Tyler is the founder of Earnest Capital. Earnest invests in early stage companies (mostly SaaS but also other models) and have an awesome group of mentors that help the companies we work with succeed. They launched this year and have invested in 11 companies, most of whom went from side hustle to full-time as part of our investment.

Earned Capital invented a new “bootstrapper-friendly” financing structure called a Shared Earnings Agreement (or SEAL for short).

Before that, Tyler took his SaaS product, Storemapper, from side project to full-time income, to profitable distributed business, to exit while traveling as a digital nomad – all in five years. He has also spent some time as a cleantech analyst, COO of an ocean conservation non-profit, and freelance Shopify/Rails developer. Tyler currently works remotely from Rio de Janeiro, Brazil and will be moving to Mexico City next year. He’s a huge backpack nerd so hit him with your day pack, one-bag, travel bag questions and suggestions.

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AMA Transcript

Hey Tyler, for making some time. Where exactly does Earnest fit into an LP’s portfolio? What types of LP’s are OK with non-venture scale returns if you’re funding ‘bootstrappers’?

Good question. To date most of our LPs for our first fund are founders/operators in the bootstrapped who just intuitively get the value of backing these kinds of companies (our mentors are all LPs and collectively make up about ~70% of the fund https://earnestcapital.com/about/).

Among more pure capital allocators (folks just looking for the best return) we are often compared to “venture returns” but you have to look at the portfolio returns for venture funds, not just one example of a company going 100x. The bar to be competitive her is actually super low.

A 3x fund, that returns investors 3 times their capital over 10 years is basically in the top 10% of venture funds, most return 1x, ie just getting your money back, or less (which is kinda :exploding_head: ). So for LPs we make a compelling case that we also have a shot at 3x fund, we just do it with more companies giving us a 3x, 5x or 10x and few failures rather than most investments failing and one single 50x “fund maker”

How far behind are traditional early stage investor LP’s in terms of education and awareness of this new ‘investible market’ opportunity? When does this movement see mass adoption beyond former ‘founders/operators in the bootstrapped who just intuitively get the value’?

Let’s just say this is more than a hunch. We’re reaching a tipping point where the idea of building a bootstrapped/profit-focused tech business is going to break out from its until now still fairly small echo chamber. Bring on the wave.

I think the timing couldn’t be better for the WeWork chaos on the reckoning we’re seeing reverberate from public markets to seed VCs and we’re about to hit an inflection point. Honestly though 90% of the people I show the SEAL to look at it and go “head nodding vigrously yes, makes total sense, everything about the early stage market makes no sense to me and this does”

Thanks for doing this Tyler! What are the non-monetary benefits of investment from Earnest Capital? It seems like a big part of funds like Earnest, TinySeed, etc. is to pay salaries for founders so they can work full-time on their ideas. If those founders already have some runway, would it make sense to still partner with Earnest in some way?

We are definitely happy to do investments that allow founders to go full-time and use some of that cash to basically pay their own bills but about 40% of our investments (only 11 total so still small datasets) are from companies that didn’t actually need the money per se. They had good uses for it of course.

The non-monetary benefits in the way that I think our founders would rank them would be:

1/ working together with other founders to solve problems, not repeat mistakes, bounce ideas off each other and not work in total isolation every day (even if that’s just Slack, Zoom, and a handful or IRL events)

2/ Working directly with our mentor network, all of whom are literally invested in your success. These folks are surprisingly willing to dig in and do everything from make warm introductions to pair program together for an hour.

3/ Structured office hours. This is a mix of our mentor network plus other folks who just want to be helpful. We currently have a Basecamp project with a friend of mine who is a senior machine learning engineer who’s just very happy to answer questions and help founder think through how ML could be applied to their business (I’d estimate the value there at ~$500/hr if you had to pay for consulting)

4/ Shared Resources. I kinda view myself as the head of a little startup union and will happily go and shake down big companies to give Earnest founders priority access, discounts, or white glove treatment from otherwise hard to get ahold of BigCos

Hey @Tyler Tringas, just read up on the SEAL and it looks interesting. I am particularly bullish on these types of financial products such as ISAs. What would you say are the main differences between a SEAL and a ISA?

Thanks! Some folks have noted the parallels and I’m also super interested in seeing if there’s a way we can create an ISA-like structure that works for founders that aren’t yet at the stage where we can invest (for reference https://earnestcapital.com/faq). I think both do a good job of aligning the investors and founders to different outcomes.

The big challenge with ISAs is they have only been really deployed effectively where what you are giving as the “investor” is actually education, which is non-fungible, vs say money. I can’t go an convert a Lambda School education into a speculative bet on a crypto… either I use to build up my own human capital and earn more in a salary or I don’t… money on the other hand can be used for all kinds of things. Which makes structuring very tricky.

Hey Tyler, thanks for doing this AMA! Have all of the Earnest investments so far been through your SEAL? Have you done any more ‘traditional’ investments?

