Then there’s Campaign Monitor which just this year raised $250M in their first round of funding at what many speculate to be an even greater than $1B valuation. There are others- Big Commerce has gone on to raise over $150M in funding and WooCommerce which was acquired by Wordpress for around $30M.

I’ll stop there, but hope that the point is becoming a bit more clear.

Conventional VC wisdom would suggest that profitability is capitulation that a company is not reaching their ultimate growth potential. And in some cases that is true. More often than most would like to acknowledge, it is not.

We have a different view. We see profitability as the only immovable milestone. No change of winds among startup trends or investment themes du jour can change that milestone.

We also believe that profitability is the most leveraged position a founder can put themselves in to scale, to raise or to sell if they so choose.

The investment model we are developing works in scenarios where founders choose to never sell and we take out our distributions in cash. We’ve set the fund up in such a way that we can return all committed capital if roughly 30% of our companies can achieve profitability and hit their 3x distribution cap. This maps to Fred’s general “rule of thirds” for VC investments:

Our target batting average is “1/3, 1/3, 1/3” which means that we expect to lose our entire investment on 1/3 of our investments, we expect to get our money back (or maybe make a small return) on 1/3 of our investments, and we expect to generate the bulk of our returns on 1/3 of our investments.

Given that our entire focus is on helping our founders get to profitability, there is a chance we will see fewer entire losses but we may also see fewer “homeruns”.

That said, if we can generate a baseline return of capital from distributions and have equity options across a portfolio of companies who aren’t constantly raising and diluting us, as investors, or the founders, it doesn’t take more than one “homerun” to generate many multiples on the fund.

Which brings us back to Bootstrapped, Profitable and Proud.

If viewed as a fund executing the Indie.vc strategy, BPP would likely be one of the best performing venture funds of all time, not some halfway house for limping lifestyle businesses.

That is why we have the focus we do.

And those are the types of returns we are working to generate for ourselves and our investors.

Strong Words

Independent Thinking for Independent Businesses

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