Finding Venture Funds That Value Profitable Growth

When most founders think about the path to fundraising to fund their company’s growth, they typically think about traditional venture capital. Multiple rounds of funding, at increasing valuations, with a need to drive high levels of growth to maintain investor interest from round to round.

But traditional venture capital isn’t the right solution for most companies. VC’s are looking for high growth companies that can deliver outsized returns to their investors. They are expecting an exit to provide liquidity in their investment, whether that’s through an IPO, M&A, or a buyout from another investor in a future round of funding.

Your goals might be different. Your measure of success might not align with a traditional venture capitalist. You might have an idea to build a $10 million or $50 million company that can ultimately deliver 25% profit margins and real cash flow. An amazing outcome, but not appropriate for typical venture capital term sheets.

While the press around entrepreneurship is hyper-focused on the unicorns, defined as companies with at least a $1 billion valuation, the reality is that 99.9% of startups never reach that level of valuation. Founders with visions for building a company that can create meaningful impact and profitable growth are told that they are aiming too low, and derided as building “life-style” businesses.

Fortunately, there are alternative approaches to funding your company in the early years, until you get that cash flow flywheel turning. From bootstrapping your way to product-market fit to raising from funds that optimize for profitable growth, you will find an increasing number of funding options if you aren’t chasing the mythical unicorn.

One example is the increasing number of funds following in the footsteps of Indie.vc, offering a hybrid VC investment model that allows for a company to decide to step off of the fundraising hamster wheel and pursue profitable growth instead.

Indie.vc was originally launched in 2015 by Bryce Roberts, who had spent the previous ten years as a traditional venture capitalist with his first firm, OATV. Indie.vc is a seed stage firm that invests up to $1 million in companies that have a product and are producing some revenue. It doesn’t have to be a lot of revenue. They just expect you to be up and and running, and looking for funding to invest in your growth.

If a founder decides they don’t want to raise another round, they start to pay back the investment as a percentage of gross revenue until an agreed upon cap is hit. In the case of indie.vc, the cap is typically 3x the original investment.

If the founder decides to raise another round, there is a pre-determined conversion rate to allow indie.vc to convert their investment into preferred shares in the next round.

The way this all works is broken down in their FAQ, and they’ve even published their investment docs on GitHub. I love how simple and transparent this all is.

One word of warning. As these alternative investment vehicles develop, and the term sheets get easier to draft and negotiate, you should never forget that the quality of the investment team matters. Pick partners that can help you build your business, offer you advice, and bring with them a network and/or operating experience you can lean on when you need to.

Regardless of which path you choose in building your company, the investors, board members and advisors you put around your table as you build your company can be of real value when you hit a rough patch. And I assure you…the rough patch is ahead.

Bonus: If you’re interested in the backstory of indie.vc, there is a great interview with Bryce Roberts, the founder of indie.vc, and Chris Marks of Blue Note Ventures on Jerry Colonna’s Reboot Podcast.