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Launching a tech startup without any early-stage capital is extremely difficult, emphasizes Tyler Tringas, speaking from his experience as a founder in that very position. Tyler Tringas, founder of Earnest Capital, is working on a new type of Venture Capital firm focused on developing a founder-friendly method of financing made specifically for bootstrappers.
Earnest has an ambitious yet clear vision: to find and develop a new default way to fund passionate entrepreneurs. Tringas’ has been a member of the bootstrapping ecosystem for years — founding his own startup and researching the space heavily — and aims to change the way that startups pursue their early-stage fundraising.
The space for bootstrapping for startups is currently small, but growing. There are currently a few investors such as TinySeed, Indie.vc, and Lighter Capital pursuing this space. Earnest Capital has differentiated themselves from these investors through their culture of experimentation and exploration of developing new fundraising standards which can be applied to founders who are looking to bootstrap their companies. In this interview, Tringas reveals his experience as a bootstrapper and outlines how he is working towards achieving Earnest’s vision every day.
Disrupting startup fundraising
Tringas founded Earnest Capital after identifying an opportunity for new forms of startup financing for early-to-mid stage companies who are looking to scale. Tringas has worked as both a founder and a bootstrapper, and experienced first-hand the pain associated with raising capital as an early stage entrepreneur. Further, Tringas also identified the inflexibility with the venture capital and angel investing scene — terms are very specifically orientated based on an expectation that a company will exit — and is looking to disrupt the status quo in this regard.
A new default funding model
Tringas has been passionate about developing a new default funding model for technology companies for quite some time. Prior to founding Earnest Capital, Tringas spent several years attempting to raise venture capital money for a CleanTech startup at what he described as “exactly the wrong time”. Tringas made this assertion because venture capital operates on a model where only the “hottest” startups will be funded, and the rest will be ignored by traditional investors. Venture Capital (VC) operates on a system of herd mechanics where when one VC has identified a hot deal in a trending sector, other VCs almost immediately try to get in on the deal. However, if you are not in one of the sectors that VCs are interested in and believe are “hot” right now, raising venture capital is incredibly difficult.
Tringas was so passionate about his startup that he decided to use his credit cards to fund his growth. Eventually, Tringas pivoted to a bootstrapped Software-as-a-Service (SaaS) business that eventually became quite successful due to the pressures associated with being in a market which venture capitalists do not consider to be “hot”. This funding source quickly dried up and Tringas ended up in $60k of debt, which created feelings of stress and constrained his future actions. By having access to limited funds, Tringas could not explore every avenue he was passionate about, which ultimately affected the core decisions he made whilst at the helm of his startup.
This is not an uncommon problem, however. Tringas highlighted that most founders have issues with money in their earliest stages and have to rely on incurring personal debt (because taking out a loan for a tech startup with very little track record is very difficult) or money from family members who believe in them to finance their operations. Incurring personal debt — like it did for Tringas — can be a major source of stress for founders, which coupled with the stress associated with building a startup, can become quickly unmanageable. Raising money from friends and family, while a good way to raise initial capital, can limit the options that a founder has and can also cause a fear of losing their family’s money, which can cause them to make conservative decisions in the name of preserving capital, rather than making the right decisions to grow the business.
The venture capital model is fundamentally incompatible with the core aims of founders who want to bootstrap their businesses. The venture capital model operates on the fact that they can only earn a return if a startup exits — where the startup has an Initial Public Offering, or is acquired. Therefore, VCs often ask that founders make decisions based on what would be best for the growth of the business to help them exit in the short-to-mid-term, rather than what would be best for the startup in the long-term. This is because VCs can only raise money from Limited Partners if they can demonstrate high returns, and they can only achieve those high returns if companies exit at a high valuation. Many founders do not want to “chase the unicorn”, metaphorically speaking, and would rather build a sustainable business than a high-intensity startup that could become a billion dollar company in the future, which involves a high degree of pressure and intense fundraising.
