Tech Start-Ups View Alternative to Traditional Venture Capital

Christopher Mims reported in yesterday’s Wall Street Journal that, “Marc Hedlund and his co-founders are launching a company called Skyliner that looks like a typical tech startup, except in one important way.

“The founders are all engineers and, collectively, veterans of marquee tech companies such as Microsoft Corp., Yammer Inc., Etsy Inc. and Stripe Inc.”

The Journal article noted that, “But here’s how Skyliner is different. It has avoided, for now, what can seem like a prerequisite for innovation and growth: venture capital.

“Instead, Skyliner’s $800,000 in startup capital is coming from a different kind of funding source, called, headed by venture capitalist Bryce Roberts.”

Mr. Mims went on to explain that, “Despite the involvement of traditional VCs, it operates differently, says Mr. Roberts.

“For one, doesn’t take a stake in the companies it funds, though it retains the option to convert its investment into an ownership stake if a company is sold or goes public. In other cases, recoups its investment by taking a portion of founders’ salaries after a certain point. A firm that wants to stay private forever pays cash to, up to five times the amount invested.

This arrangement, and the philosophy behind it, is driven by frustration with traditional venture capital, which Mr. Roberts and others argue drives founders to try to create the next $1 billion unicorn or die trying.”

Yesterday’s article indicated that, “For companies that do receive venture capital, it has an outsize impact. A recent report from the Kauffman Foundation found that less than 5% of all startup funding comes from venture capitalists, and only 6.5% of high-growth startups take venture funding. However, 37% of companies that had IPOs between 1980 and 2005 had VC funding.

But Mr. Roberts argues that the traditional venture model doesn’t work for most companies. Some founders agree. Atlassian Corp., a maker of workplace-collaboration software that went public in December 2015 and is now valued at nearly $5 billion, grew without venture funding, using its revenue to finance its operations.

“‘Venture capital can be like a mortgage you can’t afford,’ says Atlassian co-founder Scott Farquhar. ‘It sounds great at the time, but you regret it when your mortgage payments overwhelm you and you realize you didn’t really need a big house in the first place.'”

Mr. Mims added that, “By giving companies an alternative to traditional venture capital or bootstrapping, aims to let companies grow at their own pace.

“This doesn’t eliminate the possibility of a big payday for everyone, says Mr. Roberts. It just means both the fund and founders can prosper if a company is merely successful and not a monster hit.”

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