RevenueLoan Blog

July 20, 2011

On Personal Guarantees

Filed under: educational,investment philosophy — rlucas @ 4:46 pm

I. No Free Lunch.

“Unsecured Business Loans!”  “No Personal Guarantees!”  “Free Beer and Hot Girls!!”

Yeah, right.

Lots of folks are clearly interested in the question, “how can I get financing for my business without taking on a huge personal risk of ruin?”  And, just like any time there’s a lot of folks interested and highly motivated, in a complicated problem involving money, there’s a huge shitstorm of shady mofos ready to please — or so they claim.

The fact is: small businesses are hugely risky, and nobody is going to take that risk fully (or even mostly) away from the vast majority of entrepreneurs.  Up until a business has $20 M (or more) in revenue, it might as well be viewed as just an extension of the entrepreneur’s personal credit.

So, you can pretty much count out anyone who promises to give you an unsecured, unguaranteed business loan (unless your company happens to be rated by Moody’s and can issue your own bonds).

(Yeah, VC backed companies are different — but there have also been fewer than 30,000 VC backed companies ever in the history of the universe — vs. the 30,000,000 businesses currently in the US.)

II. No Free Lunch … Except for the banksters.

This is true for banks, credit card issuers, and specialty financiers all the same.  Seriously: go ask for an SBA loan … personal guarantee.  Try to get a credit card in the name of your business … no problem, with your own FICO score and personal guarantee.  Asset backed loan or merchant advance?  Betcha dollars to donuts, personal guarantee.

(In fact, it’s kind of a farce that these products hold themselves out as “business finance,” so as to avoid the laws and rules of usury and consumer protection.  After all — a business loan with a personal guarantee is kind of a mirror reflection of a consumer loan with a business as co-signer.)

So, here we are at Lighter Capital (nee RevenueLoan) with a quandary.  We kind of hate the idea of a personal guarantee on our RevenueLoans.  We find it farcical and repugnant that others advertise themselves as business financiers but fully expect that many of their businesses will default, and they’ll wind up going after ex-entrepreneurs who’ve schlepped back into day jobs to scrape back pennies from their paychecks.  We don’t want to do that.

III. Never say never?

But we’ve run into a few situations, especially in the last several weeks, where the word “… guarantee …” has cautiously, and none too enthusiastically, crossed our lips in conversations with entrepreneurs.  This has caused a few awkward moments, where a concerned and ticked-off entrepreneur wonders if we are trying to bait-and-switch him, and we wonder what we did to be so offensive.

So let me get this off my chest right here: We at RevenueLoan don’t /always/ ask for personal guarantees.  But we don’t /never/ ask for any form of guarantee.  Sometimes, we think a certain form of “Working Guarantee,” perhaps tweaked or limited, is the right thing to do for all concerned.  Here’s why.

Oftentimes, we want to find a way to fund a company, but we feel stuck around the “intellectual property [IP] collateral question.”  You see, the main reason we ask for a security interest in the IP of our customers’ companies is NOT because we figure we can sell the IP in a pinch and get our money back.  Instead, the IP is our guarantee of “stickwithitness.”

IV. Sticking with the business, NOT sticking it to the entrepreneur.

If you’ve got the recipe for the world’s best chocolate chip cookie (hi Michael!) or the world’s smoothest — and only — goat milk frozen yogurt (hi Laura!), then we trust you are motivated to USE that recipe.  And so we take a security interest in the recipe — not because we want to “repossess” the recipe, but because it’s what binds us together.  Keep using the recipe, please, and keep paying us our agreed % of revenue.  As long as we’ve both done the right math at the beginning, this should be totally doable and win-win.

However, if the secret to your business success is not in a recipe or a formula, nor in a patent or trademark or other form of “IP” that we can use as security — if it’s your personal Rolodex and know-how — then we’re in a bit of a bind.  Let’s say we’re promised 5% of Famous Joe’s fortune-telling practice revenue as repayment, with no security whatsoever (no IP).  Famous Joe uses our funds to market his services, etc., and he keeps 95% of the revenue he generates.  But if Famous Joe decides to quit his business, move across the street, and reopen his practice under a new company name, he’ll still be Famous Joe and keep his customers — but he’ll now keep 100% of the revenue he generates.