Tringas’ aim with Earnest Capital is to provide a way in which founders can build real and sustainable business and raise the early-stage capital they need in order to succeed — without having to rely on traditional venture capital or other methods. Earnest is crafting a unique approach to startup fundraising through pioneering a new model of investing in bootstrappers, and building a community of founders who are aligned with the goals of founders to build sustainable businesses. Tringas believes that all talented people who want to start a company should be able to do so, without having to suffer from the constraints of strict terms which are commonly offered in venture capital deals. Tringas and Earnest are building a founder-first approach to investing, based on their specific needs as bootstrappers, rather than prioritizing profitability.
Earnest’s investment structure
Earnest Capital was founded on the belief that there should be another option for people who are building startups which do not integrate with the traditional VC model. Earnest is investing in passionate and dedicated early-stage founders and providing them with the capital they need to grow their business the way they see fit, and have developed a unique investment thesis to help them showcase their value to startups who may be interested in seeking funding.
When building Earnest’s investment thesis, Tringas identified two basic challenges that would need to be resolve. The first challenge was to prove that an alternative model to venture capital can exist without having to resort to the power law of distribution — a concept which forms the basis of venture capital economics. In essence, the power law states that around 90% of an investor’s portfolio companies will fail, and around 5% will return 1-2x the original investment. The top 5% need to generate impressive and outsized returns to ensure that the fund can cover all of the losses from the unsuccessful companies, while still yielding a favorable return for founders. Tringas had an interesting take on the power law, and stated that raising VC actually makes a company both more likely to grow really fast, and much more likely to fail — which disputes the “hustle hard and grow quickly” culture which has been developed among a few startups.
The second component of building an investment firm for bootstrappers was that they needed to create an investing model that aligned with the desires of founders in their portfolio. Most investing structures dictate that founders should reinvest every dollar back into the business because they will earn a large amount of money when the business goes public or is acquired. This means that founders can often struggle to manage their personal finances and make ends meet while running their startup, and is an unnecessary part of the founder experience, according to Tringas. In this regard, Tringas asked:
“What if you don’t want to be forced to sell the business? What if you want to build a very profitable business and pay yourselves (as the founders) substantial profits.”
He then went on to address how the traditional venture model puts founders under an untenable amount of stress and forces them to make decisions based on the profitability prospects of the business, rather than what would help ensure that it can sustain over time. Tringas highlighted that most of the current investment structures available today such as taking preferred equity, or raising through a Simple Agreement for Future Equity (SAFE), popularized by startup accelerator Y Combinator, are misaligned with the goal of building a healthy and profitable business. Tyler was not interested in working from the inside to change these models — so instead he decided to build his own approach to funding startups.
Earnest’s structure has been developed in co-operation with the bootstrapping and maker community to ensure that their offerings align with the exact needs of the founders that they serve. They have made several changes to their structure and their proprietary fundraising tool, the Shared Earnings Agreement, so that they can better serve founders and offer terms which integrate with their goals for their startup.
One of the most important lessons that Tringas has learned from his interactions with the bootstrapping community at large is that founders ultimately don’t know the direction their startup will take at the earliest stages — it is difficult to evaluate whether they want to become profitable, grow to become a “unicorn”, etc. Thus, Tringas believes that founders should be nurtured and given all of the support and freedom they need to make an informed decision that will ultimately affect the future direction of their startup.
The Shared Earnings Agreement
Earnest are the pioneers of a new investment vehicle – the Shared Earnings Agreement (SEA). The basic principle behind the SEA (or the SEAL, a more “friendly” name for the security coined by Tringas) was to establish a standard investment structure that would offer both founder-friendly and investor-friendly terms. This model was based on the premise that there are so many founders out there who could make a real difference, but cannot raise enough capital to build their dream startup because of venture capital’s restrictive economics.
Tringas was unsatisfied with the current offerings such as the Simple Agreement for Future Equity (SAFE) developed by Y Combinator, and convertible notes, and believed that these models were incompatible with founders who wanted to bootstrap their businesses. Through the SEA, Earnest makes an upfront investment at the early-stage of businesses, and agree on a return cap which is a multiple of the initial investment. This return cap limits the return that Earnest can make and ensures that they can earn a return without taking equity in the startup, which is counterproductive for founders who have no intention of “chasing the unicorn”, or developing a $1B startup with the end goal of going public.
