Revenue Participation Financing for Startups and Growing Small Businesses
Since I first discovered revenue-based (aka Revenue Royalty Certificates) back in the mid-1980s (yes, 1980s), it's surprising to hear people now talking about it as if it was something new. Here's just the latest piece thrown onto the pile.
"Royalty Financing": The New, New Thing in Venture Capital
Basically, the idea is this: Someone lends you money (in this case, $100,000), but instead of a fixed interest rate, you agree to pay the lender a percentage of your gross sales (not net profits) each month -- 2 percent to 6 percent is customary. The royalty payments may continue for a specified time period (generally three to five years) or until the lender has received all of their money back plus a 20 percent return on their investment (in this case, $120,000 in total payout). Once the time period expires or the desired return has been achieved, the loan is considered fully paid, and you stop making the royalty payments each month. (Source)
So where do you find royalty investors? A number of firms are setting up venture funds built entirely around the royalty financing concept. Among those are Arctaris Capital Partners, LP in Waltham, Mass. (www.arctaris.com); Cypress Growth Capital LLC in Dallas (www.cypressgrowthcapital.com); Revenue Loan LLC in Seattle (www.revenueloan.com); and Noventi Ventures in Menlo Park, Calif. (www.noventivc.com).
Before you get overly-excited understand that these firms only lend to companies with reliable existing revenues not startups. However, it is possible if you have a strong team to find individuals to back you using Revenue Royalty Certificates. In the case of startups, there is normally a moratorium of 6 to 12 months on payments to allow the company time to achieve traction. To find out how you can pitch an RRC to angel investors and set one up, click here: How Deal-makers Close Angel Investors.
Just yesterday I announced the realease of version 3.0 of How Deal-makers Close Investors which explains how to use revenue royalty finnacing and today the Wall Street Journal publishes a piece on a company that used them to raise capital.
Revenue-based financing is becoming the hot new way to provide capital to companies. I'm proud to be the first person to ever provide entrepreneurs with a tool for raising money with this type of deal structure.
I have now just released version 3.0 of How Deal-makers Close Investors. It shows you how to approach capital raising like a deal-maker as well as how to utilize revenue-based finance with a Revenue Royalty Certificate. There is nothing sadder than someone with nothing but a business plan and Powerpoint who can't understand why people aren't throwing money at their venture. Don't be one of these time wasters.
Here's more information on how to be successful at raising capital from private investors and business with revenue-based financing.
Have you experienced the frustration of dealing with a self-proclaimed "interested" angel investor who you just cannot close, no matter how hard you try or how many months go by? If you have, read on.
After writing last month about angel investment "Deal-Killers," I received a slew of emails and calls from frustrated and angry entrepreneurs unable to close deals with angel investors. Many of them had invested more than a few months talking to investors who had repeatedly expressed a commitment to invest. Yet every attempt at closing the deal had ended in frustration. Some of the angel investors finally expressed a reluctance to invest at this time while others have just dragged their heels and avoided the subject. Either way, the result is the same. The frustrated entrepreneur can't get the money he or she desperately needs for their company.
As pointed out in the previous post, the resistance often stems from the angel investor's uncertainty over how they will get their money back plus any profit that may have accrued. To be honest, their fears are warranted. Minority shareholders in a small private company (i.e., a chronically cash-strapped one) are at the mercy of the majority who can easily find a hundred better uses for limited capital than buying out investors--especially the passive variety. Both sides always have a convincing rationale. The minority investor feels that it's time he was finally rewarded for taking a gamble on the company at an early stage. Meanwhile the majority are convinced that if they just hold onto that money for another six or twelve months, it will allow the company to hit a new plateau which will insure its long-term success.
Who is right? Probably both sides to a degree.
With this problem in mind, I developed a tool for raising money that addresses the concerns that all angel investors have about investing. Indeed, it tackles them head on. In a nutshell, How Deal-makers Close Investors demolishes the big deal-killers:
-The inability of investor and founder to bridge the valuation gap.
-The investor uncertainty over the chances of a profitable liquidity event occuring.
-The investorss fears that majority shareholders will run roughshod over him.
Closing Angel Investors With Revenue Royalty Certificates (RRC)
Revenue-based financing is finally emerging from the shadows and I have been one of its pioneers. This product consists of a book in pdf and an accompanying spreadsheet in Excel. Contained within the package is all the knowledge you need to be able to utilize this innovative financing instrument to close the deal with angel investors. The instrument, called a Revenue Royalty Certificate (RRC) or Revenue Participation Certificate, is an off balance sheet loan which clearly demonstrates to the investor how and when they will recover both their principal and profit while also potentially receiving an equity stake in the company.
However, the RRC is not just about benefits for the investor. This instruments also offers substantial benefits to the entrepreneur. I am referring to freedom and autonomy here. With an RRC, the investor is unlikely to interfere with your management style as long as the payments are being made on time. The RRC is a win-win for both parties.
There are a few more bonus lessons contained within which reveal how sophisticated financiers select their target investors and do deals.
Those Deal-Killing Answers to Important Investor Questions
Every month, like clockwork, I receive three to five emails from exasperated entrepreneurs who can't understand why the angel investor, or investors, they were talking to backed out of the deal, despite giving it their thumbs-up. In most cases, the entrepreneur invested several months in answering the investor's questions, editing their business plan to incorporate feedback provided by the investor, and generally trying to build a relationship with them based on trust.
Then just when the entrepreneur was expecting the angel investor to finally pull out his checkbook, the latter either said, "I'm going to pass on this," or they simply stopped returning phone calls and replying to emails.
This leaves a frustrated entrepreneur asking, "What happened? What went wrong?"
While I can't guarantee the true explanation of why your angel investor got cold feet at the end, I can offer you a pretty good guess based on two decades of experience.
No matter how much an investor likes your deal, at some point he or she will start asking themselves, "So, how will I get my money back out of this deal?"
Now here's where the deal-killer answers come into the picture. Every book I have ever read on raising money and writing business plans advises you to answer the "exit question" with this standard line:
"Eventually we will either IPO or be acquired!"
Note my italicization of the word "eventually" here. It's to emphasize just how incredibly vague and meaningless this answer really is to an investor.
When an investor hears these words, the natural response is to get cold feet. It's really no different from hearing your unemployed brother-in-law say, "I need you to give me $10,000 and I promise to pay it back as soon as I win the lottery."
I have sat on both sides of the desk over the years. Initially, I was the entrepreneur using that pat answer and turning off potential investors. Later on, I was the investor whose eyes would glaze over every time I heard it from a money-seeker.
Savvy entrepreneurs structure their financing deals so that investors can begin pulling out their principal quickly. This typically involves a plan for monthly installments which pay off the investment principal over a fixed term much like a bank loan. If you can show an investor that you treat the return of their money as one of your top two priorities, they will be more likely to invest. (The other priority, obviously, is to make the company a success.)
No one wants to hear vague Wimpy-style promises about anything--especially when it comes to their money.