There are a lot of great businesses out there that can benefit thousands of potential future employees and customers that need some help getting off the ground. But the typical funding paths and assistance available to startups don’t work for the vast majority of founders. The majority of venture capital funds and accelerators create one successful business in 20. Sure, small business loans are available — but banks don’t offer any support or advice when it comes to running or scaling your business. That’s exactly why Earnest Capital was created: To offer a new model of startup business funding and accelerator guidance specifically for bootstrappers.
The Problem with the Venture Capital Startup Funding Model
About a year ago, I was having a Twitter conversation with Tyler Tringas. Tyler is a fellow entrepreneur, and we’ve remained friends since he sold his SaaS store locator app, Storemapper, to SureSwift back in 2017.
At the time, I was frustrated that almost all the media, tech, and startup discussions for launching a new business revolved around how to raise venture capital funding, because the VC funding model kills a lot of great companies.
Yes, VC means an infusion of cash into your business. But it also means pressure to spend that cash quickly, which can create over-inflated hiring and wasteful spending on paid advertising that often prevents your founding team from ever finding a sustainable business model.
Then, since your company is spending more each month than you’re earning, you’re forced to raise the ‘next’ round.
And if you aren’t growing fast enough? You won’t be able to raise that next round, or (almost worse) you get a valuation that’s the same or less than the prior round (the dreaded “down round”) and your business looks like a total failure.
The likely end point from here is to close up shop, fire everyone, tell your customers to find an alternative, and move on to something else. Now your company is in the Deadpool, when it may have been a promising idea.
So What about Accelerators?
With startup accelerators, the typical idea is that a group of talented people who want to help new and/or aspiring founders pull together a cohort of founders at a similar (usually early) stage of launching their companies.
The “help” provided usually comes in the form of advice and guidance on things like branding, business model, pricing, product development, hiring, legal issues, marketing, and yes… fundraising. Usually, the point of an accelerator is to help companies get their first or ‘next’ round of funding. So the typical accelerator is on the same VC track that ends in failure for 19 out of 20 companies. A one in 20 chance isn’t great.
Only 1/20 VC funded businesses succeed. Your overall odds of winning a Powerball prize are 1/24, so getting on the VC train is basically like playing the lottery with your business. Click to Tweet.
The other problem with many traditional accelerators is that they’re location based. When you apply to be a part of one of these cohorts, you’re committing to either being in a place or moving to that place for 3-4 months during the program.
This immediately limits the pool to either people who live in that city, or people who are able and willing to move to that city. That’s fine if you’re in your 20s with few ties, but what if you have a family, or a house, or any number of reasons why you can’t pick up and move?
The location-based nature of these accelerators means the older you are, and the more practical experience you have, the less likely you’ll be able to participate. This is unfortunate because recent data show that people in their 40s actually have a much higher chance of success in starting a new company than people in their 20s or 30s.
Recent data shows that people in their 40s have a higher chance of success in starting a new company. So why are so many startup accelerators location based (i.e. excluding most people over 30)? Click to Tweet.
So VC forces the failure of most of the businesses it funds, and accelerators typically exclude the business owners most likely to succeed. This brings us back to that Twitter conversation with Tyler.
A New Startup Funding and Accelerator Model for Bootstrappers
What emerged from that conversation was the idea for a better, alternative kind of startup business funding and accelerator model.
We imagined an accelerator that gives you a little bit of money to help you make that first hire, or go full-time on your business. But not so much that you’re throwing money at paid ads just to spend it, while further lining the pockets of Facebook and Google, who get 40 cents of every dollar of VC funding according to Social Capital.
We imagined an accelerator that would draw founders from around the world, because we both believe talent is evenly distributed, but opportunity is not.
We imagined an accelerator that would provide mentorship from talented founders who bootstrapped businesses to great success without fundraising — showing new founders that there is a path to success that doesn’t involve outside investors or VC money. You can have a business that provides amazing returns for you, as well as a more sane and sustainable lifestyle.
How the Conversation Became a Reality
Both Tyler and I were excited about the idea, and we didn’t know of anything that looked like quite like it. We considered launching it from within SureSwift. We knew we could fund it, hire a program manager, and pull together mentors from our portfolio. But our mission at SureSwift is to acquire and grow successful online companies, and the risk was that the accelerator could be a distraction from that mission.
So, I wanted this thing to exist, and I was willing to commit capital to it because it aligns with our investment model and our core values, but I didn’t think we were the right people to run it.
Fortunately, Tyler grabbed the idea by the scruff of the neck and ran with it.
The next six months were really fun. (As in fun for me because I got to observe and discuss while Tyler did all of the work.)
He took a transparent approach to launching the idea. A blog post to open the discussion. Open term sheets to get feedback from founders and investors. A few pivots along the way based on these discussions. Some welcome inspiration from Indie VC and SparkToro.
Meeting (in person and via phone) with hundreds of investors, advisors, founders, and other fund managers to refine this new idea where there was no playbook.
How the Earnest Capital Fund Works
Along the way, this transparent approach and deep thinking about the best way for this new accelerator to function led to some differentiating concepts.
Namely, when Earnest Capital invests in your company, it’s via a Shared Earnings Agreement which works differently than traditional startup investing. As your company starts to generate “Founder Earnings” (basically profit + founder compensation) Earnest will receive a percentage of that until it cumulatively receives a multiple of the initial investment. From there founders are free to run the business profitably forever without paying investors another dollar. If at any point you decide to sell the business or raise a big round of equity, the whole investment easily converts to a predefined percentage of equity or the sale.
This makes the return expectations crystal clear. It also puts the founder in the driver’s seat. If you want to raise more money…cool. But we won’t push you to do that. If you way to pay us off once you have a healthy and profitable business…also cool, and everyone understands the terms that allow that to happen.
If you’d rather pay a percentage of profits…also cool. That’s how the fund expects to pay back investors: Cash flow from great businesses coming in over time.
Another major decision I love is that Mentors are Investors and vice versa.
When the same people advising founders are quite literally invested in their success, it ensures that the mentoring relationship will be squarely based on the founder’s success and it will endure. Click to Tweet.
Early Days and Early Investments
So here we are. We have an all-star group of mentors. We’ve had 1000+ founders express some sort of interest in Earnest Capital, which tells me we’re onto something. Hundreds of those interested submitted formal applications, and we’re starting to make investments. I love it when a plan comes together.
To be clear: SureSwift is not a “Fund of Funds.” We’ve never done this before and we don’t intend to do it again. But we wanted Earnest Capital to exist, and we believed we needed to help it to exist because it aligns perfectly with our mission: To invest in profitable digital businesses that help customers and employee people around the world.