Earnest invests upfront capital at early stages of a business, and will agree on a return cap which is a multiple of the initial investment they have made. In exchange for their investment, founders will return to Earnest “founder earnings”, which is a portion of the amount of money taken home by founders. Earnest does not take equity, unlike economic arrangements like the SAFE, and also do not take any board seats from the founder. Earnest believes in leaving founders to do what they do best, rather than forcing them into making decisions based on profit maximization and achieving high levels of growth.
The SEA aligns the incentives of both the founder and Earnest Capital and ensures that founders have the freedom they need to develop a sustainable and profitable business. Earnest only gets paid if the company succeeds. If Earnest helps guide a company to success and the founders build a sustainable business, then Earnest will receive a return based on “founder earnings”. If the business does not succeed and Earnest does not help the founders build their business, the founder does not need to pay anything. In venture capital, investors can force an acquisition to earn a return if a business is not doing well so that the investors can recover some of their initial investment. In addition, venture investors can sometimes earn large returns and founders are left with less money after they have taken their reserved amount, which was a scenario that Tringas wanted to avoid with Earnest.
The most elegant aspect of the Shared Earnings Agreement is that it provides founders with a large amount of freedom. The SEA allows founders to explore the prospects of building a bootstrapped, sustainable business by providing them with the capital they need to do so. However, if the founders decide that they would rather raise traditional venture capital, the SEA includes special provisions which will allow them to take an equity stake in the business upon the fundraising round closing. Therefore, founders can choose their own future and there is no pressure nor an expectation to raise more money in the future.
There is no pressure to be acquired or IPO in the end because Earnest can earn a return in any scenario, which can help take away some stress from founders and allow them to build the business the way they see fit. At the earliest stages of a startup, according to Tyler, founders don’t know what direction they want to take their company. They may want to try to become a unicorn, or they may instead want to make a sustainable and profitable business. The SEA gives founders the maximum amount of options available and provides clear terms that ensures that founders understand the nature of Earnest’s investment and how they will earn a return.
Further, the Shared Earnings Agreement consists of clear and simple terms that both align the incentives of Earnest and the founder, as aforementioned, and takes into account the fact that founders have their own lives outside of their business. Based on his experience as a founder, Tringas knows that founders and employees have their own lives and families to deal with, in addition to their obligations towards the startup. Tringas believes that by providing founder-friendly terms that eliminate the need to develop a high-growth startup that is positioned to become a “unicorn”, founders are not exposed to as much stress and are less likely to burn out, which increases the chance that Earnest can earn a return.
Earnest’s approach to“deal flow”
“Deal flow” refers to the ways in which an investor can get access to the best deals which show potential for growth in the future. Tringas does not like using the term “deal flow” because the Earnest Capital program is all about building relationships with people — founders — not companies as an entity. Aside from the unique characterization of the term, Tringas has developed a community-first approach which allows them to discover passionate makers and builders who would benefit from their advice.
Tringas highlighted the fact that Earnest is interested in developing connections with founders before they are even interested in raising capital. This strategy is employed because by providing support to founders before they need to raise capital, Earnest can showcase their value-add services and stay in the mind of people when they are ready to raise money. In addition, Tringas believes that this strategy allows Earnest to give back to the community which they rely on to succeed, and to provide in-depth advice to the next generation of founders, which is a liberating experience.
In addition to their community efforts inside existing groups, Earnest Capital recently launched Earnest Radar, a service which allows founders to “get on the radar” of Earnest without applying to raise capital. The aim of Radar is to help Earnest get prospective leads and better understand the maker community at large, which helps guide their decision-making process regarding their fund’s structure. Radar is currently in an experimental stage, and Tringas and his teammate, Ben Tossell, are using the platform to host interviews with founders and office hours with mentors, with the ultimate goal of cultivating a strong community of founders who may want to raise money in the future.
