You may have been hearing a lot of buzz recently around ‘alternative’ investment structures in private investing; this has been a particularly hot topic among angel investors. This blog post departs from our usual musings on how to efficiently and effectively use syndicates (aka SPVs or single purpose vehicles) to discuss our latest investment adventure: the launch of a revenue-based fund.
Investors are experimenting with a number of innovative investment structures including revenue/royalty/profit sharing, equity buyback, and performance-based equity, to name just a few. As they are sometimes used in place of traditional VC or angel equity models, these structures are often referred to as ‘alternative capital’. From our perspective, this is a misnomer: these structures are not a replacement for other funding mechanisms but are often highly complementary.
Revenue-based financing or investing (RBF or RBI) is one form of funding relationship wherein investors provide funds in return for payments based on a percentage of ongoing gross revenues. Monthly payments continue until the initial capital amount plus a multiple is repaid.
For example, an RBF investor might invest $100,000 in a company in exchange for a contractual right to 5% of the cash receipts from sales until the investor has received back $250,000. Unlike a traditional loan where the payment and interest rates are fixed, with RBF the payments vary depending upon sales, and the effective interest rate can only be determined when the entire amount has been paid.
RBF can be complementary to both bank funding and equity capital. Many think of RBF as an interim source of financing when a company isn’t quite ready for bank lending or desires to augment its equity (angel or venture) capital. The main differences between these funding types and RBF is that RBF investors generally do not require collateral and/or personal guarantees, do not take long-term ownership (equity) positions and do not require an exit to return their investment.
We think such financing can be beneficial to both companies and investors:
For early-stage companies that are beginning to scale, they receive funds that can fuel growth when traditional bank financing may not yet be available on acceptable terms, and while retaining the option to sell equity. They also get a variable payment based upon their sales performance.
For the investors, they get attractive returns in cash on a regular basis. While the investors do give up the opportunity for large exit returns, they don’t have to wait years and accept the substantial risk of loss common to venture investing.
Denise Dunlap and Kevin Learned, the partners in Loon Creek Capital Group recently created a new partnership with Molly Otter to create and manage this new type of fund. Molly has twenty years of private equity experience in debt and revenue-based financing. The fund, known as Sage Growth Capital, is now open for business and considering investments.
Initially we will invest in Idaho and the surrounding states. If you know of a company that might find this type of capital attractive, or you would like to know more yourself, visit https://www.sagegrowthcapital.com/
Loon Creek specializes in syndicate formation and management services for private investors (and for the companies in which they invest). You can learn more about our services on our website.