Why are revenue-based VCs investing in so many women and underrepresented founders?

This guest post was written by David Teten, Venture Partner, HOF Capital. You can follow him at teten.com and @dteten. This is part of an ongoing series on revenue-based investing VC that will hit on:

A new wave of revenue-based investors are emerging who are using creative investing structures with some of the upside of traditional VC, but some of the downside protection of debt.

I’ve been a traditional equity VC for 8 years, and I’m researching new business models in venture capital. As I’ve learned about this model, I’ve been impressed by how these venture capitalists are accomplishing a major social impact goal… without even trying to.

Many are reporting that they’re seeing a more diverse pool of applicants than traditional equity VCs — even though virtually none have a particular focus on women or underrepresented founders. In addition, their portfolios look far more diverse than VC industry norms.

For context, revenue-based investing (“RBI”) is a new form of VC financing, distinct from the preferred equity structure most VCs use. RBI normally requires founders to pay back their investors with a fixed percentage of revenue until they have finished providing the investor with a fixed return on capital, which they agree upon in advance. For more background, see “Revenue-based investing: A new option for founders who care about control“.

I contacted every RBI venture capital investor I could identify, and learned:

  • John Borchers, Co-founder and Managing Partner of Decathlon Capital, reports that “37% of our portfolio companies would be considered ‘impact’ qualified companies. This includes companies that would meet most institutional definitions for impact investing (women, minority, and veteran owned/run businesses, including LMI (“Low to Moderate Income”) and CRA (“Community Reinvestment Act”) qualified companies. While we do lots of work in these areas due to the attractive opportunity set, we are not an impact investor, and impact qualification is not a criterion that we use in evaluating or funding companies. On an organic basis, 13% of our portfolio companies are women-owned or run businesses, while 19% of the companies we work with are minority-owned or run. When you look at the composition of the entire founding or executive teams, the number of companies with either a woman or minority in management jumps even higher and is north of 50%.”
  • Indie.VC reports, “…50% of the teams we’ve funded are led by female founders and nearly 20% are led by black founders.”
  • Lighter Capital reports that they’ve funded companies in 30 states, including well established startup hubs and less mature ecosystems.
  • According to Derek Manuge, CEO of Corl, in the past 12 months, 500+ companies have applied to Corl for funding. Of the ones who received capital, “30% were led by women, and 40% were led by executives of non-Caucasian or of mixed ethnic origin.”
  • Feenix Partners reports that “35% of our portfolio companies have either a female or minority (non-Caucasian) CEO or Owner.”
  • Michelle Romanow, co-founder and CEO of Clearbanc, says that “We have funded eight times more women than the venture capital industry average – probably because we’re not doing meetings, which is an amazing accomplishment, and that’s not because we do different sourcing or anything else. It was just because we looked at data.” (Note that Clearbanc has a somewhat different business model than the RBI VCs I list here.)
  • Founders First Capital is the only RBI VC I’ve identified with a specific focus on underrepresented founders. Kim Folsom, Co-Founder, reports that as of August 2019, Founders First’s portfolio was 80% women and 55% women of color; 70% people of color; 20% military veterans; and 71% located in low/moderate income areas. 85% of their companies have under $1m in annual revenues. I can also announce exclusively that according to Kim Folsom, “Founders First Capital Partner (F1stcp) has just secured a $100M credit facility commitment from a major institutional impact investor. This positions F1stcp to be the largest revenue-based investor platform addressing the funding gap for service-based, small businesses led by underserved and underrepresented founders.”

By contrast, according to PitchBook Data, since the beginning of 2016, companies with women founders have received only 4.4% of venture capital deals. Those companies have garnered only about 2% of all capital invested. This is despite the fact that the data says that in fact you’re better off investing in women.

Paul Graham href="http://www.paulgraham.com/bias.html"> observes, “many suspect that venture capital firms are biased against female founders. This would be easy to detect: among their portfolio companies, do startups with female founders outperform those without?

A couple months ago, one VC firm (almost certainly unintentionally) published a study showing bias of this type. First Round Capital found that among its portfolio companies, startups with female founders outperformed those without by 63%.”

Image via Getty Images / runeer

Why are RBI investors investing disproportionately in women & underrepresented founders, and vice versa: why do these founders approach RBI investors? 

I’d argue it’s not that RBI is so unbiased and attractive; it’s that traditional equity VC is biased structurally against some women and underrepresented founders.

The Boston Consulting Group and MassChallenge, a US-based global network of accelerators, partnered to study why “women-owned startups are a better bet”. Through their analysis and interviews, BCG identified three primary reasons why female founders are less likely to receive VC funds.

The study used multivariate regression analysis to control for education levels and pitch quality to conclude that gender was a statistically significant factor. I argue that these 3 reasons are much less applicable for RBI investors than for conventional VCs.

  1. Less need for a belief in breakthrough technology. From the study: “More than men, women founders and their presentations are subject to challenges and pushback. For example, more women report being asked during their presentations to establish that they understand basic technical knowledge. And often, investors simply presume that the women founders don’t have that knowledge.” However, companies with a focus on early profitability are less likely to require an investor to believe in complex, hard-to-predict new technology which is hard to diligence. Instead, the company can pitch itself based on a credible financial projection.
  2. Realistic projections. “Male founders are more likely to make bold projections and assumptions in their pitches,” BCG observes, while, “Women, by contrast, are generally more conservative in their projections and may simply be asking for less than men.” However, to raise RBI a woman founder does not need to promise a valuation of $1 billion within 5 years. Rent the Runway co-founder and CEO Jennifer Hyman said in a recent interview with CNBC’s Julia Boorstin, “I haven’t been given the permission or privilege to lose a billion every quarter… I’ve had to bring my company towards profitability…”
  3. Concentration in consumer/branded products startups. BCG reports that, “Many male investors have little familiarity with the products and services that women-founded businesses market to other women”—especially in categories such as childcare or beauty. However, RBI investors report that they see a lot of proposals for ecommerce and consumer packaged goods geared to mothers. Meghan Cross Breeden, Cofounder of Amplifyher Ventures, observes, “Personal customer attachment shouldn’t be a factor in investing; the early investors in Snapchat and Facebook weren’t the Gen Z target demo. Rather, I would imagine that one explanation of women garnering rev-share modes of financing is the prevalence of women-led companies in the consumer/branded goods field, which systemically is more tangible and revenue driven. Therefore, there’s more revenue to share – as opposed to the typical venture business, which requires capital upfront before a J curve of growth.”