Mentorship and value-add
Mentorship is at the heart of Earnest Capital, according to Tringas, who believes that for founders, having a strong mentor relationship would be a huge boost to their trajectory and help them achieve their potential. Therefore, Earnest has developed a strong internal mentorship program that provides portfolio companies access to a community of passionate and accomplished individuals who can help accelerate their success. Earnest refers to these people as “Earnest Advisors”, who are tasked with helping founders on their path to developing a successful company, based on their specific skills. Earnest’s hands-on mentorship allows founders to get feedback on their progress, establish a strategy based on the insights of experts, and work to break down and address any challenges which they are facing at the time.
Tringas highlighted the importance of the fact that every mentor has “skin in the game”, and that they are literally invested in the long-term success of their portfolio companies. Earnest’s core mentors have a financial stake in their fund, which means that their advisors are more likely to provide honest and constructive advice as their thoughts will have a direct impact on the future of the company. According to Tringas, Earnest has hand-selected mentors who have demonstrated deep subject-matter knowledge and a strong passion to help founders succeed. Earnest invests a significant amount of time in cultivating strong relationships between mentors and mentees, because it is a critical part of their success.
The Earnest Advisor program includes names ranging from Jason Fried, Founder and CEO of Basecamp, to Ben Tossell, head of platform at Earnest Capital, and former Community Lead at Product Hunt. These advisors are skilled in a range of different areas such as business development and community management, providing portfolio founders with access to a strong network of people who can provide them with the advice they need to grow and scale. The aim of the mentorship program is to ensure that founders can speak to someone who can provide honest advice at any moment to founders, allowing them to avoid costly mistakes, and get back on track.
Tringas and Earnest have developed the mentorship based on the underlying fact that there is no set structure. Founders will be given access to as many options and resources as Earnest can, and are given the platform they need to request help from experts who can help guide their startup to success. One consideration which Earnest has also taken into account is how they can develop a community that allows for thoughtful conversations to be facilitated remotely. Earnest invests in founders around the world, and Tringas and Ben are working hard to develop a set of resources which ensure that it is as easy as possible for founders to get the advice they need from their current location.
Looking into the future
Earnest has successfully positioned themselves as a viable alternative to venture capital for founders who want to build healthy and sustainable businesses, without the expectation of raising further capital in the future. Tringas has worked hard to cultivate a founder-first culture at Earnest and has developed a strong fundraising model that allows founders to do what they do best, without having to worry about sourcing capital, which was the main reason why Tringas’ first startup failed.
Thus far, Earnest Capital has announced two investments publicly — HostiFi and Callingly — and have plans to invest in many more companies in the near future. These two investments caused Tyler to realize that the demand for a funding model for makers and bootstrappers is much higher than what he was prepared for. There is a large amount of ambitious founders around the world who are working on innovative and exiting projects, Tringas said, adding that there is most certainly room to grow based on the growing size of this new investing space.
As Earnest Capital continues to grow and invest in new bootstrapped founders, Tringas wants to move away from the perception that they are developing an alternative to venture capital. Earnest wants to find and become the new default way to fund entrepreneurs who are working on an interesting project and need capital to take it to the next level and turn it into a profitable and sustainable business. Indeed, an ambitious goal, but achievable based on the strong progress demonstrated by Earnest over the last few months.
Tringas sees Earnest moving away from the venture fund model which backs a small amount of startups, and hopes to develop a new system which essentially acts as a middle-ground between a bank which makes small business loans and a venture capital fund. This is because Tringas is focused on increasing the accessibility of capital to the point more than the traditional fund model could facilitate, and believes that the best way for the fund to invest in more companies would be to further deviate from the traditional VC structure.
“There are so many new businesses out there that are building something great and don’t have a partner that can provide capital, mentorship, and resources.”
Earnest are focused on making even more investments into passionate, early-stage founders, and are continuously making changes to their model based on feedback from the maker and bootstrapper community. Tringas sees strong potential in building a new default method of raising capital for founders, and believes that a community-first approach will help them differentiate themselves from other companies as the space grows. In the long-term Tringas wants to back hundreds, if not thousands of companies per year through Earnest Capital, and is dedicated to achieving this goal.
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