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Hello HN - I'm Tyler the founder of Earnest Capital. We officially went live today and I'm here for questions, comments, criticisms, whatever really.

ljoshua 8y ago
Very neat Tyler, love the attention to the non-VC funding space. Besides the no equity position of Earnest, could you do a quick compare/contrast with TinySeed, of similar ilk and recency?
- tylertringas 8y ago
  Specific to the funding model, we both do a kind of profit-share, with the main difference being that Earnest's repayment will usually happen earlier (assuming the business is successful) but is capped, Tinyseed payments would be smaller in the earlier years and keep growing over time perpetually. Neither one is "better" and I probably wouldn't advise founders to choose between an offer from both on the basis of just the funding model. If you're successful with either model you definitely won't be upset about the details of which model you went with.
ganeshkrishnan 8y ago
No criticism from me. Love the concept and I hope there are more ventures like yours. Quick question: what is your investment criteria? Is a revenue of around $500 but a growth of 5% weekly good enough? If there was a checklist online that we could tick ourselves before we start talking to you, it would be awesome.
- tylertringas 8y ago
  Thank you! Yep, check https://earnestcapital.com/faq/ https://earnestcapital.com/faq/ and let me know if anything needs to be added?
ddebernardy 8y ago
If I read your agreement correctly, your terms are so that you invest $150k in what is or nearly is a bootstrapped business, on what essentially seems like a profit share basis, and expect to get paid for your doing so until you've made $3M? It's not entirely clear to me what the benefit is compared to a bank loan or VC money if you can get the latter.
- tylertringas 8y ago
  $3m?! No. This post walks through each of the terms in detail: https://earnestcapital.com/shared-earnings-agreement-digging-into-the-numbers/ https://earnestcapital.com/shared-earnings-agreement-digging... We have a Return Cap which is negotiated on a per deal basis but we guide toward 3-5x the initial investment.
  - ddebernardy 8y ago
    [Didn't read the doc properly]
    - extesy 8y ago
      You are confusing it with a valuation cap. Return cap in that very same document is 3X of the investment.
SimianLogic2 8y ago
Reminds me a lot of the Indie Fund in the game space, but slightly more profit-centered (which is not a bad thing). How did you settle on a 3-5x return cap? Are you planning to tune that over time? Did you consider a graded return schedule? I don't know if you've published your profit share or if that varies by deal, but I'm curious if something like 25% up until 100% recoup, 10% up to 200%, 5% up to 3-5x target would compare to a flat 10-15% or whatever. As a point of comparison, I used a portfolio loan to buy a business to run as a side project. The debt service on ~$125k is variable but roughly $500/month. At time of purchase that was about 20% of net, but that number will go down as the debt is paid and revenue grows. If I pay it off in ~5 years the total debt service will be in the range of $20-$30k... BUT that means almost all net is going to pay down the debt vs reinvesting in the business. I know you're targeting more bootstrappers who want to go full time, but if this type of funding were available for side hustle acquisitions I'd probably consider it pretty strongly instead of taking on a bunch of personal risk (even though the rewards for me become less on paper).
- tylertringas 8y ago
  > Are you planning to tune that over time? Yes, very much consider this our next product. Will build, measure, learn, iterate as we go. > I used a portfolio loan to buy a business to run as a side project It's a useful comparison but not apples to apples. There are a lot more capital options to fund an operating business (ie SBA loans, IRA loans) than starting a new one. We are focused on the latter. Our financial model might be a good fit for acquiring co's but it's not our strategy. Happy to help if anybody else wants to give it a shot.
heroic 8y ago
Hi Tyler, this is amazing! Going through the FAQ it seems, you're not investing in India right now! Would love to know if and when you do!
- tylertringas 8y ago
  Don't think we have the legal infrastructure to invest in Indian companies right now, but definitely could invest in a company that used Stripe Atlas to form a US entity: https://stripe.com/atlas https://stripe.com/atlas
jkuria 8y ago
Great concept. But Why is there nothing about the team behind it? It feels less trustworthy.
- tylertringas 8y ago
  Good question! Small team for now. Me: https://twitter.com/tylertringas https://twitter.com/tylertringas Head of Platform: https://twitter.com/bentossell https://twitter.com/bentossell Amazing group of mentors: https://earnestcapital.com/earnest-mentorship/ https://earnestcapital.com/earnest-mentorship/
nodesocket 8y ago
Any idea the total number of investments you are looking to make a year? Handful, dozens? Is there a limit on the term? Let's say you invest $100,000 in a $3k MRR business. Unfortunately it does not grow, or maybe even MRR declines. What happens to the investment obligation?
- tylertringas 8y ago
  10-12 per year. There's no limit. If the business stalls at $3k MRR (ie no Founder Earnings) it can go on running forever or shut it down. We would get a % if it was ever sold.
  - nodesocket 8y ago
    Thanks for the reply. So if after accepting investment, if the company does not work out and has to shut down, is there a personal liability owned back to Earnest Capital by the founders? Second, can you explain the valuation cap in terms of acquisition. Let's say I take $100k in investment, and 5 years later I sell the company for $10M. What is the max amount Earnest Capital will receive?
    - tylertringas 8y ago
      No personal liability. We assume some of these investments will fail for us. % of the sale would be roughly $100k / Valuation Cap (which is negotiable at time of investment).
