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TinySeed seems much better than the "predatory" deal Earnest Capital is offering[1]. But they still seems hamstrung by not understanding that startup investing

TinySeed seems much better than the "predatory" deal Earnest Capital is offering[1]. But they still seems hamstrung by not understanding that startup investing is inherently a hits-based business. At some point they're going to get a 1000x return, whether they want it or not, and it will make all their previous investments look financially insignificant. A startup doesn't have to be the "the next Facebook" to return 1000x. It could be an Atlassian or GitHub, two previously-tiny bootstrapped startups. The big advantage of trying to make your money off your big hits is it allows you to be genuinely founder friendly. The big hits pay back so much that you can be generous and high-minded with the rest, like YC. 1. Giving up 15% for ~$150k would suck as a founder. But 8% would be a good deal. Forcing smart founders to insist on the minimum end of the range seems like a bad place to start the relationship. 2. Having an investor make monthly payments and control your salary would suck as a founder. It's going to cause anxiety about the money being cut off and it will make you feel like an employee that has to report to their boss. Investors should be peers and partners. Seems like they should just make the deal 8% and pay the money at once, and trust that you've chosen good founders. If they blow the money, well, you messed up. And if they spend it differently from how you would, but succeed, who cares? 1. https://news.ycombinator.com/item?id=19160036 https://news.ycombinator.com/item?id=19160036

einarvollset 8y ago
Skipping over the comment about how we don't understand startup investing.. :) On pt 2: there is no mandatory monthly payments, and we don't really control founder comp. What we're trying to do (which relates to the point I skipped over above) is attempting to come up with a structure where a founder can build a profitable business doing 7 or 8 figures while the investors get "suitably" risk adjusted compensated for that success. Whether you think our valuations "suck" or not, we have spent a lot of time thinking about what we can do to build out a novel ecosystem that can provide fertile ground for these kinds of businesses. What we don't think works is simply say "hey, you know what this is a hits business, so forget about valuations and just give them a SAFE". If you had a business that wanted to raise financing but was honest about the fact that the founder did not thing they were going to become GitHub you'd know what I meant :)
- staunch 8y ago
  Thanks for the reply. I hope you appreciate some critical feedback that comes from a good place. Helping early stage startups is a great thing. But the entire point of startups being hit-based is that not even the founders themselves know how big they could get. The founders of Atlassian and GitHub could not possibly have known. Their opinion at the beginning was totally useless. They very well might've said "We'll never be as big as X" with total honesty. So it's not a matter of "honesty" at all. Businesses and people evolve. Ambitions grow. Even Mark Zuckerberg had absolutely no idea how big Facebook would become. This is a counter-intuitive fact of startups that seems hard to internalize, but it's the very nature of such highly scalable companies. It doesn't require that you "forget about valuations". You can absolutely try to get returns on your average outcomes, in total they should be significant. But it just takes a single 1000x return to dwarf them all, and now your big hit is all that really mattered financially. I think the 15% valuation sucks and the 8% valuation is high but reasonable. As a founder I would not want to give up more than 8% but I wouldn't want to come across as a hardass either, which is an awkward spot to be placed. Good luck!
  - einarvollset 8y ago
    Thank you, but I think your assumption that the only thing that matters is finding 1000x returns is wrong. If you look at VC returns at scale and over time, what's considered acceptable returns are lower than you might expect (12% IRR). If you're funding people at $2m valuation without customers and with a SAFE, then yes the only way to get there is with the hits. We are betting that's not the only way, but it does mean we cannot compete in the valuation olympics.
    - staunch 8y ago
      (I find this topic interesting to talk about and I don't mean to make this a huge criticism of what you're doing. I think it's great any time someone in a position to help early stage startups does so.) I'm definitely not saying that 1000x returns are all that matters, just that they're an inescapable reality. My understanding is based on what I believe are three facts: 1. A given startup's financial returns can range from 0x to 1000x or more due to the uniquely-high scalability of tech startups. 2. It's impossible to predict how big any particular startup's returns will be (i.e. not even the founders or investors can know). 3. Some very small percentage of any (sufficiently large) startup portfolio will return huge multiples unless you do something incredibly backwards. I'd imagine that YC generates much more than 12% IRR even excluding their hits. But what makes them so incredibly profitable is their hits. And because of their understanding that the hits are what makes them so profitable, they can rationally afford to be very generous towards all of their startups, which makes great startups want to apply, creating a virtuous cycle. Creating a firm that tries to be YC-without-the-hits seems totally fine, except if you still end up with huge hits, because then you're just YC with much less founder-friendly terms. It may feel like the conservative and safe approach but it could also be the riskiest possible path, by serving to filter out the best startups. There's a huge market opportunity for YC competitors that are remote but operate on the same terms. And when someone does this, they'll be first choice for all of the best startups, just like YC is. And it seems smart to compete with what's possible rather than with what currently exists.
tylertringas 8y ago
This thread is about Tinyseed so I won't hijack it with a defense of calling Earnest predatory (folks can read the terms, decide for themselves https://earnestcapital.com/shared-earnings-agreement-digging-into-the-numbers/ https://earnestcapital.com/shared-earnings-agreement-digging...). Uncritically believing that investing in software companies can only ever be a "hits driven business" is the reason why there is such a giant gap in the market that Tinyseed, Earnest, Indie VC, and lots more coming will fill. The big disadvantage of trying to shoe horn every business into being a unicorn is that you cause a lot more founders to fail by forcing them to try to grow fast enough to raise the next round or flame out trying.

