The Opportunity to Finance “Reasonable” Tech Companies

revenue based financingHunter Walk of Homebrew Ventures has an interesting post about how he doesn’t want to finance reasonable businesses.

After a pitch I’m sometimes left with the feeling “well, that was a perfectly reasonable plan to build a business.” That sentiment always almost results in a pass. Why? Because the reality is I fear a reasonable plan. A perfectly reasonable plan usually represents a low risk path towards a forecastable outcome. An outlandish plan offered by founders with twinkles in their eyes is much more appealing to venture economics where I’m seeking large multiples on an initial investment.

Hunter actually advises to beware of these plans.

And this makes sense for Hunter.  As a VC, reasonable doesn’t work.  You make your money on the black swans.

But what this highlights to me is an opportunity to fund “reasonable” tech companies.  Those companies which are not necessarily the lottery ticket or moon shot type of companies that VCs must target.  These are companies that may have one of the following characteristics:

  • Making money and are growing
  • May be in out of favor geographies
  • May be in less sexy industries
  • Have equity and control conscious founders
  • Have founders not optimizing their day-to-day for exit
  • Have founders playing the long-game

Traditional banks do not understand these companies.  There are no assets to collaterize.

These companies don’t fit VCs as Hunter points out because they are often eminently reasonable.  And at the same time, these companies may not want VCs.

With technology costs continuing to decline and the ability to monetize software and technology speeding up, I think there is an interesting asset class waiting to be built to finance these types of reasonable companies.

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