RevenueLoan Blog

February 17, 2011

The cracks widen in the VC funding model

Filed under: news — Christian @ 2:01 pm

A couple of recent articles are showing the ever-widening cracks in the venture capitalist model of funding. Basically, the VC idea is to buy a stake in a company at the lowest possible value, and then sell that stake later on at the highest possible value.

Unfortunately there are a lot of hurdles for a small business owner to leap successfully to get from concept to delivery to sell-out. And the vast majority of startup businesses fail to leap all those many hurdles.

VC territory is shrinking...

And that is why most VC funds lose money, according to Dan Primack at Fortune.

Add to that Mark Cuban’s belief that the current VC funding climate is just an elaborate pyramid scheme.

And finally, pile on the fact that the Wall Street Journal says VCs are pushing into the Angel space just to find deals they can fund!

The picture is pretty clear: VCs are like polar bears, fighting for the last remaining bits of ice in the arctic. Their home terrain is shrinking and they are desperately looking for other territory to conquer.

This illuminates investors favorite feature of revenue based financing: Pay back begins immediately!

If you get a RevenueLoan this month, your first payment is less than 60 days away. That means that the investment (our loan) begins paying off almost immediately, instead of waiting months or years for that big buyout or IPO… and waiting to leap every one of those business hurdles before getting a cent of your investment repaid.

For a traditional Angel or VC style investor who is fighting for an ever-smaller bit of the ice floe, the prospect of immediate returns has got to be a tasty thing…

February 16, 2011

Are Citibank and LendingClub really “Greasy Loan Sharks?”

Filed under: Uncategorized — rlucas @ 1:56 pm
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Please let me clarify: I am not leveling an accusation at my fellows in the world of finance. Emphatically, I am not calling those companies by that epithet. But, it seems that they’ve adopted that name for themselves … (read on…)

Looking at some keywords to bid on in our neverending quest to bring the gospel of RevenueLoan to small business owners across the country, I got a bit fed up and tried out “greasy loan shark” as a possible keyword. Google said that there was no competition, so I went to check it out for myself:

Sho’nuff. Right there on the top and right side, four advertisements from companies who /chose/ to appear for the phrase “greasy loan shark.”

(Note to Citi, LendingClub, et al.: Maybe you meant to do it. But if not, perhaps you might want to add a few choice phrases like “greasy” to your excluded keywords…)

February 10, 2011

RevenueLoan at the Angel Capital Assn

Filed under: news — Christian @ 1:35 pm

On a chilly February morning (4 Feb 2011, to be exact) Randall Lucas of RevenueLoan warmed the hearts of the Angel Capital Association members by showing them how to start recouping their investments immediately, rather than waiting for the usual buyout/IPO exit.

Presenting “Revenue Based Finance in two acts”, Randall used the familiar model of how to finance a big-budget movie, and showed how an RBF (aka – royalty based financing) investment pays off better, sooner, and with less risk. His humor and depth of knowledge on the topic merged into one of those rare presentations that was both fun and informative

View the complete slide deck either at Scribd, or Slideshare.

An animated intro to Revenue Based Finance

Filed under: news — Christian @ 10:44 am
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This animation provides an introduction to revenue based finance, as practiced by superheroes. Seriously!

Yes, at RevenueLoan we approach things a little differently. If you think this kind of content is unusual from people that provide funding, you should see our newsletter

February 8, 2011

Build it, Ship it, Fund it.

Filed under: news — Christian @ 3:09 pm

Twelve months ago it was crazy talk. Like the dude with the scraggly beard on the corner raving about the coming apocalypse, if you told someone you could conceive, build, and launch a company in a few months, they would have backed slowly away from you and avoided making any sudden movements.

Six months ago the tech media picked up on the rapid-launch and scraped around for a few examples to showcase, “Hey! Look at these lunatics! They designed, built, and launched a company in a month!”

In the last month this method of starting a company has ceased to be newsworthy in the “edge media” most of us read. The mainstream media still doesn’t know what to do with the story, but then if it isn’t about Lady Gaga shagging some Republican Senator, the mainstream echo chamber can’t process it.

Now the roadmaps for how to do a rapid-launch yourself are appearing, and one of the best ones I have seen is (more…)

February 7, 2011

HOWTO use Dropbox to organize your startup’s documents

Filed under: educational — rlucas @ 7:25 pm

(or, poor man’s document management system, on the cheap.)