skrebbel 8y ago
Tyler, I've been very interested in this development and I have a somewhat fundamental question to you. I've seen a number of VCs and other pundits recently say things of the form "there's a reason why for decades, there were only bank loans and VC and not much in-between". Eg Jerry Neumann (a NY based solo investor) has a nice twitter rant about it here: https://twitter.com/ganeumann/status/1093961051425697794 https://twitter.com/ganeumann/status/1093961051425697794 If I follow the math in his linked blog posts well (eg [0]), he's basically putting down the hypothesis that there's 3 categories of companies (determined by the alpha value of the power-law distribution they're in): 1. Companies where the risk and the upside potential are small. This is where bank loans are focused. 2. Companies where the risk is enormous but the upside potential is "meh". 3. Companies where the risk is enormous but the upside potential is also enormous. This is where VC is focused, and it's why they're all about finding those few big hits because this covers all the losses (or mediocre performance) of the rest. Neumann appears pretty confident about this hypothesis; not because he can explain the underlying phenomenon, but simply because until now he's not seen much successful funding for companies that's neither VC nor bank loans. And if his hypothesis is right, then you're targeting companies of type 2: investments with enormous risk (comparable to that of a high-growth startup) but at the same time you're hard-capping your upside at 5x. That seems madness. I don't think you're mad, however, so you must believe that his hypothesis is wrong. If so, why now? What changed in the world, or in the investment landscape, or in technology, that suddenly multiple people (you, indie.vc, etc etc) believe that a low-capped profit sharing scheme for startup investments is a good idea, when nobody did before? Did the risk go down? How did it? Why? Why now and not 10 years ago? Super interested in any insights you might have on this. Great job, hope you succeed (i.e. I hope to be proven wrong) [0] http://reactionwheel.net/2019/01/why-do-vcs-insist-on-only-investing-in-high-risk-high-return-companies.html http://reactionwheel.net/2019/01/why-do-vcs-insist-on-only-i... * disclaimer: I'm a founder, not an investor and I don't spend a lot of time thinking about this stuff. Ergo I probably misinterpreted a lot of what Neumann is saying. If someone (or Jerry himself) reads this and thinks they know better, I'll be happy to stand corrected.
- SatvikBeri 8y ago
  I've worked at a lender that did loans to small businesses somewhere in between categories 1 and 2. The major thing that's changed is the availability of data. A $100k loan used to take several hours of expensive analyst time to process manually, and since most would be rejected, it wouldn't be worth it. Now a business can, e.g., securely share real bank account data. That makes the whole process much faster, which reduces the cost per loan, which makes smaller loans profitable. I imagine something similar can apply for small business equity.
krstffr 8y ago
Looks very interesting, are you investing in Sweden?
- tylertringas 8y ago
  Definitely.
mbesto 8y ago
1. How is this different from venture debt? 2. How big is your fund?
- tylertringas 8y ago
  It's not debt. No interest rate, no repayment schedule, no recourse.
jedberg 8y ago
So is Earnest Capital more of a charity than a profit making enterprise? I really like what you are doing, serving the vast majority of businesses that don't want to be hyper growth. But for the math to work out, with a 3x cap on earnings, you need 33% of the businesses to be successful just to get your money back. At 5x you still need 20%. And that is over however long it takes for those companies to reach payback, which could be measured in decades for some of the companies. I think it's really altruistic, but I'm not sure how big this market segment could actually get.
- berberous 8y ago
  Website also says: "In most cases, we’ll agree on a long-term residual stake for Earnest if you ever sell the company or raise more financing."
  - fragsworth 8y ago
    They don't explain it, but it sounds like the whole deal is effectively seed financing where they eventually get a 9.5% stake, but also with a 3-5x loan interest payment once you make money (which they're framing as "Shared Earnings"). And they're trying to hide the 9.5% part.
    - tylertringas 8y ago
      Hiding? https://earnestcapital.com/shared-earnings-agreement-digging-into-the-numbers/ https://earnestcapital.com/shared-earnings-agreement-digging...
- tfehring 8y ago
  I'm not OP, but it's worth mentioning that Earnest starts to recoup its investment as soon as founders take a salary. Its calculator [0] shows a percentage of 30% by default - if that's accurate, for the 67%-80% of companies that fail, Earnest would still recoup 30% of its investment (ignoring other expenses and time value of money) even if those companies never saw a penny of revenue. Also, they list a starting point of $2k-$5k in MRR, and on a $150k investment with a 30% split, they break even as soon as the founder(s) have taken $350k in total salary (again ignoring time value of money), including any salary paid out of the original $150k investment. I don't want to trivialize the process of scaling a startup beyond $2k-$5k of MRR, but I bet more than 20% of companies with $2k-$5k of MRR are capable of reaching that point. [0] https://docs.google.com/spreadsheets/d/1h_L7oa3rbV8P-ZnMM-l1fY5zc97GetYkRjQ_zCi6by4 https://docs.google.com/spreadsheets/d/1h_L7oa3rbV8P-ZnMM-l1... edited for clarity
hornbaker 8y ago
Very cool, Tyler. Just applied. :)
intelliderp 8y ago
Any way to get involved on the investor side?
- tylertringas 8y ago
  https://earnestcapital.com/contact/ https://earnestcapital.com/contact/
icedchai 8y ago
So is this basically like a loan, where I eventually have to pay back up to 300 to 500% of the initial principal? This assumes I don't go broke...