Traditional equity VCs are looking for high-risk, high-reward, “swing for the fences” models. The founders of such companies inherently are taking financial risk, reputational risk, and career risk.

Paul Graham, co-founder of Y Combinator, said, “few successful founders grew up desperately poor.” Ricky Yean, a serial founder, agrees: “building and sustaining a company that is “designed to grow fast” is especially hard if you grew up desperately poor”.

Most of the founders of the paradigmatic VC home runs were privileged: male, cisgender, well-educated, from affluent families, etc. Think Bill Gates and Mark Zuckerberg .

That privilege makes it easier for them to take very high risk. The average person, worried about students loans and long term employability, quite rationally is less likely to take the huge risk of founding a company. It’s far safer to just get a job.

Investors who back diverse teams can win much higher returns than the industry norm. Both RBI investors and the founders they back will hopefully benefit from this pattern.

For further reading

Note that none of the lawyers quoted or I are rendering legal advice in this article, and you should not rely on our counsel herein for your own decisions. I am not a lawyer. Thanks to the experts quoted for their thoughtful feedback.

Should your new VC fund use revenue-based investing?

You’re working on launching a new VC fund; congratulations! I’ve been a traditional equity VC for 8 years, and I’m now researching revenue-vased investing and other new approaches to VC. The question I’m asking myself: should a new VC fund use revenue-based investing, traditional equity VC, or possibly both (likely from two separate pools of capital)?

Revenue-based investing (“RBI”) is a new form of VC financing, distinct from the preferred equity structure most VCs use. RBI normally requires founders to pay back their investors with a fixed percentage of revenue until they have finished providing the investor with a fixed return on capital, which they agree upon in advance.

This guest post was written by David Teten, Venture Partner, HOF Capital. You can follow him at teten.com and @dteten. This is part of an ongoing series on Revenue-based investing VC that will hit on:

From the investors’ point of view, the advantages of the RBI models are manifold. In fact, the Kauffman Foundation has launched an initiative specifically to support VCs focused on this model. The major advantages to investors are:

  • Shorter duration, i.e., faster time to liquidity. Typically RBI VCs get their capital back within 3 to 5 years.

Who are the major revenue-based investing VCs?

This guest post was written by David Teten, Venture Partner, HOF Capital. You can follow him at teten.com and @dteten. This is part of an ongoing series on Revenue-Based Investing VC that will hit on:

So you’re interested in raising capital from a Revenue-Based Investor VC. Which VCs are comfortable using this approach?

A new wave of Revenue-Based Investors (“RBI”) are emerging. This structure offers some of the benefits of traditional equity VC, without some of the negatives of equity VC.

I’ve been a traditional equity VC for 8 years, and I’m now researching new business models in venture capital.

(For more background, see the accompanying article “Revenue-based investing: A new option for founders who care about control” published on Extra Crunch.

RBI normally requires founders to pay back their investors with a fixed percentage of revenue until they have finished providing the investor with a fixed return on capital, which they agree upon in advance.

I’ve listed below all of the major RBI venture capitalists I’ve identified. In addition, I’ve noted a few multi-product lending firms, e.g., Kapitus and United Capital Source, which provide RBI as one of many structural options to companies seeking capital.


The guide to major RBI VCs

Alternative Capital: “You qualify if you have $5k+ MRR. We have a special program if you are pre-seed and need product development. Since 2017 we’ve managed $3 million in revenue-based financing, which helps cash-strapped technology companies grow. In 2019 we partnered with several revenue-based lending providers, effectively creating a marketplace.”

Bigfoot Capital: According to Brian Parks, “Bigfoot provides RBI, term loans, and lines of credit to SaaS businesses with $500k+ ARR. Our wheelhouse is bootstrapped (or lightly capitalized) SMB SaaS. We make fast, data-driven credit decisions for these types of businesses and show Founders how the math/ROI works. We’re currently evaluating about 20 companies a month and issuing term sheets to 25% of them; those that fit our investment criteria. We’re also regularly following-on for existing portfolio companies.”

Investment Criteria:

  • B2B SaaS or tech-enabled services with proven, recurring contracts
  • ARR of $500K+
  • At least 12 months of customer history, generally 20+ enterprise customers or 200+ SMB customers
  • Rational burn profile, up to 50% of revenue at close, scaling down
  • Capital need of up to $1.5M over next 12 months

Benefits:

  • Non-dilutive, flexible credit offerings that fit SMB or enterprise SaaS
  • Facility sizes of 2-5x MRR
  • Repaid 12-36 months with ability to prepay at reduced cost
  • For RBI, return caps of 1.2x-1.8x and cash share rates of 3-10%
  • Multiple draws available once history established
  • Ability to scale payments to provide initial cash flow relief
  • No board seats or personal guarantees
  • Success fee on M&A can be traded for lower payments

Corl: “No need to wait 3-9 months for approval. Find out in 10 minutes. Corl can fund up to 10x your monthly revenue to a maximum of $1,000,000. Payments are equal to 2-10% of your monthly revenue, and stop when the business buys out the contract at 1-2x the investment amount.”

  • Investment amount of up to 10x monthly revenue, to a maximum of $1,000,000.
  • Payment is 2-10% of monthly revenue, until a Contract Buyout.
  • The Contract Buyout Rate is 1-2x the Investment Amount, depending on the risk of the business.
  • To be eligible, a business must have at least $10,000 in monthly revenue, at least 30% gross margins, and post-revenue for at least 6 months.

According to Derek Manuge, Corl CEO, “Funds are closed significantly quicker than the industry average at under 24 hours. The majority of businesses that apply for funding with Corl are E-commerce, SaaS, and other digital businesses.”