Thx. We’ve done 11 investments. 9 of them we led and were all on a SEAL. Two of them we followed other investors (one was Indie VC and one was Betaworks). In those cases we used their preferred term sheets. So far we have not encountered a situation where we want to lead a deal and the founder wants to too but they don’t want to use a SEAL.

Does your interest in clean energy affect how you think/work as a VC?

Hmm. I’m not sure I have a great answer to that one tbh. The clean energy market is still really hard for startups. You genuinely do need a lot of capital most of the time and the true moonshot venture model should apply here, but VCs in general just have not backed the sector.

My experience in failing to raise enough VC for my first cleantech startup taught me about the dynamic that generates group-think among VCs. If your business model is “I’m going to give you this investment as a lead, then you need 3-5 other firms to co-invest now, then in 18 months you’ll need another firm to lead your Series B and another 3-5 firms to join….” the it’s rational to factor in “how likely is it that other VC firms will also invest in this company?”

So group-think becomes actually pretty rational. Annoying and part of the reason I structured Earnest to focus on opportunities where we don’t need to rely on follow-on investment, so we can make a bet and not give a crap what other investors think.

Tyler, many here may not be as familiar with the Maker movement, could you describe what the typical ‘Maker’ looks like in your mind, the growth of the ‘maker trend’ overall and how these new age entrepreneurs are being left behind/ignored by traditional capital raising avenues?

This is a really tricky one because the “maker” term seems to be really squishy and I try to avoid defining it. I think it ranges from a group of folks just building things for the fun of it who are primarily motivated by ProductHunt upvotes to really talented entrepreneurs cranking out MVP-style products before choosing to focus on one or a portfolio.

I think most of them really never even consider raising capital because they have a sense of what VC is and just intuitive know “that’s not for me”… A huge motivation behind trying to be as transparent as we possibly can is to build trust in a community of founders that is very much skeptical of investors.

Hey Tyler, In which geographical area are you typically investing?

We can invest in US, Canada, EU, Aus, NZ and probably a few other places. In practice we’ve invested in almost all US entities (2 were Stripe Atlas Corps with founders in Chiang Mai and Cape Town) and 1 UK entity.

What are the more global factors you consider for investment outside of founders, product, and existing traction (i.e. market size, industry growth, etc.)?

The biggest difference between my model and traditional VC is I care about retention over growth. I like to see deep understanding of the customer, outrageously low churn (ideally net negative), super high % of conversions through the funnel indicating you have a really good narrow focus and tight product market fit vs a clever growth engine or huge top of funnel or big TAM. (Those matter too but I prioritize the former).

Amazing, quality answers so far Tyler! Where is Earnest in 5 years? Plans for second fund?

Fund 2 starts next year and target is 10x Fund 1. Probably the biggest hurdle for Earnest is can we jump from passionate angels funding most of what we do to institutional capital allocators. Our strategy there is to help build as many funds as we can in the space so it’s obviously a wave that they need to get out in front of, not some weird thing a handful of funds are testing. Great progress on that as I think we’ll see another dozen funds in what you could broadly call our space soon.

In 5 years we have a half a dozen GPs, a mentor network of 500+ and back 50+ companies per year.

Hey there Tyler, what are some benchmarks a bootstrap business needs to meet in order to get funding from Earnest capital. Whats a typical deal? Do you work with interest rates or equity?

My answer to most of these things is “there’s a blog post for that stage: https://earnestcapital.com/faq/

Structure: https://earnestcapital.com/shared-earnings-agreement/

How exactly does Earnest contrast with Einar Vollset’s Tiny Seed?

I always hesitate to characterize other funds’ strategies with these kinds of questions but some obvious ones would be:

• We invest via a Shared Earnings Agreement (https://earnestcapital.com/shared-earnings-agreement/). Tinyseed uses a modified version of equity with a salary cap and dividends https://tinyseed.com/faq

• Tinyseed happens in batches and Earnest accepts applications on a rolling basis with no start or end date.

• I imagine there are considerable differences in the program structure, mentorship, and strategy but I can’t really speak to that in detail having only been on one side of things

Not a question but just read about SEAL and that is fascinating, didn’t know something like that existed! Your mentor list is pretty bad ass too if I must say.

A few weeks ago you mentioned on Twitter that you were considering offering ‘investment’ to founders who were just interested in the Earnest network rather than $$$. Is this something you’re still planning to try? Have any additional info on it you could share? Thanks!

Still working on that. I 100% want to do it but need to make sure it works on the fund administration side first. It looks like it will so more updates on that soon.

What do you believe is the bigger constraint for investors in making customer introductions for their portfolio companies their social capital or their time?

I honestly wouldn’t know. I happily shill relentlessly for our portfolio companies and shamelessly ask our mentors to do that same

Thanks Tyler for a fantastic AMA!