ljoshua 8y ago

Very neat Tyler, love the attention to the non-VC funding space. Besides the no equity position of Earnest, could you do a quick compare/contrast with TinySeed, of similar ilk and recency?

tylertringas 8y ago
Specific to the funding model, we both do a kind of profit-share, with the main difference being that Earnest's repayment will usually happen earlier (assuming the business is successful) but is capped, Tinyseed payments would be smaller in the earlier years and keep growing over time perpetually. Neither one is "better" and I probably wouldn't advise founders to choose between an offer from both on the basis of just the funding model. If you're successful with either model you definitely won't be upset about the details of which model you went with.

ganeshkrishnan 8y ago

No criticism from me. Love the concept and I hope there are more ventures like yours. Quick question: what is your investment criteria? Is a revenue of around $500 but a growth of 5% weekly good enough? If there was a checklist online that we could tick ourselves before we start talking to you, it would be awesome.

tylertringas 8y ago
Thank you! Yep, check https://earnestcapital.com/faq/ https://earnestcapital.com/faq/ and let me know if anything needs to be added?

ddebernardy 8y ago

If I read your agreement correctly, your terms are so that you invest $150k in what is or nearly is a bootstrapped business, on what essentially seems like a profit share basis, and expect to get paid for your doing so until you've made $3M? It's not entirely clear to me what the benefit is compared to a bank loan or VC money if you can get the latter.

tylertringas 8y ago
$3m?! No. This post walks through each of the terms in detail: https://earnestcapital.com/shared-earnings-agreement-digging-into-the-numbers/ https://earnestcapital.com/shared-earnings-agreement-digging... We have a Return Cap which is negotiated on a per deal basis but we guide toward 3-5x the initial investment.
- ddebernardy 8y ago
  [Didn't read the doc properly]
  - extesy 8y ago
    You are confusing it with a valuation cap. Return cap in that very same document is 3X of the investment.

