Video Of The Week: The Shifting Funding Landscape
Our friend and USV Limited Partner Beezer Clarkson hosted a panel at the recent Slush Conference in Helsinki talking about the shifting landscape for startup funding. My partner Rebecca participated on the panel along with several others.
It’s a roughly 30min conversation and covers the big topics in startup finance.
Comments (Archived):
At 9:00, Alice Bentinck mentions taking a share of startup revenue as one of her investment models. I can’t imagine that being good for the startup unless maybe in very special circumstances.
Semi-related, what are your thoughts on tradeoffs of investor combo of equity + product royalties? That always seemed like a good incentive to me, but curious if it makes sense in software scenarios…
That reminds me of the deals being made on the Shark Tank. It is not that common in the VC world as far as I know.
I stopped watching Shark Tank years ago but the idea behind agreements like that is so that the ‘investor’ can recoup their investment in a situation where there isn’t a clear way to earn any payback from the deal or things are generally fuzzy because of who you are dealing with or other factors.It actually makes a bit of sense. Say you want to invest in a pizza restaurant. But the controls are loose and you have no way of actually getting a distribution. So you give them $100,000 and say that not only do you have a percentage of the income or equity (whatever you are doing) but you also are going to get paid back with a $1 for every pizza sold over some baseline (what was sold before involvement). That is not a real deal but something I just mapped out based on your comment. So you are telling the pizza restaurant that with your help they will grow their business (selling pizzas) and this is the way you want to be (among other ways) rewarded. And you get it up to the point where your investment is paid back on each incremental unit.
yeah, but that’s different from the traditional way VCs make their returns.
I can see it. It would instill some spending discipline and do a better job at determining the true cost of capital to the firm. It’s not much different from a startup issuing a high yield junk bond.
Sounds like tithe tax thinking. A business model that served the British aristocracy well for centuries.
I have not watched the entire video but based on what you indicated that Alice said (at 9:00) I just took a look at that particular part. Alice is actually saying they take a share of the actual person ‘income sharing agreements’ , not the startup. In other words they ‘bless’ the person (my words) and then get a share of their income and if I heard right ‘for life’. Just listened to it again. I’ve heard of this happening but can’t remember where it was. I am sure people will think it’s objectionable right off the top. Especially given the difference of power. I would love to see the legal agreements and how enforceable that actually is. [1] Almost as if they want to be the entrepreneurs ‘agent’. Of course in the case of an agent with an agreement there is a time period. Yep she did say ‘their life’.[1] Note that even if it’s not enforceable it may still serve a purpose defacto in some way. I have made plenty of agreements over time that I know are not legally enforceable and additionally w/o a signed contract. And in the right situation and with the right person the right thing happens in the end I have found. With the wrong person the contract doesn’t even matter. I don’t mean there aren’t words that indicate obligations just that they are not formal in an actual signed legal contract (in particular either boiler plate or drawn up by an attorney).
I understood income as the startup’s income. And even if that was the case, many startups don’t generate significant income for at least 4-6 years after their conception.
What do you think of Alice’s model of identifying and financially supporting talented people before they’ve even come up with an idea for a startup?
On reflection it feels like a ‘talent tax’ (the modern equivalent of a general tithe tax). The young and impoverished talent may find her idea attractive in the first instance, but it has consequences. It feels like they are being ‘owned’. I don’t like that.
I really enjoy your blog. Are there any similar blogs that you follow that you would recommend?
You will like my startup for that and essentially all interests. And you will get much better recommendations than that just you like the one blog. Maybe I’ll announce the alpha test here?By “similar” you mean in meaning which no doubt you have discovered is next to impossible to characterize with a few key words. Okay, got meaning of the content handled!I know; I know; software to handle meaning of content is a Holy grail problem far beyond current computer science and artificial intelligence.I’ve taught computer science in college and grad school and published papers in artificial intelligence at IBM’s Watson lab. In spite of that background, I found a powerful way to search for content with the desired meaning.The key is some original applied math with some advanced pure math prerequisites.Right, I have a powerful, crucial, relevant Ph.D. in pure/applied math. Really my startup is not a computer project but an applied math project; given the applied math, the computing is trivial.Without the applied math, computing for a solution would be essentially impossible. Since Sand Hill Road won’t back applied math projects, and since essentially no one they back would do my research, I have little chance of any meaningful competition.
Why don’t VCs don’t raise via high yield bonds ? It would add more liquidity and increase the size of the LP market. The free market would do a better job at mark to market of the fund during its 7-10 year holding period as well.