Manuge continues, “Corl connects to a business’ bank accounts, accounting software, payment processors, and other digital services to collect 10,000+ historical data points that are analyzed in real-time. We collect more data on an individual business than, to our knowledge, any other RBI investor, through our application process, data partners, and various public sources online. We have reviewed the application process of other RBI lenders and have not found one that has more API connections that ours. We have developed a proprietary machine learning algorithm that assesses the risk and return profile of the business and determines whether to invest in the business. Funding decisions can take as little as 10 minutes depending on the amount of data provided by a business.”

In the past 12 months, 500+ companies have applied for funding with Corl. The following information is based on companies funded by us and/or our capital partners:

  • The average most recent monthly revenue is $331,229
  • The average most recent annual revenue is $1,226,589
  • The average most recent annual profit is $237,479
  • The average gross profit margin is 55%.
  • The average monthly operating expenses is $70,335
  • The average cash balance is $191,164
  • The mode purpose for funding is (in order of frequency) Sales, Marketing, Market Expansion, Product Development, and Hiring Employees.
  • 30% have been operated by females, 70% have been operated by males.
  • 40% have been operated by “visible minorities”, 60% have been operated by “non-visible minorities”.

Decathlon Capital: According to John Borchers, Co-founder, Decathlon is the largest revenue-based financing investor in the US. His description: “We announced a new $500 million fund in Q1 of 2019, in our 10th year. Unlike many RBI investors, a full 50% of our investment activity is in non-tech businesses. Like other RBI firms, Decathlon does not require warrants, governance involvement, or the types of financial covenants that are often associated with other venture debt type solutions. Decathlon typically targets monthly payment percentages in the 1% to 4% range, with total targeted multiples of 1.5x to 3.0x.”

Earnest Capital: Earnest is not technically RBI. Tyler Tringas, General Partner, observes, “Almost all of these new [RBI] forms of financing really only work for more mature companies (say $25-50k MRR and up) and there are still very few new options at the stage where we are investing.” From their website: “We invest via a Shared Earnings Agreement, a new investment model developed transparently with the community, and designed to align us with founders who want to run a profitable business and never be forced to raise follow-on financing or sell their business.” Key elements:

  • “We agree on a Return Cap which is a multiple of the initial investment (typically 3-5x)
  • “We don’t have any equity or control over the business…”
  • “As your business grows we calculate what we call “Founder Earnings” and Earnest is paid a percentage. Essentially we get paid when you and your co-founder get paid.”
  • “Founder Earnings = Net Income + any amount of founders’ salaries over a certain threshold. If you want to eat ramen, pay yourselves a small salary, and reinvest every dollar into growth, we don’t get a penny and that’s okay. We get earnings when you do.”
  • “Unlike traditional equity, our share of earnings is not perpetual. Once we hit the Return Cap, payments to Earnest end.”
  • “In most cases, we’ll agree on a long-term residual stake for Earnest if you ever sell the company or raise more financing. We want to be on your team for the long-term, but don’t want to provide any pressure to “exit.”
  • “If you decide you want to raise VC or other forms of financing, or you get an amazing offer to sell the company, that’s totally fine. The SEA includes provisions for our investment to convert to equity alongside the new investors or acquirers.”

Feenix Venture Partners: Feenix Venture Partners has a unique investment model that couples investment capital with payment processing services. Each of Feenix’s portfolio companies receives an investment in debt or equity and utilizes a subsidiary of Feenix as its credit card payment processor (“Feenix Payment Systems”). The combination of investment capital and credit card processing (CCP) fees creates a “win-win” partnership for investors and portfolio companies. The credit card processing data provides the investor with real-time sales transparency and the CCP fee margin provides the investor high current income, with equity-like upside and significant recovery for downside protection. Additionally, portfolio companies are able to access competitive and often non-dilutive financing by monetizing an unavoidable expense that is being paid to its current processors, thus yielding a mutual benefit for both parties.

Feenix focuses on companies in the consumer space across a number of industry verticals including: multi-unit Food & Beverage operators, hospitality, managed workspace (office or food halls), location-based entertainment venues, and various direct to consumer online companies. Their average check size is between $1-3 million, with multi-year term and competitive interest rates for debt. Additionally, Feenix typically needs fewer financial covenants and can provide quicker turnaround for due diligence with the benefit of transparency they receive by tracking credit card sales activity. 10% of Feenix’s portfolio companies have received VC equity prior to their financing.

Founders First Capital Partners: “Founders First Capital Partners, LLC is building a comprehensive ecosystem to empower underrepresented founders to become leading premium wage job creators within their communities. We provide revenue-based funding and business acceleration support to service-based small businesses located outside of major capital markets such as Silicon Valley and New York City.”

“We focus our support on businesses led by women, ethnic minorities, LGBTQ, and military veterans, especially teams and businesses located in low to moderate income areas. Our proprietary business accelerator programs, learning platform, and growth methodologies transition these underserved service-based businesses into companies with $5 million to $50 million in recurring revenue. They are tech-enabled companies that provide high-yield investments for fund limited partners (LPs) that perform like bonds but generate returns on par with equity investments. Founders First Capital Partners defines these high performing organizations as Zebra Companies .”

“Each year, Founders First Capital Partners works with hundreds of entrepreneurs. Three tracks of pre-funding accelerator programs determine the appropriate level of funding and advisory support needed for each founder to achieve their desired expansion: 1) Fastpath for larger companies with $2 million to $5 million in annual revenue, 2) Founders Growth Bootcamp program for companies with $250,000 to $2 million in annual revenue, and 3) Elevate My Business Challenge for companies with $50,000 to $250,000 in annual revenue.”

“Founders First Capital Partners (FFCP) runs a 5-step process:

  1. Attend the Appropriate Pre-Funding Accelerator Program. Programs are offered in both online, in-person, and hybrid format with cohorts of leadership teams for an average of 10 companies. Most programs culminate with a Pitch Day and Investor Networking Event where the companies present their newly defined and expanded growth playbook.
  2. Apply for funding. After completion of the relevant pre-funding program, FFCP will review company funding applications and conduct due diligence.
  3. Get Funding. FFCP-approved companies receive revenue-based loans of up to $1 million to support the implementation of a customized 5-year growth playbook for their businesses.
  4. Growth support. FFCP uses its proprietary performance technology platform, structured growth program curriculum, and executive-level coaching operations to assist funded companies with the development, implementation, and iteration of their custom 5-year growth playbook.
  5. Graduate. Companies repay loans with growth revenue generated over a 5-year term, capped at 2x the amount financed. Companies gain predictable revenue streams with significant and measurable increases in revenue and profits to graduate to either traditional debt or equity sources of growth capital.”

