The concept of “seed venture capital” is relatively new — starting in the early 2000s, post the Web 1.0 crash. The concept was, VCs would write first cheques as low as $1M. This was because the cost of starting digital businesses decreased dramatically. In the Web1 era, you would need to pay $1M for a single large server from Sun Microsystems.
Obviously the cheque sizes decreased from $1M to a few $100K, but also the bar for financing went up: it is difficult to raise money on “just” a pitch deck, without having built anything.
These are a few notes on different kinds of funding and related resources.
To get a good understanding of venture investment, read Venture Deals, by Brad Feld.
Common Share Equity
Investing in the same Common Share class as a founding team. There is strong alignment between investors and founders, as they have the same class of shares and any actions affect them equally.
Preferred Share Equity
Most typical venture investment, a preferred class of shares that have extra rights, and often gets a return on investment before Common Shares do.
Some times also known as a Convertible Note. This is a form of debt, with optional and forced “conversion” into a new class of shares. Valuation of the company is pushed to the future.
Like Convertible Debt, but designed specifically to not be debt, among other things.
SAFE - Simple Agreement for Future Equity
Y-Combinator created this funding instrument to formalize their “handshake deals”.
They released an updated version in September 2018, which has post-money SAFEs.
Revenue Based Financing
There are a couple of different forms of revenue based financing, with more emerging as you see automation of analytics and other metrics — e.g. e-commerce loans to buy ads.
The founder, Bryce, was part of the first seed VC, OReilly Alpha Tech. He has written about how IndieVC is a continuation of that fund, just with a model that has evolved over time.
In rough terms, the investment is made with a requirement to pay back the investment out of revenue over time. Once there is sufficient net revenue, investors are paid back on a ratio — e.g. 80% to pay back the investment, 20% as net profits or re-investment into the business.
Once the investment is paid back, then the ratio is flipped, so investors get 20% of net revenue, until the investors have made a 3x return.
There may also be options to have a conversion if a Venture Investment happens — to hold equity.
The main feature / thesis for this model, is that investors can see venture-like returns without having to invest in all-or-nothing 10x/100x businesses. The businesses just have to make consistent revenue.
For founders, they can be part of a network and get the kind of product/organizational help that typically has only been available through venture investment.