Needless to say, this is a troubling scenario for those of us who make the investments.  Not because we don’t trust Famous Joe to do the right thing — but hey, this is business, and we never like to set up scenarios that give incentive to do the wrong thing.

V. Names have been changed to protect the awesome.

So, if you’re still sticking with me, you can understand the role that an IP security interest plays, even if it doesn’t act like traditional collateral (repo and sell it).  But what about those cases where a company doesn’t have any IP to speak of?

(Note: this doesn’t mean the company isn’t “intellectual” or that it doesn’t have any value.  It just means that the IP isn’t in an external, recognizable, legally demarcated form like patents, trademarks, copyrights on software, etc.)

This could be know-how, relationships, golden Rolodex — let’s take for example a very savvy event promoter … let’s call him Fabio.  He may know the marketing techniques to get thousands of people to show up, the right people to get venues and attractions set up at cities around the country, and the skills to run the event smoothly, safely, and profitably.  Maybe he’s got a revenue track record in a few cities and wants to go nationally, good gross margins, and a good growth rate — but no hope of getting banks or VCs interested — in other words, Fabio’s a great RevenueLoan candidate.  But: without any IP, how are we to solve our “stickwithitness” structure problem?

Right now, we think the answer is this: we ask for a guarantee from the entrepreneur that he will stay working on the business; that he won’t throw in the towel early; and that he won’t go work for (or start) a competitor for a while if, for whatever reason, things go pear-shaped.  And since this is a money-based game we’re playing, we ask for the entrepreneur to stand behind that with, yes, money he personally guarantees.

VI. More than (just) words.

We call this a “Working Guarantee,” to differentiate it from a straight up, unconditional, “personal guarantee.”  But it’s not just “spin” B.S. on our part.

We typically will put some kind of limitation on the guarantee, that basically suggests that so long as the entrepreneur is in good faith putting in full time on the business, and the business is paying its RevenueLoan percentage (even if it’s only 5% of $1.00 a month), we will not come after him for any money personally.

Also, we are open to tweaking the amount that is covered by the working guarantee — or agreeing to milestones where that amount is reduced or eliminated.

VII. Complicated?

So now that we’ve just shown you all our negotiating cards … are we just plain nuts?  Is this too complicated and weird?

Hardly.  We think this is part of a natural evolution of business finance.  Keep in mind that our entire business financing infrastructure was build to help joint-stock corporations purchase looms and waterwheels and drill presses and big brick factories.  (OK, in fairness, the VC part of that infrastructure was basically created in the ’80s to fund Genentech, Max Headroom, and Starbucks.  It just happened to work for fiber-optic switches and enterprise software, too.)

So, when you see a bank using the same old forms from 1899, and just filling in the principal, interest, and description of collateral … it’s not really their fault.  It’s worked for a hundred years.  They don’t want to change, even if they could.

But as our economy evolves (for better or worse) into a post-industrial, knowledge-based system where small teams and individuals can survive and thrive on non-asset-intensive businesses … blah blah blah.  You get the picture.

New times call for new measures.  And we get to reinvent those measures, with help from our customers.  And since we have this new fancy thing called “COMPUTERS,” and we don’t have to rely on mimeographing a form that’s been around for a century, we’re not scared.  (In fact, we love creating product-market fit that resonates for our customers.  Nothing psyches us up more.)

VIII. Not for everyone, but a tool in the toolbox.

In sum, it remains to be seen whether folks like you, gentle reader, will agree with our point of view on Working Guarantees.  We might be full of shit on this one.  (We occasionally are.)

But if it works out, and if we can strike the right balance, we feel like this could be huge — a way to make a whole new category of businesses possible to finance.  In fact, we daresay that the Working Guarantee could usher in an era of Jeffersonian smallholding knowledge-farmers, prompting a new wave of entrepreneurialism, raising educational attainment rates, and thereby single-handedly conquering the recession and saving the economy.  But then we daresay a lot of stuff.

But long story short — please know that we promise not to bait-and-switch you, only to ask for a Working Guarantee if we think it’s the only way to get a deal done, and to be reasonable and flexible about how we do go about it.


June 10, 2011

Why Banks Suck Part 1: Overdraft Fees

Filed under: Uncategorized — rsbelcher @ 5:57 pm

Financial intermediaries, like banks, exist because of a market need. Pure economics. Someone a long time ago, saw a need in the marketplace for a financial intermediary, hung a shingle, and began the first savings and loan institution.