SimianLogic2 8y ago

Reminds me a lot of the Indie Fund in the game space, but slightly more profit-centered (which is not a bad thing). How did you settle on a 3-5x return cap? Are you planning to tune that over time? Did you consider a graded return schedule? I don't know if you've published your profit share or if that varies by deal, but I'm curious if something like 25% up until 100% recoup, 10% up to 200%, 5% up to 3-5x target would compare to a flat 10-15% or whatever. As a point of comparison, I used a portfolio loan to buy a business to run as a side project. The debt service on ~$125k is variable but roughly $500/month. At time of purchase that was about 20% of net, but that number will go down as the debt is paid and revenue grows. If I pay it off in ~5 years the total debt service will be in the range of $20-$30k... BUT that means almost all net is going to pay down the debt vs reinvesting in the business. I know you're targeting more bootstrappers who want to go full time, but if this type of funding were available for side hustle acquisitions I'd probably consider it pretty strongly instead of taking on a bunch of personal risk (even though the rewards for me become less on paper).

tylertringas 8y ago
> Are you planning to tune that over time? Yes, very much consider this our next product. Will build, measure, learn, iterate as we go. > I used a portfolio loan to buy a business to run as a side project It's a useful comparison but not apples to apples. There are a lot more capital options to fund an operating business (ie SBA loans, IRA loans) than starting a new one. We are focused on the latter. Our financial model might be a good fit for acquiring co's but it's not our strategy. Happy to help if anybody else wants to give it a shot.

heroic 8y ago

Hi Tyler, this is amazing! Going through the FAQ it seems, you're not investing in India right now! Would love to know if and when you do!

tylertringas 8y ago
Don't think we have the legal infrastructure to invest in Indian companies right now, but definitely could invest in a company that used Stripe Atlas to form a US entity: https://stripe.com/atlas https://stripe.com/atlas

jkuria 8y ago

Great concept. But Why is there nothing about the team behind it? It feels less trustworthy.

tylertringas 8y ago
Good question! Small team for now. Me: https://twitter.com/tylertringas https://twitter.com/tylertringas Head of Platform: https://twitter.com/bentossell https://twitter.com/bentossell Amazing group of mentors: https://earnestcapital.com/earnest-mentorship/ https://earnestcapital.com/earnest-mentorship/

nodesocket 8y ago

Any idea the total number of investments you are looking to make a year? Handful, dozens? Is there a limit on the term? Let's say you invest $100,000 in a $3k MRR business. Unfortunately it does not grow, or maybe even MRR declines. What happens to the investment obligation?

tylertringas 8y ago
10-12 per year. There's no limit. If the business stalls at $3k MRR (ie no Founder Earnings) it can go on running forever or shut it down. We would get a % if it was ever sold.
- nodesocket 8y ago
  Thanks for the reply. So if after accepting investment, if the company does not work out and has to shut down, is there a personal liability owned back to Earnest Capital by the founders? Second, can you explain the valuation cap in terms of acquisition. Let's say I take $100k in investment, and 5 years later I sell the company for $10M. What is the max amount Earnest Capital will receive?
  - tylertringas 8y ago
    No personal liability. We assume some of these investments will fail for us. % of the sale would be roughly $100k / Valuation Cap (which is negotiable at time of investment).

skrebbel 8y ago

Tyler, I've been very interested in this development and I have a somewhat fundamental question to you. I've seen a number of VCs and other pundits recently say things of the form "there's a reason why for decades, there were only bank loans and VC and not much in-between". Eg Jerry Neumann (a NY based solo investor) has a nice twitter rant about it here: https://twitter.com/ganeumann/status/1093961051425697794 https://twitter.com/ganeumann/status/1093961051425697794 If I follow the math in his linked blog posts well (eg [0]), he's basically putting down the hypothesis that there's 3 categories of companies (determined by the alpha value of the power-law distribution they're in): 1. Companies where the risk and the upside potential are small. This is where bank loans are focused. 2. Companies where the risk is enormous but the upside potential is "meh". 3. Companies where the risk is enormous but the upside potential is also enormous. This is where VC is focused, and it's why they're all about finding those few big hits because this covers all the losses (or mediocre performance) of the rest. Neumann appears pretty confident about this hypothesis; not because he can explain the underlying phenomenon, but simply because until now he's not seen much successful funding for companies that's neither VC nor bank loans. And if his hypothesis is right, then you're targeting companies of type 2: investments with enormous risk (comparable to that of a high-growth startup) but at the same time you're hard-capping your upside at 5x. That seems madness. I don't think you're mad, however, so you must believe that his hypothesis is wrong. If so, why now? What changed in the world, or in the investment landscape, or in technology, that suddenly multiple people (you, indie.vc, etc etc) believe that a low-capped profit sharing scheme for startup investments is a good idea, when nobody did before? Did the risk go down? How did it? Why? Why now and not 10 years ago? Super interested in any insights you might have on this. Great job, hope you succeed (i.e. I hope to be proven wrong) [0] http://reactionwheel.net/2019/01/why-do-vcs-insist-on-only-investing-in-high-risk-high-return-companies.html http://reactionwheel.net/2019/01/why-do-vcs-insist-on-only-i... * disclaimer: I'm a founder, not an investor and I don't spend a lot of time thinking about this stuff. Ergo I probably misinterpreted a lot of what Neumann is saying. If someone (or Jerry himself) reads this and thinks they know better, I'll be happy to stand corrected.