According to Kim Folson, Co-Founder, “Founders First Capital Partner (F1stcp) has just secured a $100M credit facility commitment from a major institutional impact investor. This positions F1stcp to be the largest revenue-based investor platform addressing the funding gap for service-based, small businesses led by underserved and underrepresented founders.”

GSD Capital: “ GSD Capital partners with early-stage SaaS founders to fund growth initiatives. We work with founding teams in the Mountain West (Arizona, Colorado, Idaho, Montana, Nevada, New Mexico, Utah and Wyoming) who have demonstrated an ability to get sh*t done… We empower founders with a 30-day fundraising process instead of multiple months running a gauntlet. ”

“To best explain the process of RBF funding, let’s use an example. Pied Piper Inc needs funding to accelerate customer acquisition for its SaaS solution. GSD Capital loans $250,000 to Pied Piper taking no ownership or control of the business. The funding agreement outlines the details of how the loan will be repaid, and sets a “cap”, or a point at which the loan has been repaid. On a 3-year term, the cap amounts typically range from 0.4-0.6x the loan amount. Each month Pied Piper reviews its cash receipts and sends the agreed upon percentage to GSD. If the company experiences a rough patch, GSD shares in the downside. Monthly payments stop once the cap is reached and the loan is repaid. In a situation where Pied Piper’s revenue growth exceeds expectations, prepayment discounts are built into the structure, lowering the cost of capital.”

“Requirements for funding consideration:

  • Companies with a minimum of $50k in MRR
  • We can fund to 4x MRR (Monthly Recurring Revenue)
  • Companies seeking funding of $200k to $1mm
  • Limited amount of existing debt and a clean cap table”

Indie.VC: Part of the investment firm O’Reilly AlphaTech Ventures. See Indie VC’s Version 3.0 . “On the surface, our v3 terms are a fairly vanilla version of a convertible note with a few key variables to be negotiated between the investor and the founder: investment amount, equity option, and repurchase start date and percentage.”

  • Investment amount “is what it is”.
  • Equity option is, ” a simple fixed percentage which converts into that % of shares at the time of a sale OR into that % shares prior to a qualified financing.”
  • Repurchase start date and percentage is, “We chose 24 months from the time of our investment (but can be whatever date the founders and investors agree upon) and a % of gross revenue shared to repurchase the shares. With each revenue share payment, our equity option decreases and the founder’s equity increases. With v3, a team can repurchase up to 90% of the original equity option back at any point prior to a qualified financing through monthly revenue share payments, a lump or some combination of both until they reach a 3x cap. “

Kapitus: Offers RBI among many other options. “Because this [RBI] is not a loan, there is no APR or compounded interest associated with this product. Instead, borrowers agree to pay a fixed percentage in addition to the amount provided.”

Lighter Capital: “Since 2012, we’ve provided over $100 million in growth capital to over 250 companies.” Revenue-based financing which “helps tech entrepreneurs get to the next level without giving up equity, board seats, or personal guarantees… At Lighter Capital, we don’t take equity or ask you to make personal guarantees. And we don’t take a seat on your board or make you write a big check if you’re having a down month.”

  • “Up to 1/3 of your annualized revenue run rate”
  • “Up to $3M in growth capital for your tech startup”
  • “Repaid over 3–5 years”
  • “You pay between 2–8% of monthly revenue”
  • “Repayment caps usually range from 1.35x to 2.0x”

Novel Growth Partners: ” We invest using Revenue-Based Investing (RBI), also known as Royalty-Based Investing… We provide up to $1 million in growth capital, and the company pays that capital back as a small percentage (between 4% and 8%) of its monthly revenue up to a predetermined return cap of 1.5-2.2x over up to 5 years. We can usually provide capital in an amount up to 30% of your ARR. Our approach allows us to invest without taking equity, without taking board seats, and without requiring personal guarantees. We also provide tailored, tactical sales and marketing assistance to help the companies in our portfolio accelerate their growth.” Keith Harrington, Co-Founder & Managing Director at Novel Growth Partners, observes that he sees two categories of RBI:

  • Variable repayment debt: money gets paid back month over month, e.g., Novel Growth Partners
  • Share buyback structure, e.g., Indie.vc. Investors using this model typically can ask for a higher multiple because they wait longer for cash to be paid back.

He said, “We chose the structure we did because we think it’s easier to understand, for both LPs and entrepreneurs.”

Podfund: Focused on podcast creators. “We agree to provide funding and services to you in exchange for a percentage of total gross revenue (including ads/sponsorship, listener support, and ancillary revenue such as touring, merchandise, or licensing) per quarter. PodREV terms are 7-15% of revenue for 3-5 years, depending on current traction, revenue, and projected growth. At any time you may also opt to pay down the revenue share obligation in full, as follows:

  • 1.5x the initial funding in year 1
  • 2x the initial funding in year 2
  • 3x the initial funding in year 3
  • 4x the initial funding in year 4 “

RevUp: “Companies receive $100K-250K in non-dilutive cash… [paid back in a] 36-month return period with revenue royalty ranging from 4-8%, no equity .”

Riverside Acceleration Capital: Closed Fund I for $50m in 2016. Fund II has raised over $100m as of mid-2019.

Investment size : $1 – 5+ million, significant capacity for additional investment.
Return method: Small percentage of monthly revenue. Keeps capital lightweight and aligned to companies’ growth.
Capped return: 1.5 – 2x the investment amount. Company maximizes equity upside from growth.
Investment structure: 5-year horizon. Long-term nature maximizes flexibility of capital.”

Jim Toth writes, “One thing that makes us different is that we live inside of an $8Bn private equity firm. This means that we have a tremendous amount of resources that we can leverage for our companies, and our companies see us as being quite strategic. We also have the ability to continue investing behind our companies across all stages of growth.”