The market need that a bank fills is two-fold: to reduce information costs and to reduce transaction costs.

A bank reduces information costs by:
– reducing the search cost by bringing borrowers and savers together,
– conducting independent valuations to reduce adverse selection (aka price discovery), and
– monitoring

A bank reduces transaction costs by:
– providing denomination intermediation ( apparently doesn’t),
– providing maturity intermediation,
– providing a payments system
– diversifying risk
– hedging risk
– providing liquidity

By providing these services, banks lower the interest rate that borrowers pay and raise the interest rate that savers make. The bank makes money by setting these two rates slightly apart, thus “banking” the spread[1].

Now please tell me, where on that list is: “Charge usurious fees”?
We here at RevenueLoan work with small businesses who are all kind enough to show us their dirty laundry, giving us access to their bank statements. I am floored by the frequency (sometimes every couple of days!) and high cost ($75, $135 even $175!) of bank overdraft fees.

It is well documented that over the last 30 years Wall St has lured the best and brightest away from Main St by paying them huge bonuses for inventing new ways to charge fees to savers and borrowers and to increase the velocity of transactions to almost continuous.

Instead of workers innovating in the fields of medicine, education, manufacturing, design or engineering, our society has rewarded them for strangling those very industries they should be working for by adding complexity on top of an industry that at its foundation is a very simple one. The saying is about brain surgery and rocket science, not banking.
RevenueLoan is different. Wall Street got greedy and over-levered the country into the worst credit crisis we have every experienced.

We want to repower America’s small businesses and offer them credit. We want to do it a different way. Without all the fees.
For more information on financial markets in theory and in practice, RevenueLoan, why banks suck, and denomination intermediation (just fun to say), feel free to contact me.
Rob Belcher

[1] Dr. Alan Hess. “Effects of Information and Transaction Costs on a Financial Market”. 2000.

May 31, 2011

Summer Blockbusters 2011 & Revenue-Based Finance: Fast Five

Filed under: Movies — rsbelcher @ 3:43 pm

Fast Five: Vin Diesel and Paul Walker

As discussed in this blog and elsewhere, revenue-based finance has its roots in entertainment (as well as oil, natural gas and mining). [If you missed Randall’s slideshow from the Angel Capital Association meeting in February on why revenue-based finance was developed in the entertainment business, particularly for expensive feature films, it is available here .]

Well, Hollywood is expanding the idea to now include how it pays its actors. Universal Pictures has developed something it calls the “gross pool”. No, this does not refer to the swimming pool at my friend Ben’s beach house after Memorial Day Weekend. The “gross pool” refers to the pool of cash available to pay actors after the costs of the movie have been netted out of the box office receipts.

Universal Pictures has put the gross pool, which is really a royalty payment system, into effect on “Fast Five”, the latest installment (yup, the fifth) of the “Fast and Furious” franchise. This is a savvy move by Universal Pictures. The franchise has been very successful for the studio, with Vin Diesel and Paul Walker driving much of that success. Paying them market rates to make a fifth installment would cost a fortune; after all there is only one Vin Diesel. The earning power of these two stars could possibly put the profitability of the film in jeopardy.

That said, making this film was relatively low-risk — the fan base was built-in and the franchise was well established; therefore the marketing virtually took care of itself.

This structure was a win-win: the movie gets made and everyone makes money. True Paul and Vin aren’t getting what the “could have” made, but it is likely that without this agreement the movie wouldn’t have been made at all.

While Paul and Vin brought considerable star power to the first “Fast and Furious”, they brought less so to the second and subsequent films (they weren’t even in the third one, save for a cameo hinting at the strong possibility of a fourth). Increasingly the brand and story has become the “star power” that draws the crowds. We can assume they were compensated well for the first movie, but the “gross pool” structure makes more sense at this point in the franchise’s life cycle.

May 9, 2011

Send Me An Angel: Royalty-Based Financing for Angel Investors

Filed under: Angel,Movies — rsbelcher @ 4:55 pm


Yes, the above clip is rad. But it is also from “Rad”, the 1986 cult classic BMX film, starring Bill Allen as Cru Jones, and Lori Laughlin as Christian Hollings. As opposed to just dancing at the Formal like normal high school students (the two guys in matching Star Trek uniforms are ‘normal’?), Cru and Christian do sweet tricks on their BMX bikes to Real Life’s “Send Me An Angel”.

