There is definitively a small but growing trend of new forms of financing for early/mid-stage tech companies. As a founder and bootstrapper, I feel like I saw the opportunity before I understood why it was there. I wanted to lay out the simple macro framework for why I believe this is just the beginning of a huge shift in how we fund startups.
Premise 1: Almost all new companies are technology companies now
Anil Dash and many others argue that there is no “technology industry” and that the label is too big to be useful.
There is no “technology industry”. A label that’s too big to be useful, and why you shouldn’t buy your own mayo. https://t.co/cP63Mw0NEh
— Anil Dash ? (@anildash) August 22, 2016
Almost all companies use tech in some way, just like almost all companies use electricity.
‘Internet of Things’ is no more a product category than ‘contains electricity’ is
— Benedict Evans (@benedictevans) January 21, 2017
Premise 2: Most companies (tech or not) are not a fit for VC and don’t have alternative options.
And yet there is this totally out-sized relationship between tech companies, which most new companies are, and venture capital, which is definitionally not a fit for the vast majority of companies. So every founder building in software/web/tech thinks they should raise VC when in reality almost none of them should.
To clarify, I don’t mean that VC gets replaced (still plenty of opportunities there) but that a new form of capital needs to be become the *default* for software/web/mobile companies, even as a small % will still be better served by VC. https://t.co/w2zfFlJGQs
— Tyler Tringas (@tylertringas) January 4, 2019
But what should they raise? What about debt.
My father took out a loan in the 70s to start his business. That’s how most of the small business entrepreneurs from that era got started. You took out a loan, bought property and equipment, started your business and if you failed the bank foreclosed on your building and equipment, and depending on the loan, maybe your house and personal assets. Seems pretty risky to me but at least it was a well-known pathway to capital for entrepreneurs starting new ventures.
The problem is most tech companies don’t have collateral and you simply can’t get a loan at the earliest stages.
My theory: early-stage capital. Most SMBs are relatively capital-efficient, asset-light, tech/tech-enabled businesses in some way now. Not enough assets for a bank loan, not scaleable enough for VC. It’s easier to get $1m to open an Arby’s than $100k to build a Micro-SaaS. https://t.co/OM5MS43ACZ
— Tyler Tringas (@tylertringas) December 19, 2018
We’ve seen a precipitous drop in new firm startup rates since the early 2000’s. I don’t think my theory here is fully explanatory, but I think part of the problem is the fact that there is no good default financing option for entrepreneurs.
Why it’s all happening now
How did we end up in this position? Jerry Neumann, argues persuasively in this post that we are now in the Deployment Age of the internet/web/mobile technology cycle. This is an application of Carlota Perez’s theories in Technological Revolutions and Financial Capital. This podcast is excellent and compelling that we are past the age of bubbles, crashes, and winner-take-all opportunities specifically in the internet/web/mobile sector. We now get to deploy all the new productivity gains of the web to a ton of new sectors in a much lower risk way.
In particular this section: pic.twitter.com/GcEpMucLea
— Tyler Tringas (@tylertringas) January 4, 2019
During this phase, new kinds of capital are needed with a different risk-return profile. The easiest comparison for me to wrap my head around is this quote from the post describing the creation of tons of new forms of consumer credit starting in the 20s.
Venture capital, as we think of it, is primarily a feature of the current cycle. Other cycles had other funding mechanisms. E.g.:
The consumer boom of the 1920s was financed through a vast expansion of credit, with personal debt nearly doubling as a proportion of income. And since banks did not make consumer loans, new lending channels had to be created. These included installment sales finance companies (such as the General Motors Finance Company founded in 1919), retail installment lenders (particularly department stores), licensed consumer finance companies (such as the Beneficial Loan Company) and Morris Plan industrial banks4.
This is just the beginning
Thus we find ourselves in a moment when there is vast demand to fundamentally re-define the default form of capital for entrepreneurs. It’s an exciting opportunity and a great time to be both an investor and a founder in this space.
— Tyler Tringas (@tylertringas) January 1, 2019