Fed up with the grow-fast-or-perish mantra that has dominated startup communities around the world, two Ottawa entrepreneurs are introducing an alternative funding model to support local “lifestyle businesses” – firms that are growing at a steady clip but won’t yield the exponential returns on investment that venture capital investors are after.
Scott Annan and Guido Giordano, the two men behind the Mercury Grove accelerator that spawned Ottawa success stories such as Fullscript, are launching Manual Ventures at the end of the month.
The fund targets SaaS firms that already have some monthly recurring revenue under their belts, and ties small loans to that figure. Interest is paid back to investors on a quarterly basis based on how quickly the firm is growing, allowing angels to see a return on their investment without a startup necessarily achieving an exit.
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Annan says the alternative model addresses a problem he’s seeing in startup communities around the world, Ottawa included: there are a lot of startups out there today, and VCs are only putting money into the ones that are likely to show an exponential return.
As a result, companies with hyper growth that are likely to be acquired or go public are seeing plenty of cash come their way. Conversely, the firms that are growing but taking many years to scale up – Annan says this is often the case for Canadian companies – are being tossed aside. Firms with a stable two dozen employees, creating jobs and contributing to the economy, then, are second-class in this world, and that mindset pervades our approach to starting businesses.
“We’re pushing more and more people into entrepreneurship. Every college and university has entrepreneurship programs, we’re trying to get people to start more businesses, but if the only mechanism for you to be successful is to try to be Facebook… then our measurement for success is, I think, pretty bad,” Annan tells Techopia.
A new model
Here’s how Manual Ventures works: Both funding and interest payments are tied to MRR. A company can receive a convertible loan from the fund valued as high as five times its MRR. Based on the MRR multiple chosen for the loan, a startup will pay the money back at a higher or lower percentage of the previous month’s sales.
So if my startup – let’s call it Craigopia – borrows at a multiple of 4x MRR, my repayments are 6.5 per cent of the revenue Craigopia brought in last month. If 5x, I’d be making payments of eight per cent, and lower if I’d taken less.
“If the only mechanism for you to be successful is to try to be Facebook … then our measurement for success is, I think, pretty bad.”
The total amount payable is dependent on how long it takes to pay back the initial funding. On the anniversary of the loan, the total increases, incentivizing fast growth but not making it a requirement.
So if Craigopia repays the funding after just two years, the company will only have needed to return 160 per cent of the initial loan. If it takes three years, the total payback is 170 per cent, and so on.
“It basically works out that the faster you grow, the faster you pay it back,” Annan says.
A different lifestyle
What are the advantages to this system? Well, angel investors no longer need to foresee exponential growth and an obvious exit to invest in a startup and see a return. Annan says angels make investments not because they’re hoping to get rich – there are better ways to do that than getting involved in startups, he adds – but because they earnestly want to support the community that has helped them.
“It’s more of a passion than an investment.”
For startups themselves, they can maintain cash flow without the pressure to meet the demands of the VC environment. Annan says the expectations that come with venture capital often drive entrepreneurs to depression, anxiety and poor health, and most startups are not built for that kind of growth.
“This model is not the best for 99 per cent of companies,” he says.
Changing that mindset – whereby founders see raising huge VC rounds as a “badge of honour” – will be Manual Ventures’ biggest obstacle, Annan says.
“The term ‘lifestyle business’ is considered derogatory when it comes to startups. I think lifestyle businesses are amazing, and if it means you are creating a great lifestyle for founders, for employees, for customers and investors, that really should be our goal in society.”
Manual Ventures will begin in Ottawa with a rolling fund of between $300,000 and $500,000 and just a few startups at launch, but Annan would like to see the model eventually spread across Canada.