Lori Laughlin is certainly an angel, but Cru desperately needs an angel of a different kind – he needs a sponsor for the upcoming BMX competition because Mongoose Cycles (“Big Corporate”) is constantly changing the entry rules to keep Cru (“Little Guy / Scrappy Entrepreneur”) out of the race so that their sponsee, Bart Taylor (played by 1984 Olympic gymnastic gold medalist and husband of Nadia Comaneci, Bart Connor) will win with relatively little challenge.

Corporate Sponsorship of Athletes: The Venture Capital Model

Corporate sponsorship is ubiquitous in professional sports, but in individual sports like BMX racing, tennis and golf, the number of corporate sponsored athletes is actually quite small compared to the total pool. These athletes wear branded apparel, use the company’s gear and get paid to appear in television advertisements. These players usually come from a family of professionals , have built a unique brand and market following or hail from a prestigious high school or college program.  Occasionally someone with truly unique talent, strength and competitive advantage comes out of nowhere and dominates the field. Fitting into one or more of these categories doesn’t insure sponsorship, however, and the calls from corporate sponsors only come AFTER the athlete has achieved some success and displayed a capacity for more.

Similarly, only a very small percentage of start-ups and small companies receive top tier venture funding and the access to networks, branding and capital that comes with it. These companies are usually characterized by having founders from previous successful exits, having a unique brand with strong following or already having good connections from college or business school. Occasionally a category killer erupts to dominate a space. Like in the golf example above, fitting into one of these buckets certainly aids your company’s chance of attaining venture funding, but regardless, the vulture – ahem – venture capitalists don’t start calling until after you’ve achieved some success and demonstrated the capacity for the “hockey stick” growth curve.

Like the corporate sponsors, venture investors are only interested in opportunities that are worthy of and headed toward “prime time”.

The Gap

Tiger Woods and Facebook are the obvious standouts. But what about the rest of the field?

There are about 225 golfers on the PGA tour. Also, there are about 200 on the Nationwide Tour and another 2,000 on the mini-tours (Canadian Tours, New England Tour and Gateway Tour) and even more on the international tours. How many are on TV each weekend? How many are in car commercials? How many can you name?

In 2008 there were approximately 29.7 million companies in the U.S. almost all of which were sole-proprietorships. Of that 29.7 million only 6.0 million were small-businesses with more than one employee and only 18,000 had more than 500 employees[1].

In all of history (or at least since 1995) there have only ever been 61,427 venture financings[2].

As an aside, my inner spreadsheet-jockey can’t resist – here they are on a quarterly basis by stage:

As our analogy between professional golf and small business continues, it is clear in both examples that only a small number of both reach the upper echelons and receive the lime light, money, awards and PR to become pop culture icons.

The other 90% make nice, profitable businesses for themselves, but a big corporate sponsorship / venture capital is not available to them.

Credit cards or bank debt my work for some, but not all. For some the lack of collateral will be a non-starter and the lumpiness of cash flows can make paying amortizing loans difficult.

In sports, angels have addressed this gap in start-up funding for budding pro athletes by adopting a royalty-based financing model. In exchange for cash up front to pay for travel, meals, entry fees, equipment, health insurance and the like, an angel investor would receive a significant portion of the player’s winnings until he was made whole, and which point the percentage might step down over time.

Almost all angel investments in companies remain equity-based, and I posit that there is a need and an opportunity for royalty-based angel investing.

Angel Investing and the Royalty-Based Finance Model

Investor-sponsors in sports are usually enthusiasts of that sport themselves, and therefore enjoy sponsoring a young kid trying to make a go of it (and what 19th hole stories would he have if his investee really hit it big!). They enjoy having a horse in the race for what is a relatively small part of their portfolio. They also get paid back throughout the year, starting with the very first tournament. Lastly, the overall return on this investment is of less importance to the investor-sponsor than is the return on invested capital to the corporate development group at an equipment manufacturer looking to sponsor and promote an athlete for the season.