ScaleWorks: “We developed Scaleworks venture finance loans to fill a need we saw for our own B2B SaaS companies. No personal guarantees, board seats, or equity sweeteners. No prepayment penalties. Monthly repayments as a percentage of revenue.”

United Capital Source: Provides a wide structure of loans, including but not limited to RBI. The firm has provided more than $875 million in small business loans in its history, and is currently extending about $10m/month in RBI loans. Jared Weitz, Founder & CEO, said, “[Our] typical RBF client is $120K-$20M in annual revenue, with 4-200 employees. We only look at financials for deals over a certain size.

For smaller deals, we’ll look at bank statements and get a pretty good picture of revenues, expenses and cash flow. After all, since this is a revenue-based business loan, we want to make sure revenues and cash flow are consistent enough for repayment without hurting the business’s daily operations. When we do look at financials to approve those larger deals we are generally seeing a 5 to 30% EBITDA margin on these businesses.” United Capital Source was selected in the 2015 & 2017 Inc. 5000 Fastest Growing Companies List.

Note that none of the lawyers quoted or I are rendering legal advice in this article, and you should not rely on our counsel herein for your own decisions. I am not a lawyer. Thanks to the experts quoted for their thoughtful feedback. Thanks to Jonathan Birnbaum for help in researching this topic.

Revenue-based investing: A new option for founders who care about control

Does the traditional VC financing model make sense for all companies? Absolutely not. VC Josh Kopelman makes the analogy of jet fuel vs. motorcycle fuel. VCs sell jet fuel which works well for jets; motorcycles are more common but need a different type of fuel.

A new wave of Revenue-Based Investors are emerging who are using creative investing structures with some of the upside of traditional VC, but some of the downside protection of debt. I’ve been a traditional equity VC for 8 years, and I’m now researching new business models in venture capital.

I believe that Revenue-Based Investing (“RBI”) VCs are on the forefront of what will become a major segment of the venture ecosystem. Though RBI will displace some traditional equity VC, its much bigger impact will be to expand the pool of capital available for early-stage entrepreneurs.

This guest post was written by David Teten, Venture Partner, HOF Capital. You can follow him at teten.com and @dteten. This is part of an ongoing series on Revenue-Based Investing VC that will hit on:

So what is Revenue-Based Investing? 

RBI structures have been used for many years in natural resource exploration, entertainment, real estate, and pharmaceuticals. However, only recently have early-stage companies started to use this model at any scale.

According to Lighter Capital, “the RBI market has grown rapidly, contrasting sharply with a decrease in the number of early-stage angel and VC fundings”. Lighter Capital is a RBI VC which has provided over $100 million in growth capital to over 250 companies since 2012.

Lighter reports that from 2015 to 2018, the number of VC investments under $5m dropped 23% from 6,709 to 5,139. 2018 also had the fewest number of angel-led financing rounds since before 2010. However, many industry experts question the accuracy of early-stage market data, given many startups are no longer filing their Form Ds.

John Borchers, Co-founder and Managing Partner of Decathlon Capital, claims to be the largest revenue-based financing investor in the US. He said, “We estimate that annual RBI market activity has grown 10x in the last decade, from two dozen deals a year in 2010 to upwards of 200 new company fundings completed in 2018.”

‘Breaking Into Startups’: Torch CEO and Well Clinic founder Cameron Yarbrough on mental health & coaching

There has long been a stigma associated with therapy and mental health coaching, a stigma that is even more pronounced in the business world, despite considerable evidence of the efficacy of these services. One of the organizations that has set out to change this negative association is Torch, a startup that combines the therapeutic benefits of executive coaching with data-driven analytics to track outcomes.

Yet, as Torch co-founder and CEO Cameron Yarbrough explains in this Breaking Into Startups episode, the startup wasn’t initially a tech-oriented enterprise. At first, Yarbrough drew on his years of experience as a marriage and family counselor as he made the transition into executive coaching, even referring to the early iterations of Torch as little more than “a matchmaking service between coaches and professionals.”

In time, Yarbrough identified a virtually untapped market for executive coaching — one that, by his estimate, could amount to a $15 billion industry. To demonstrate to investors the great potential of this growing market, he first built up a clientele that provided Torch with sufficient recurring revenue and low churn rate.

Only then was Yarbrough able to raise a $2.4 million seed round from Initialized Capital, Y Combinator, and other investors, convincing them that data analytics software could enhance the coaching process — as well as coach recruitment — enough to effectively “productize feedback,” as he puts it.

For Yarbrough and Torch, “productizing feedback” involves certain well-known business strategies that complement traditional coaching methods. For instance, Torch’s coaching procedure includes a “360 review,” a performance review system that incorporates feedback from all angles, including an employee’s manager, peers, and other people within an organization who have knowledge of the employee’s work.

The 360 review is coupled with an OKR platform, which provides HR departments and other interested parties with the metrics and analytics to track employee progress through the program. This combination is designed to promote the development of soft skills, which in turn drive leadership.

Torch has achieved considerable success, landing several influential clients in the tech sector through its B2B approach. But Yarbrough is clear that his goal with the company is to “democratize” access to professional coaching, in hopes of providing the same kind of mental health counseling and support to employees in all levels of an organization.

In this episode, Yarbrough discusses the history and trajectory of Torch, his experience scaling a company many considered unscalable, and the methods he uses to manage his own emotional and mental health as the CEO of an expanding startup. Yarbrough offers insights into the feelings of anxiety and dread common among entrepreneurs and provides a close look at how he has found business and personal success with Torch.


Breaking Into Startups: There’s a difference between a mentor and a coach. Today, I want to talk about that difference and in addition to the intersection between business and psychology, What Cameron Yarbrough, CEO of Torch and Founder of Well Clinic.

If you’re someone that is looking for a mentor or a coach as you break into tech, or if you just want to be surrounded by peers, make sure you download the Career Karma app by going to www.breakingintostartups.com/download.

On today’s episode, you’re going to understand the importance of therapy, mental health and coaches, as well as how historically, it has been inaccessible to people and how Cameron is using his background to democratize this for the world.

If this is your first time listening to the Breaking Startups Podcast, make sure you leave a review on iTunes and tell your friends. Listen to it on Soundcloud and talk about it on Spotify. If you have any feedback for us, positive or negative, please let us know. Without further ado, let’s break-in.