SatvikBeri 8y ago
I've worked at a lender that did loans to small businesses somewhere in between categories 1 and 2. The major thing that's changed is the availability of data. A $100k loan used to take several hours of expensive analyst time to process manually, and since most would be rejected, it wouldn't be worth it. Now a business can, e.g., securely share real bank account data. That makes the whole process much faster, which reduces the cost per loan, which makes smaller loans profitable. I imagine something similar can apply for small business equity.

krstffr 8y ago

Looks very interesting, are you investing in Sweden?

tylertringas 8y ago
Definitely.

mbesto 8y ago

1. How is this different from venture debt? 2. How big is your fund?

tylertringas 8y ago
It's not debt. No interest rate, no repayment schedule, no recourse.

jedberg 8y ago

So is Earnest Capital more of a charity than a profit making enterprise? I really like what you are doing, serving the vast majority of businesses that don't want to be hyper growth. But for the math to work out, with a 3x cap on earnings, you need 33% of the businesses to be successful just to get your money back. At 5x you still need 20%. And that is over however long it takes for those companies to reach payback, which could be measured in decades for some of the companies. I think it's really altruistic, but I'm not sure how big this market segment could actually get.

berberous 8y ago
Website also says: "In most cases, we’ll agree on a long-term residual stake for Earnest if you ever sell the company or raise more financing."
- fragsworth 8y ago
  They don't explain it, but it sounds like the whole deal is effectively seed financing where they eventually get a 9.5% stake, but also with a 3-5x loan interest payment once you make money (which they're framing as "Shared Earnings"). And they're trying to hide the 9.5% part.
  - tylertringas 8y ago
    Hiding? https://earnestcapital.com/shared-earnings-agreement-digging-into-the-numbers/ https://earnestcapital.com/shared-earnings-agreement-digging...
tfehring 8y ago
I'm not OP, but it's worth mentioning that Earnest starts to recoup its investment as soon as founders take a salary. Its calculator [0] shows a percentage of 30% by default - if that's accurate, for the 67%-80% of companies that fail, Earnest would still recoup 30% of its investment (ignoring other expenses and time value of money) even if those companies never saw a penny of revenue. Also, they list a starting point of $2k-$5k in MRR, and on a $150k investment with a 30% split, they break even as soon as the founder(s) have taken $350k in total salary (again ignoring time value of money), including any salary paid out of the original $150k investment. I don't want to trivialize the process of scaling a startup beyond $2k-$5k of MRR, but I bet more than 20% of companies with $2k-$5k of MRR are capable of reaching that point. [0] https://docs.google.com/spreadsheets/d/1h_L7oa3rbV8P-ZnMM-l1fY5zc97GetYkRjQ_zCi6by4 https://docs.google.com/spreadsheets/d/1h_L7oa3rbV8P-ZnMM-l1... edited for clarity

hornbaker 8y ago

Very cool, Tyler. Just applied. :)

intelliderp 8y ago

Any way to get involved on the investor side?

tylertringas 8y ago
https://earnestcapital.com/contact/ https://earnestcapital.com/contact/

icedchai 8y ago

So is this basically like a loan, where I eventually have to pay back up to 300 to 500% of the initial principal? This assumes I don't go broke...