Angel business investors are very similar – they are typically successful businesspeople who now are afforded the opportunity to make investments for the return, of course, but almost more for the philanthropic component. They are eager to support growing companies in their hometown even if the investment returns flat or at a loss.

But typical angel investing is equity-based and tends to have very long investment horizons. Because she is investing in equity, the angel only gets paid back upon a liquidity event, and therefore the investments tend to be digital: they are either a success, or a donation. And unfortunately, as these things go, you’ll know much sooner if you’re donating than if it’s a success. In the event of success, Angel’s may not see returns (or even the principal!) for up to 10 years after the investment. In other cases the companies being invested in have no clear exit opportunity at all.

We here at RevenueLoan are offering an alternative to bank debt and venture equity for companies needing growth capital. We offer revenue-based loans from $50k to $500k to fund expansions.

I argue that revenue-based funding makes a lot of sense at the seed stage, and should be considered more carefully prior to an angel investment. Revenue-based debt provides:

–          on-going cash flows

–          solution to the “no clear exit opportunity” problem

–          opportunity to partake in the upside along the way, not just at exit

–          some risk protection: receive repayment immediately, not 10 years from now.

Angel investing is great for all those involved, and helps to fund and drive an innovative start-up industry in a community.

The next time you look to make an angel investment, or the next time you look to take angel funding, think through some of the criteria and situations raised in this post and consider if a  revenue-based model isn’t a better fit for your opportunity than classic equity.

May 8, 2011

Revenue-Based Financing a la Dylan

Filed under: classic rock — rlucas @ 12:15 pm

A cheeky relative of mine created a mix tape (remember what those were, kids?) once upon a time, called “Songs By Bob Dylan, Sung By Other People So They Don’t Suck.”  This comes to mind as I review some revenue-based financing documents for RevenueLoan in a coffeeshop this Sunday, with Blonde on Blonde playing in the background.

Have a listen if this reference doesn’t ring a bell immediately:

Cultural icon?  Certainly.  Vanguard of a movement?  Mos def.  Musical genius?  Arguably.  Great singer?  Ehh…. not so much.

We here at RevenueLoan are psyched to be on the verge of announcing our first five investments.  Five amazing companies, five very cool entrepreneur/executive teams, five awesome yet wacky deals we’re sure a traditional VC or bank would never have done.

But I’m a little ashamed to say it’s been harder than it should have been.  The first five deals we closed were struck on a lightweight 1- or 2-pager term sheet — but ultimately didn’t get closed until we had the better part of 20 pages of legalese hammered out.  So, a double-thanks to our first few customers for sticking with us through the closing process.

At the risk of immodesty, I’d say we at RevenueLoan are finding ourselves in our “Dylan vocals” moment.  The song has staying power.  The album is going to go platinum.  But the vocals on the first studio cut … may not be what everyone remembers.

So, to our next five customers: stick with us, it gets better.  We’re working with our fine lawyer, Patty C. (but not a man named Bello moving around mysteriously), to streamline these docs.  And our amazing tech team is working to smooth the process, be it Web, email, or otherwise.

And we promise that RevenueLoan will be growing and morphing into the best financing experience for growing small companies.  The songs are being written … and eventually, better singers than Bob will be covering the lyrics:

…like our pal J.C.:

… or our Seattle hometown hero, J.H.:

[I really want to close by saying “Everybody must get RevenueLoaned” … but we really should ask folks to see our criteria and see if their business qualifies today, before applying for financing.]

April 29, 2011

RevenueLoan is getting busy, and… so is RBF Girl?!?

Filed under: news — Christian @ 11:33 am

RevenueLoan is expanding in all directions at once! New deals are getting done, some hotshots have moved their desks closer to our to help us out for a bit, we are finding more ways to help small businesses find the funding they need, and it may be time for a bit of a makeover, too!

Whew! So much going on…

And in the midst of this, we have the latest installment of The Adventures of RBF Girl; in which our heroine expresses some deep feelings for the mysterious man from RevenueLoan… click below for all the juicy details!

April 14, 2011

RevenueLoan at 2011 Angel Capital Association Summit

Filed under: news — Christian @ 10:26 am
Small business loans for the "glass half full" set

50% water + 50% air = 100% full

Who would have thought investors would be packed standing-room-only at the crack of dawn to discuss “Revenue Structured Investments”? Sounds like a snoozer if there ever was one. Yet anyone showing up last minute might have thought they walked into a Southern-style auction as hands shot up and the lively discussion escalated. Why the excitement?