Cameron Yarbrough is the CEO of Torch. He’s one of the best executive coaches in the world. Not only are we going to be talking about coaching and mentoring for executives, but we’ll also be talking about coaching in general for everyone. We’re going to go into how he created his company.

How ‘ghost work’ in Silicon Valley pressures the workforce, with Mary Gray

The phrase “pull yourself up by your own bootstraps” was originally meant sarcastically.

It’s not actually physically possible to do — especially while wearing Allbirds and having just fallen off a Bird scooter in downtown San Francisco, but I should get to my point.

This week, Ken Cuccinelli, the acting Director of the United States Citizenship and Immigrant Services Office, repeatedly referred to the notion of bootstraps in announcing shifts in immigration policy, even going so far as to change the words to Emma Lazarus’s famous poem “The New Colossus:” no longer “give me your tired, your poor, your huddled masses yearning to breathe free,” but “give me your tired and your poor who can stand on their own two feet, and who will not become a public charge.”

We’ve come to expect “alternative facts” from this administration, but who could have foreseen alternative poems?

Still, the concept of ‘bootstrapping’ is far from limited to the rhetorical territory of the welfare state and social safety net. It’s also a favorite term of art in Silicon Valley tech and venture capital circles: see for example this excellent (and scary) recent piece by my editor Danny Crichton, in which young VC firms attempt to overcome a lack of the startup capital that is essential to their business model by creating, as perhaps an even more essential feature of their model, impossible working conditions for most everyone involved. Often with predictably disastrous results.

It is in this context of unrealistic expectations about people’s labor, that I want to introduce my most recent interviewee in this series of in-depth conversations about ethics and technology.

Mary L. Gray is a Fellow at Harvard University’s Berkman Klein Center for Internet and Society and a Senior Researcher at Microsoft Research. One of the world’s leading experts in the emerging field of ethics in AI, Mary is also an anthropologist who maintains a faculty position at Indiana University. With her co-author Siddharth Suri (a computer scientist), Gray coined the term “ghost work,” as in the title of their extraordinarily important 2019 book, Ghost Work: How to Stop Silicon Valley from Building a New Global Underclass. 

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Image via Mary L. Gray / Ghostwork / Adrianne Mathiowetz Photography

Ghost Work is a name for a rising new category of employment that involves people scheduling, managing, shipping, billing, etc. “through some combination of an application programming interface, APIs, the internet and maybe a sprinkle of artificial intelligence,” Gray told me earlier this summer. But what really distinguishes ghost work (and makes Mary’s scholarship around it so important) is the way it is presented and sold to the end consumer as artificial intelligence and the magic of computation.

In other words, just as we have long enjoyed telling ourselves that it’s possible to hoist ourselves up in life without help from anyone else (I like to think anyone who talks seriously about “bootstrapping” should be legally required to rephrase as “raising oneself from infancy”), we now attempt to convince ourselves and others that it’s possible, at scale, to get computers and robots to do work that only humans can actually do.

Ghost Work’s purpose, as I understand it, is to elevate the value of what the computers are doing (a minority of the work) and make us forget, as much as possible, about the actual messy human beings contributing to the services we use. Well, except for the founders, and maybe the occasional COO.

Facebook now has far more employees than Harvard has students, but many of us still talk about it as if it were little more than Mark Zuckerberg, Cheryl Sandberg, and a bunch of circuit boards.

But if working people are supposed to be ghosts, then when they speak up or otherwise make themselves visible, they are “haunting” us. And maybe it can be haunting to be reminded that you didn’t “bootstrap” yourself to billions or even to hundreds of thousands of dollars of net worth.

Sure, you worked hard. Sure, your circumstances may well have stunk. Most people’s do.

But none of us rise without help, without cooperation, without goodwill, both from those who look and think like us and those who do not. Not to mention dumb luck, even if only our incredible good fortune of being born with a relatively healthy mind and body, in a position to learn and grow, here on this planet, fourteen billion years or so after the Big Bang.

I’ll now turn to the conversation I recently had with Gray, which turned out to be surprisingly more hopeful than perhaps this introduction has made it seem.

Greg Epstein: One of the most central and least understood features of ghost work is the way it revolves around people constantly making themselves available to do it.

Mary Gray: Yes, [What Siddarth Suri and I call ghost work] values having a supply of people available, literally on demand. Their contributions are collective contributions.

It’s not one person you’re hiring to take you to the airport every day, or to confirm the identity of the driver, or to clean that data set. Unless we’re valuing that availability of a person, to participate in the moment of need, it can quickly slip into ghost work conditions.

The secret of content marketing: avoid high bounce rates

Advice on content marketing always talks about getting people to your blog.

But, what about once they’re there — how do you get them to then buy from you?

That’s the conversion half of content marketing, and that’s what I’ll cover: converting your readers into paying customers.

First, they read. Then, they buy.

When visitors arrive on your blog, three things should happen:

  1. First, they must start reading — instead of bouncing.
  2. Next, keep should keep reading until at least halfway through.
  3. Finally, they should be enticed to read more or convert: sign up, subscribe, purchase, etc.

Demand Curve’s data shows that when readers complete this full chain of events — as opposed to skipping step #2 — they’re more likely to ultimately buy from you.

Why? People trust your brand more after they’ve consumed your content and deemed you to be high quality and authoritative.

We’ve optimized tens of millions of blog impressions, and we have three novel insights to share in this post. Each will hopefully help compel readers to stick around and buy.

Let’s conquer high bounce rates — the bane of content marketers.

Entice visitors to start reading

First, some obvious advice: Getting visitors to read begins with having a strong intro.

A good intro buys goodwill with readers so they keep reading — and tolerate your boring parts.

There are three components to a good intro:

  1. Have a hook. Read about hooks here.
  2. Skip self-evident fluff. Read about succinctness here.
  3. Tease your subtopics to reassure visitors they landed in the right place.

The web’s biggest blogs include tables of contents at the top of their posts to reassure readers. It not only benefits SEO, it also improves read-through rates.

