> I would also be skeptical of the potential of a startup that can't convince normal VCs to fund them. If people who do this for a living don't think a startup is worth investing in, why should I?

There are plenty of SaaS companies that are naturally limited in revenue potential.

In my experience, VCs are not interested in a company with a conservative forecast of 10MM ARR in 5 years. These are still viable businesses that need capital to actualize the plan.

Alternative lending sources are crucial to these companies. While the terms of this particular idea are not ideal, I think we will see a lot of new ideas in this realm over the coming years and some will be great!

How is an investor in such a company supposed to actually get a return? Unless the company is paying dividends or something similar, the only payout comes from selling your shares or if the company is acquired at a premium. But who is going to buy these companies with a conservative "slow and steady" growth rate and market share?

There are lots of ways to get a return. I helped start Lighter Capital (originally "RevenueLoan"), which invests a lump sum that gets repaid as a percentage of revenue (like a royalty). That model, Revenue-Based Financing, is harder to game than dividends (management can and often does make profit "disappear" but rarely has any incentive to make revenue disappear).

You can also have redemption rights or dividends. Depending on tax treatments these can be reasonably lucrative.

Of course, if you tautologically declare that the only payout is from an "exit" then no exit, no returns. But historically speaking "exits" are the exception, not the rule -- yet businesses have been aggregating capital and rewarding investors for centuries.

I totally agree, but in cases like Republic with a Crowd Safe, none of those options seem to apply unless I'm missing something. My question was for crowd funded smaller companies that have low potential of an exit - in those cases how is a crowd funding "investor" going to realize a return?

Very fair critique. The SAFE for all its merits is an exit-centric security.

Agreed 100%. Financial instruments are interesting- if you can dream up the structure, there's likely a (legal) way to make it work. After all, it's just a record in a database at this point :).

For small-cap companies, debt instruments can be a perfect way to raise capital. Investors hold a promissory note promising to re-pay the capital loaned, with interest, over a specified period of time.

If a company can get debt financing, it's a great choice for them. But there's not a lot of investors interested in loaning money to a company with no assets and little to no revenue. At least not at reasonable interest rates. And unreasonable interest rates can be problematic due to usury laws. The rigid repayment timing can also be problematic for the borrower. Equity is really a better fit for companies that have greater than, say, a 10% chance of not being able to repay their investors.

I used to think so as well. Anecdotally, my company has experienced the exact opposite.

Likely rare (and requires luck) but it can be done.

I think you have to get in early and hope for an IPO. But anyone who buys after the IPO is probably a sucker.

10 million dollar companies don't IPO

The idea of the JOBS act mini-IPO was to let 10 million dollar companies IPO. There are dollar and number of investor limits, but they're generous. ($1BN and 2000 investors, I think.) Above that, the regular IPO rules apply.

TrueCar, Zoës Kitchen, GlycoMimetics, ChannelAdvisor, and Malibu Boats all went public via this route, but on a larger scale, around $100M each. They did a proper IPO, where investors got publicly tradeable shares, not this weird "SAFE" thing.

You raise some good points.

The Crowd Safe is essentially a YC Safe (which in turn is a standardized convertible note) that gives companies control over when to convert, rather than conversion necessarily happening in the following financing round. Given the ubiquity of convertible notes in early stage financings, legal treatment shouldn't be a unique concern.

To your point on startups not being able to convince VCs to fund them: much of the value of crowdfunding, from our perspective, is the ability to democratize the fundraising process by putting the decision of which companies get financed into the hands of the average person. While VC investment is surely a signal to take into account, the VC industry as a whole has shown itself to be biased in who it chooses to fund (more here: https://medium.com/equitycrowdfunding/new-impact-new-inclusi...).

For many companies, there are also significant brand loyalty and marketing benefits to doing a crowdfunding campaign and letting their users play a role in their growth as a company.

The Crowd Safe is not similar to YC Safe or any convertibles issued in pre seed financing that I have seen or received. Crowd Safe seems to cap upside for investor during conversion and defers everything to company's discretion. Even the example in OP's link shows in the event of exit, the investor upside is capped at company's discretion. The whole thing is structured pretty badly. I have stayed away from equity crowdfunding because no corporate governance, no voting and information rights, and lack of influence. There is no way to diversify away the risks that come with early stage investing. And platforms can't be trusted to do due diligence or put investor interest above their own.

The Crowd Safe is designed to give investors the same economic outcome as shareholders, and doesn't cap upside upon conversion. If you're referring to the valuation cap (the only reference to a cap upon exit at OP's link), that's a standard term in convertible notes that sets the maximum price an investor will pay upon conversion. Let me know if I misunderstood.

Shareholders rarely get anything in a bankruptcy, and at best it tends to be pennies on the dollar, so that seems like a minor concern.

Voting rights are more interesting, but my impression is that tiny shareholders in startups are usually bound by tight shareholders' agreements so that they must vote along with the majority investors anyway. (That at least seems to be the practice in Europe.)

The information rights are pretty important, though.

You are absolutely right about the discount.

Being skeptical is also good, but on the flip side there is a lot of money floating around in peoples private bank accounts that is seeking an investment target. I mean, how would one invest $10 in a startup through the traditional VC model? There's no way. This model can be seen as an alternative. There's no inherent reason to think of it as a backup for startups that failed to get VC funding. It's just money from people who are not VCs.

If your life savings is 10k or even 100k you don't need to invest in startups. Try an index fund.

I agree, but that is beside the point.

Because Kickstarter! The uneducated financier model works well for everyone involved there, right? Right guys??

Works great for good talkers regardless of product quality.

The safe word, great for lawsuits when all the investors lose everything