einarvollset 8y ago

Skipping over the comment about how we don't understand startup investing.. :) On pt 2: there is no mandatory monthly payments, and we don't really control founder comp. What we're trying to do (which relates to the point I skipped over above) is attempting to come up with a structure where a founder can build a profitable business doing 7 or 8 figures while the investors get "suitably" risk adjusted compensated for that success. Whether you think our valuations "suck" or not, we have spent a lot of time thinking about what we can do to build out a novel ecosystem that can provide fertile ground for these kinds of businesses. What we don't think works is simply say "hey, you know what this is a hits business, so forget about valuations and just give them a SAFE". If you had a business that wanted to raise financing but was honest about the fact that the founder did not thing they were going to become GitHub you'd know what I meant :)

staunch 8y ago
Thanks for the reply. I hope you appreciate some critical feedback that comes from a good place. Helping early stage startups is a great thing. But the entire point of startups being hit-based is that not even the founders themselves know how big they could get. The founders of Atlassian and GitHub could not possibly have known. Their opinion at the beginning was totally useless. They very well might've said "We'll never be as big as X" with total honesty. So it's not a matter of "honesty" at all. Businesses and people evolve. Ambitions grow. Even Mark Zuckerberg had absolutely no idea how big Facebook would become. This is a counter-intuitive fact of startups that seems hard to internalize, but it's the very nature of such highly scalable companies. It doesn't require that you "forget about valuations". You can absolutely try to get returns on your average outcomes, in total they should be significant. But it just takes a single 1000x return to dwarf them all, and now your big hit is all that really mattered financially. I think the 15% valuation sucks and the 8% valuation is high but reasonable. As a founder I would not want to give up more than 8% but I wouldn't want to come across as a hardass either, which is an awkward spot to be placed. Good luck!
- einarvollset 8y ago
  Thank you, but I think your assumption that the only thing that matters is finding 1000x returns is wrong. If you look at VC returns at scale and over time, what's considered acceptable returns are lower than you might expect (12% IRR). If you're funding people at $2m valuation without customers and with a SAFE, then yes the only way to get there is with the hits. We are betting that's not the only way, but it does mean we cannot compete in the valuation olympics.
  - staunch 8y ago
    (I find this topic interesting to talk about and I don't mean to make this a huge criticism of what you're doing. I think it's great any time someone in a position to help early stage startups does so.) I'm definitely not saying that 1000x returns are all that matters, just that they're an inescapable reality. My understanding is based on what I believe are three facts: 1. A given startup's financial returns can range from 0x to 1000x or more due to the uniquely-high scalability of tech startups. 2. It's impossible to predict how big any particular startup's returns will be (i.e. not even the founders or investors can know). 3. Some very small percentage of any (sufficiently large) startup portfolio will return huge multiples unless you do something incredibly backwards. I'd imagine that YC generates much more than 12% IRR even excluding their hits. But what makes them so incredibly profitable is their hits. And because of their understanding that the hits are what makes them so profitable, they can rationally afford to be very generous towards all of their startups, which makes great startups want to apply, creating a virtuous cycle. Creating a firm that tries to be YC-without-the-hits seems totally fine, except if you still end up with huge hits, because then you're just YC with much less founder-friendly terms. It may feel like the conservative and safe approach but it could also be the riskiest possible path, by serving to filter out the best startups. There's a huge market opportunity for YC competitors that are remote but operate on the same terms. And when someone does this, they'll be first choice for all of the best startups, just like YC is. And it seems smart to compete with what's possible rather than with what currently exists.

tylertringas 8y ago

This thread is about Tinyseed so I won't hijack it with a defense of calling Earnest predatory (folks can read the terms, decide for themselves https://earnestcapital.com/shared-earnings-agreement-digging-into-the-numbers/ https://earnestcapital.com/shared-earnings-agreement-digging...). Uncritically believing that investing in software companies can only ever be a "hits driven business" is the reason why there is such a giant gap in the market that Tinyseed, Earnest, Indie VC, and lots more coming will fill. The big disadvantage of trying to shoe horn every business into being a unicorn is that you cause a lot more founders to fail by forcing them to try to grow fast enough to raise the next round or flame out trying.