GettyImages 913560720

Image via Getty Images / z_wei

Keep them reading once they’ve started

Once visitors begin reading, you have three tactics to retain them:

  1. Drop-off optimization.
  2. A/B testing.
  3. Exit rate analysis.

This is how we’ll improve our read-through and conversion rates.

Drop-off optimization

Sometimes, when I write a post on Julian.com, I find few people actually finish reading it. They get halfway through then bounce.

I discover this by looking at my scroll-depth maps using Hotjar.com. These show me how far down a page an average reader gets. Then I pair that data with the average time spent on the page, which I get from Google Analytics.

Whenever I notice poor read completion rates, I spend ten minutes optimizing my content:

  1. I refer to the heatmaps to see which sections caused people to stop reading.
  2. Then I rewrite those offending sections to be more enticing.

This routinely achieves 1.5-2x boosts in read-through rates, which can lead to a similar boost in conversion.

You see, I never just publish a blog post then move on.

I treat my posts the same way I treat every other marketing asset: I measure and iterate.

For some reason, even professional content marketers publish their posts then simply move on. That’s crazy. Not spending 10 minutes optimizing can be the difference between people devouring your post or not being able to get halfway through.

Specifically, here’s the process for rewriting a post’s drop-off points to get readers to continue reading.

How to perform drop-off optimization

Screenshot 2019 08 06 20.34.53

Image via Julian Shapiro / Julian.com

First, record a scroll heatmap of your blog post. Any heatmap tool will do. I use Hotjar.com.

Next, whenever you see, say, 80% of readers getting midway into your post but only a fraction then make it to the end, you know you have a problem in the back half of your post: it’s verbose, uninsightful, or off-topic.

Your job is to find these drop-off points then rewrite the offending content using four techniques:

  • Brevity: Make the section more concise: Cut the filler and switch to a bullet list like the one you’re reading now. Or, delete the section altogether if it’s not interesting.
  • Inject insights: Perhaps your content is self-evident and boring. Rewrite it with novel and surprising thoughts.
  • Make headlines enticing: Make the next section’s headline more enticing. Perhaps readers bounce because they see that the next section’s title is boring or irrelevant. For example, instead of titling your next section “Wrapping up,” re-write it into something more eyebrow-raising like, “What you still don’t know.”
  • Cliffhangers: End sections with a statement like “Everything I just told you is true, but there’s a big exception.” Then withhold the exception until the next section. Keep them reading.

Once you’ve ironed out drop-off points, perhaps 35% of your readers finish the post instead of 15%. This reliably works, and it’s the highest-leverage way to achieve conversion improvements on your posts.

This is so self-evident yet no one does it for some reason.

And we’re only just starting. There’s another, more effective technique for optimizing your content: A/B testing paragraphs. Whereas drop-off optimization irons out the kinks in your article, A/B testing is how you take your read-through rates to a new tier.

Before we begin, follow along

As we explore the tactics below, you’re welcome to visit two blogs that incorporate these techniques:

If you need a primer on SEO before continuing, see my other TechCrunch article on the topic here and this orientation here.

A/B testing content

A/B testing is the process of creating a variation of existing content to see if it will increase conversion.

You want to A/B test the three highest-leverage components of every post:

The secret of content marketing: avoid high bounce rates

Advice on content marketing always talks about getting people to your blog.

But, what about once they’re there — how do you get them to then buy from you?

That’s the conversion half of content marketing, and that’s what I’ll cover: converting your readers into paying customers.

First, they read. Then, they buy.

When visitors arrive on your blog, three things should happen:

  1. First, they must start reading — instead of bouncing.
  2. Next, keep should keep reading until at least halfway through.
  3. Finally, they should be enticed to read more or convert: sign up, subscribe, purchase, etc.

Demand Curve’s data shows that when readers complete this full chain of events — as opposed to skipping step #2 — they’re more likely to ultimately buy from you.

Why? People trust your brand more after they’ve consumed your content and deemed you to be high quality and authoritative.

We’ve optimized tens of millions of blog impressions, and we have three novel insights to share in this post. Each will hopefully help compel readers to stick around and buy.

Let’s conquer high bounce rates — the bane of content marketers.

Entice visitors to start reading

First, some obvious advice: Getting visitors to read begins with having a strong intro.

A good intro buys goodwill with readers so they keep reading — and tolerate your boring parts.

There are three components to a good intro:

  1. Have a hook. Read about hooks here.
  2. Skip self-evident fluff. Read about succinctness here.
  3. Tease your subtopics to reassure visitors they landed in the right place.

The web’s biggest blogs include tables of contents at the top of their posts to reassure readers. It not only benefits SEO, it also improves read-through rates.

GettyImages 913560720

Image via Getty Images / z_wei

Keep them reading once they’ve started

Once visitors begin reading, you have three tactics to retain them:

  1. Drop-off optimization.
  2. A/B testing.
  3. Exit rate analysis.

This is how we’ll improve our read-through and conversion rates.

Drop-off optimization

Sometimes, when I write a post on Julian.com, I find few people actually finish reading it. They get halfway through then bounce.

I discover this by looking at my scroll-depth maps using Hotjar.com. These show me how far down a page an average reader gets. Then I pair that data with the average time spent on the page, which I get from Google Analytics.

Whenever I notice poor read completion rates, I spend ten minutes optimizing my content:

  1. I refer to the heatmaps to see which sections caused people to stop reading.
  2. Then I rewrite those offending sections to be more enticing.

This routinely achieves 1.5-2x boosts in read-through rates, which can lead to a similar boost in conversion.

You see, I never just publish a blog post then move on.

I treat my posts the same way I treat every other marketing asset: I measure and iterate.

For some reason, even professional content marketers publish their posts then simply move on. That’s crazy. Not spending 10 minutes optimizing can be the difference between people devouring your post or not being able to get halfway through.

Specifically, here’s the process for rewriting a post’s drop-off points to get readers to continue reading.

How to perform drop-off optimization

Screenshot 2019 08 06 20.34.53

Image via Julian Shapiro / Julian.com

First, record a scroll heatmap of your blog post. Any heatmap tool will do. I use Hotjar.com.

