Sramana Mitra: What denomination do you invest in and what stage? What do you require to see to want to invest?
Bryce Roberts: For the first batch of companies we did, we had a pretty broad mandate. We were trying to figure out for whom this type of network and this type of resources made the most effect. We called that version one. In this version two, we’re looking for a minimum of $10,000 a month in revenue.
Companies that were coming from a standing start just didn’t make the same progress. They tended to fall back on the notion of fundraising early on. We want to find companies that have shown some real traction and that they’ve been able to attract customers even if they are uncertain on how big the overall opportunity is. The businesses that we have been looking at have been e-commerce, manufacturing, SaaS, and media types of properties.
In many respects, it’s businesses and sectors that are out of vogue for traditional VCs. You probably won’t be seeing us do a whole lot of VR, AI, or things that are trending. Usually, at least a year of operating history. Ideally with all of that, some net profit in there somewhere. We’re constantly revisiting these filters as we go and try to optimize for the companies that are benefiting most from it.
Sramana Mitra: What about geography?
Bryce Roberts: For the pilot, we only did US-based companies. We are open to other locations with version two. We’ve had a lot of international interest. We try to do these quarterly get togethers with all of the companies. We found that the distance might be a little much for international companies. We’re open to it, but I think we’ll still have to do it on a case-by-case basis.
Sramana Mitra: What about denomination? How much are you looking to invest?
Bryce Roberts: Our check size ranges from $100,000 to $500,000.
Sramana Mitra: You mentioned that you are open to more traditional VCs coming in. Does that mean that you exit into the VC funding round?
Bryce Roberts: In the case of an acquisition, we convert on the cap table at a predefined percentage that we negotiate with the entrepreneur. We don’t become a shareholder until there’s a transaction. In the case of further VC funding, it’s a fairly similar mechanics. We set out a predefined percentage of the business we would own when and if they decide to bring in more funding, then we convert into that round versus exiting through selling our ownership stake.
Sramana Mitra: In both cases, it’s a regular preferred share structure that goes through the regular funding cycle of a venture capital fund. There’s nothing different in your model as such.
Bryce Roberts: There is something different in that if you choose not to raise money, we never become a shareholder.
Sramana Mitra: You structure it as debt?
Bryce Roberts: Yes, debt with no interest and call date.
Sramana Mitra: However in the event of an exit, you do have approbation to share.
Bryce Roberts: You can call it like an equity option. If there’s a transfer of equity, then we have the option to participate.
Sramana Mitra: You talked about sharing in profits, how is that structured?
Bryce Roberts: We try to align that around incentives with the founder. We like to be aligned with them. We agree upon a salary that the founder and the management team is going to be taking and allow them to grow that salary 150% of the baseline that we set. If they choose to pay themselves out in distributions more than that 150%, then we split those distributions with them up to a fixed amount.
Sramana Mitra: There’s a whole bunch of alternative clauses that you work into your term sheets.
Bryce Roberts: We try to keep it as simple as possible. The term sheet is one page. We don’t have any voting right. We don’t have any Board seat. We’re trying to keep it aligned and as lightweight as possible but it does require some finesse in there around how and when a payout should be structured.