As panelist Thomas Thurston put it “it turns out, revenue based investing is sexy. It’s a way to invest in ventures without depending on an exit or liquidity event for great returns. Exit markets were relatively dead around five out of the past ten years. That’s a whole decade with around 50% illiquidity. As investors we must learn to fund ventures regardless of fickle exit markets.”

Thomas Thurston is an advisor to Seattle-based RevenueLoan and Executive Director of the Revenue Capital Association. He was joined by Rob Wiltbank, Professor at Willamette University and Venture Partner at Montlake Capital and Revenue Capital Management. The third panelist, Arthur Fox, has done revenue-based venture investments for nearly 20 years and is currently directing his third such fund, Eureka Partners.

Addressing angel investors and leaders of regional angel groups at the 2011 Angel Capital Association Summit in Boston, the panel covered top concerns including high level revenue-based concepts, alternate deal structures, and the implications of specific contractual provisions. The newly formed Revenue Capital Association was also discussed, generating strong enthusiasm and interest.

In summation, Thurston noted “as investors, we’ve always expected our portfolio companies to innovate. Ironically, what the past decade has shown is that companies need us investors to innovate too. We can’t sit back, use the same tools and expect a different result. It’s been a hard decade for ventures and investors alike. The path forward depends on our ability to innovate together, and revenue-based funding one of those promising innovations we’ve all been waiting for.”

March 18, 2011

The Sound of Flocking Wings

Filed under: news — Christian @ 10:36 am
Angel Investors or blackbirds?

The sound of wings is deafening...

The sound of wings flapping around our heads is so deafening right now, we feel like Tippi Hedren in Alfred Hitchcock’s film, “The Birds”.

But these aren’t the wings of birds we hear, these are the wings of angels!

Angel Investors, to be exact.

It turns out that investors are tired of waiting for the companies they invest in to have their big IPO/Sellout to finally see any return on their investment (if they get any return at all). Our success at getting paid early and often on our portfolio of RBF loans has caused them to flock into our space like seagulls on a beached whale.

We definitely take some responsibility for inspiring all kinds of johnny-come-latelys to join us in this arena of investing, however. Randall Lucas of RevenueLoan spoke to the Angel Capital Association recently and presented Revenue Based Finance In Two Acts, which by all accounts went over well. We have many Angel Investor friends who have watched our every move very carefully, too. And now the Angel Capital Education Foundation has an excellent, in-depth article on “Revenue Capital” (same thing; yet another name) as an attractive funding model for Angel Investors to pursue.

Dropping the whole catty facade for a moment, we are quite honestly thrilled to see the number of people moving into the RBF lending field. The whole reason we started RevenueLoan was to fund those businesses who couldn’t get growth funding elsewhere. And, to put it as plainly as possible, even if we had a billion dollars to invest we would still have to turn good businesses away. So welcome all ye investors! Join us in helping grow business in America. That way we all win.

March 11, 2011

The continuing adventures of RBF Girl!

Filed under: news — Christian @ 10:58 am

When we posted the “Animated Introduction to RBF” last month, we really didn’t know what kind of response to expect from our blog readers and Newsletter subscribers. We laughed at it – quite hard, actually! But we didn’t expect people to ask, “So what happened next…?”

Well, here is #2 in what might turn out to be a serial of RBF Girl animations!

Who thought THAT would happen?!?

Here is the next installment in the series:

March 2, 2011

RBF in the wild

Filed under: news — Christian @ 4:59 pm

Royalty Based Financing (aka Revenue based financing) is not new… our application of it is new.

The oil and mining industries have been using it for decades, and the music industry thoroughly abused it and earned themselves a bad name by doing so!

And now, TheStreet has just hired colorful financial prognosticator Doug Kass to write for them, using an interesting royalty-based model.

The plan is for him to earn a royalty off the subscribers to his Silver service on the site. (Alliteration FTW!)

It isn’t royalty based financing, but it is another interesting payment model. I wonder how many other sites will start to put their highest-read authors behind pay walls?

And what about incentives? Is this putting the incentives in the right place?

Whatever happens, it will be interesting to see how this relationship plays out…

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