The End of Indie

Bryce’s farewell letter

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.

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From Axios

One issue was that portfolio companies didn’t raise follow-on rounds as quickly as did traditional VC-backed startups, which resulted in fewer mark-ups and slower fund IRR growth. Another was that the investment structured blurred the lines between equity and debt, and LPs love their buckets.

Interesting, but not sure how groundbreaking these guys truly were. Beyond all the talk of different values and a focus away from the “scale at all costs” mentality of traditional VCs, ultimately they were playing the same game as everyone else - invest in companies and try to make your money back.

They seem to have taken moving away from the “blitzscaling” approach taken by VCs as a badge of honor, and at least between the lines I read some frustration with their inventors for not being on board with this approach, however I’m not sure if their investors really were in the wrong.

Investors are spending hundreds of thousands or millions of dollars to back what’s often nothing more than a power point presentation. Telling them you’re not going to try to scale all that hard is basically telling them their risk is the same as with other startups, but they get none of the reward. I wouldn’t blame them for putting their money somewhere else.

At the risk of being labeled some kind of cumudgeon, I think the problem with IndieVC was just a failed business model, not some kind of implied moral failing by the investor community.

Many venture funds would do better with the IndieVC model. 3x on most deals plus upside on any break outs. Rather than mostly 0 and break outs of the “traditional” model.

But then…everything is a power law. So among Earnest Capital and Tiny Seed and who knows who else, which of them are backing the stand out successes?

Also: should this even be called “venture” any more?

This implies that the IndieVC model increases the chance of 3x exits compared to the “traditional” model, though. If that’s true, I think most investors would he be happy with that. If I was an investor and I knew with reasonable certainty I’d triple my money in few years I’d be pretty happy, even if I knew I wouldn’t make $100m from the next Uber. Maybe not every VC would be into that approach, but I’m sure IndieVC would have found some folks willing to give them money.

I have no idea what IndieVC’s track record was, though, or if their approach actually increased the chance of “medium” exits at the expense of lowering the chance of a moon shot. If it actually did, then that would be a pretty interesting finding.

Yep. This was / is the whole point. Revenue generating companies return investor capital to a max of 3x, plus some equity is also held.

It’s a model that should be able to function for things that look more like small businesses as long as they are revenue positive.

Is that a steep amount — as a company — to pay for capital? Maybe. But if you can turn it into growth, especially if any advice / support helps you to do that from the investors, then yes.

Fair enough, that’s cool to know.

Next writing by Bryce:

At the heart of the strategy is a belief that there are hundreds if not thousands of venture scale opportunities going overlooked or overfunded who might have a higher likelihood of reaching their full potential if they had a different path to follow and a community of likeminded operators and advisors to share that journey with.

the low mortality rate across our portfolio (12% vs. typical VC which hovers between 30–50%).

Despite being nearly identical to a classic convertible note in every conceivable way, the release valve of redemptions and capped returns was a very steep learning curve for most to come up. What we thought was our way of hard coding founder optionality, proved to be a hard pill to swallow for more founders and LPs than I can count.

I’ll admit that this is also how I had seen IndieVC:

Although we have a revenue redemption release valve in our convertible note, we’ve made our funding decisions based on potential equity upside as opposed to the likelihood of 3x redemption.

Indie has options on equity which affects how GAAP IRR is calculated:

As of 12/31/20, the lifetime gross GAAP IRR for the strategy is 16%. In contrast, the gross “as converted” IRR is 48%.

Indie inspired a bunch of people to try new funding models and the high profile ones all seem to be doing well, with more variants coming.