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Funding independence

When IndieVC arrived six years ago, it represented an exciting alternative to traditional venture investments. While revenue-based investing wasn't new, Indie made it mainstream, and started an important conversation: VC isn't appropriate for every business, so what's available for revenue-first, independent businesses that want to shoot for profitability instead of unicorn growth?

I was gutted today to read about its demise:

We’ve not been shy in sharing the challenges of departing from the well-known narratives of startups and VCs. 4 years ago, it cost us 80% of our LP base. Unfortunately, as we’ve sought to lean more aggressively into scaling our investments and ideas behind an “Indie Economy” we’ve not found that same level of enthusiasm from the institutional LP market.

Fundamentally, this shines an important light on a discrepancy in venture capital. Every VC fund depends on Limited Partners: typically institutional funds and the family offices of high net worth individuals that dedicate a portion of their investments to riskier, potentially high-yield businesses. While VC funds themselves claim to want to invest in the future, the investment managers in charge of LP money tend as a rule to be more risk averse. At the very least, in the same way that money from wealthy philanthropists is more opinionated than public funds, it is deployed according to the values of fund owners. Alternative models are met with reticence.

Radical changes in venture capital depend on radical changes in limited partner attitudes. So what does funding these kinds of sustainability-oriented businesses look like in light of this?

I suspect it looks like this: no funding. Instead, I wonder if we need to be building ecosystems like IndieHackers, which operates as a community of solo entrepreneurs focused on making their side projects profitable. Instead of funding, members promote each other and offer skill shares and examples from their own experiences. Product Hunt has evolved into a similar kind of space: one where individuals and funded companies alike share new things they've released, get feedback, and build community.

The idea of no funding is problematic, because only a certain kind of person can get something off the ground with only their own resources. Those people are usually wealthier, and wealthier people tend to come from a very narrow demographic. On the other hand, venture capital disproportionately (and problematically) already goes to people from that narrow demographic. So, screw it. Maybe the counterculture has better answers.

I link a lot to the Zebra movement; its upcoming co-op and crowdfunding partnerships make a lot of sense to me. I'm warming up more and more to the idea of exit to community as an exit strategy, which allows companies to shift ownership to their ecosystems and maximize their distribution of equity. But these approaches are most effective when a business has been established (although co-operatives and community collaboration can certainly help). I think there needs to be more support for the first step: getting a business zygote off the ground.

VC funding has the effect of allowing founders to focus on product for an artificially long time. In contrast, aiming from profitability from the get-go forces you to build a business from day one. (A third option, building a product and running it for the love of it outside of a business context, is a radically different thing, and not really interchangeable with the first two.) The result is two radically different kinds of ventures with different roadmaps, mindsets, and approaches. One is shorter on profitability; the second is shorter on product innovation.

Venture investors, at their best, are like co-founders; being a part of a portfolio creates a kind of network effect that maximizes value. You get introductions and advice you might not receive otherwise. This could potentially be substituted with small communities of practice. But another way VC founders win is by sharing equity: it's common for early-stage founders to swap a little ownership with each other to spread the risk. If one startup succeeds, all the founders in the network see some upside. I can imagine a world where indie founders do something similar, in a revenue-bound way: an equity spread that is paid down as a percentage of profits. If one company becomes wildly popular, every founder who's struggling to do the same gets a boost.

The bottom line is this: we need an established, alternative route for starting businesses on the internet. For some companies, VC is the right thing - but it's not the right thing for every company. For the others, rather than hoping for positive iterations of VC, the best bet may simply be to create community with each other, co-operate where possible, and make money on their own terms. To aim to be the million they never made. It's not about riches; it's about sustainability.

I'm sad to see Indie VC go. But I do have hope for the future.

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