Next, whenever you see, say, 80% of readers getting midway into your post but only a fraction then make it to the end, you know you have a problem in the back half of your post: it’s verbose, uninsightful, or off-topic.

Your job is to find these drop-off points then rewrite the offending content using four techniques:

  • Brevity: Make the section more concise: Cut the filler and switch to a bullet list like the one you’re reading now. Or, delete the section altogether if it’s not interesting.
  • Inject insights: Perhaps your content is self-evident and boring. Rewrite it with novel and surprising thoughts.
  • Make headlines enticing: Make the next section’s headline more enticing. Perhaps readers bounce because they see that the next section’s title is boring or irrelevant. For example, instead of titling your next section “Wrapping up,” re-write it into something more eyebrow-raising like, “What you still don’t know.”
  • Cliffhangers: End sections with a statement like “Everything I just told you is true, but there’s a big exception.” Then withhold the exception until the next section. Keep them reading.

Once you’ve ironed out drop-off points, perhaps 35% of your readers finish the post instead of 15%. This reliably works, and it’s the highest-leverage way to achieve conversion improvements on your posts.

This is so self-evident yet no one does it for some reason.

And we’re only just starting. There’s another, more effective technique for optimizing your content: A/B testing paragraphs. Whereas drop-off optimization irons out the kinks in your article, A/B testing is how you take your read-through rates to a new tier.

Before we begin, follow along

As we explore the tactics below, you’re welcome to visit two blogs that incorporate these techniques:

If you need a primer on SEO before continuing, see my other TechCrunch article on the topic here and this orientation here.

A/B testing content

A/B testing is the process of creating a variation of existing content to see if it will increase conversion.

You want to A/B test the three highest-leverage components of every post:

How even the best marketplace startups get paralyzed

Over the past 15 years, I’ve seen a pernicious disease infect a number of marketplace startups. I call it Marketplace Paralysis. The root cause of the disease is quite innocent and seemingly harmless. Smart people with good intentions fall victim to it all the time. It starts when a platform has sufficient scale — such that there is a good amount of data on things like performance, quality rankings, purchase rates, and fill ratios. What a platform implements as a result of that data, and how it’s received by their user base, is what can lead to marketplace paralysis.

In this post, I will detail what Marketplace Paralysis is and what startups can do to avoid it. Before I get into the nitty-gritty, here’s a snapshot of the lessons you’ll learn by reading this post:

  1. Segment and focus on high-value users
  2. Remember the silent majority
  3. Modify company goals to include quality components
  4. Empower small, autonomous teams

The easiest way to explain Marketplace Paralysis is with a hypothetical example. So allow me to introduce you to Labor Marketplace X (LMX).

Equipped with the aforementioned data, the well-intentioned product managers at LMX will think about policies or features to try and improve a KPI, like fill ratio or job success rate. They might craft a policy that would separate users into two tiers.

Tier 1 gets a shiny gold star next to their name, along with extra pay, bonuses, and preferred job access. Tier 2 gets standard pay and standard job access. They’ve done their homework and feel this will benefit the marketplace.

So, they build the feature. They launch it and make an announcement to their users. And then… a revolt!

Why AI needs more social workers, with Columbia University’s Desmond Patton

Sometimes it does seem the entire tech industry could use someone to talk to, like a good therapist or social worker. That might sound like an insult, but I mean it mostly earnestly: I am a chaplain who has spent 15 years talking with students, faculty, and other leaders at Harvard (and more recently MIT as well), mostly nonreligious and skeptical people like me, about their struggles to figure out what it means to build a meaningful career and a satisfying life, in a world full of insecurity, instability, and divisiveness of every kind.

In related news, I recently took a year-long paid sabbatical from my work at Harvard and MIT, to spend 2019-20 investigating the ethics of technology and business (including by writing this column at TechCrunch). I doubt it will shock you to hear I’ve encountered a lot of amoral behavior in tech, thus far.

A less expected and perhaps more profound finding, however, has been what the introspective founder Priyag Narula of LeadGenius tweeted at me recently: that behind the hubris and Machiavellianism one can find in tech companies is a constant struggle with anxiety and an abiding feeling of inadequacy among tech leaders.

In tech, just like at places like Harvard and MIT, people are stressed. They’re hurting, whether or not they even realize it.

So when Harvard’s Berkman Klein Center for Internet and Society recently posted an article whose headline began, “Why AI Needs Social Workers…”… it caught my eye.

The article, it turns out, was written by Columbia University Professor Desmond Patton. Patton is a Public Interest Technologist and pioneer in the use of social media and artificial intelligence in the study of gun violence. The founding Director of Columbia’s SAFElab and Associate Professor of Social Work, Sociology and Data Science at Columbia University.

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Desmond Patton. Image via Desmond Patton / Stern Strategy Group

A trained social worker and decorated social work scholar, Patton has also become a big name in AI circles in recent years. If Big Tech ever decided to hire a Chief Social Work Officer, he’d be a sought-after candidate.

It further turns out that Patton’s expertise — in online violence & its relationship to violent acts in the real world — has been all too “hot” a topic this past week, with mass murderers in both El Paso, Texas and Dayton, Ohio having been deeply immersed in online worlds of hatred which seemingly helped lead to their violent acts.

Fortunately, we have Patton to help us understand all of these issues. Here is my conversation with him: on violence and trauma in tech on and offline, and how social workers could help; on deadly hip-hop beefs and “Internet Banging” (a term Patton coined); hiring formerly gang-involved youth as “domain experts” to improve AI; how to think about the likely growing phenomenon of white supremacists live-streaming barbaric acts; and on the economics of inclusion across tech.

Greg Epstein: How did you end up working in both social work and tech?

Desmond Patton: At the heart of my work is an interest in root causes of community-based violence, so I’ve always identified as a social worker that does violence-based research. [At the University of Chicago] my dissertation focused on how young African American men navigated violence in their community on the west side of the city while remaining active in their school environment.

[From that work] I learned more about the role of social media in their lives. This was around 2011, 2012, and one of the things that kept coming through in interviews with these young men was how social media was an important tool for navigating both safe and unsafe locations, but also an environment that allowed them to project a multitude of selves. To be a school self, to be a community self, to be who they really wanted to be, to try out new identities.