This quick HOWTO is inspired by the trial-and-error learnings we’ve had at RevenueLoan over the last several months of getting into business.  I’m using the example of a new company called, uncreatively, “NewCo.”  (If your business has an absurdly long name, pick a nice abbreviation with no spaces or punctuation, e.g. “Consolidated Anglo-Sudanese Hamstertraps Company, GmbH” => “cashco”)

I. When you are 1-2 people (founders).

Use ONE Dropbox folder off of the root.  Put everything of note into it.  The first few folders will probably look like this:

Dropbox/newco/
Dropbox/newco/investors/
Dropbox/newco/legal/
Dropbox/newco/presos/
Dropbox/newco/spreadsheets/

Since the only people using it at this point are founders, don’t worry about who-can-see-what.  (DO, however, worry about general security; see below for “Paranoia.”)

However, one VERY important thing should be settled here: who will “own” the Dropbox folder setup.  In general, this should be someone very unlikely to leave.  If you’re a non-technical CEO, there may be a temptation to punt this to an early dev hire or such; I suggest you use this simple HOWTO to manage it yourself.

If you have significantly more than 2 founders, chances are you’re doing it wrong …  but nonetheless, move on to II. below because you’ll need to add some more structure soon.

II. When you hire your first non-founder employee(s).

Once you start actually hiring people, even contractors, you will want and need to keep certain things private.  This is not just for Machiavellian reasons; it’s a duty you owe people who must, by law, trust you with their personal information (like SSN, salary info, etc.).

The RIGHT WAY to do this is to create a new Dropbox folder off of the root, and call it “newco-everybody”.  (This creates a big screaming warning flag that “everybody” in the company can see this folder.)

Then, move ONLY those particular files and folders from your “newco” folder into the “newco-everybody” folder, which everybody (or nearly everybody) needs to see.  These include:

  • * Logos (do everyone a favor and make vector art easy to find!)
  • * Blank NDAs
  • * Marketing collateral / PDFs / handouts
  • * Letterhead / templates

The old “newco” folder is kept only accessible to executives.  I recommend only the CEO and CFO, in an early company, plus maybe a trusted admin or bookkeeper.  (Later, you might add a controller or inside counsel to this inner circle.) Obviously, at this point, you’ll need to start choosing where new documents go.  Our pattern has been to put the following ONLY in the executive / founder folder:

  • * Employment agreements
  • * Executed NDAs
  • * IRS forms (e.g. W-2 forms)
  • * Budgets (which include salary info)
  • * Insurance or other benefits info
  • * Articles of Incorporation, Cap Table, etc.
  • * Investor details

When you’re comfortable with how this is all set up, there’s one final important thing to do.  Go onto the Dropbox site, and under the “Account Info” tab in “Account,” sign up for “Packrat” unlimited undo history.  (Unless you’re planning on pulling a “full Enron” and being totally evil, I guarantee this feature will save your ass at some point.  Once you become a big enough company to install real document management, you will have expensive laywers to tell you not to do this, and you should listen to them then.)

III. When you start sharing GIANT files.

Dropbox has a great policy about disk use.  You get a lot for free.  But, their policy is subtlely nefarious, and you gotta love it: the free space limit applies to ALL the Dropbox folders on a given computer, and, you can only have ONE account per computer.  This means that the moment your “newco-everybody” folder reaches the free-account limit, EVERYBODY in your company now has to sign up for the paid account.

Now, I’m all for paying for Dropbox when you need it.  But, it’s silly if you have 20 people and only 3 of them need the paid account, to shell out for everyone.

So, make a THIRD folder off of the Dropbox root, and call it “newco-giant” (or something).  Chances are, unless you have a unique business model I haven’t thought of, the only stuff going in here will be .MPEG files of video to be edited, or large backups, or disk ISO images etc. — any of which are generally only used by a subset of your team (e.g., just the creatives, or just the IT ops guys).  Hence, only those folks should need to pay.

IV. When you start collaborating and partnering outside the firm.

With each partner or group of partners that you start working with on a particular project, create a “deal room” or “project” folder.  You should be loathe to permit any non-employee or non-contractor to access the “everybody” folder.

V. When people must leave the firm.

Alas, all good (and not so good) things come to an end.  So when a colleague leaves the company, it’s important to remind them to voluntarily return all originals and destroy all copies; your NDAs and agreements with these folks should have such clauses included.  However, you should also be sure to log into Dropbox, and for each “root” folder (e.g. “newco-everybody”,) ensure that their access is removed and that they are *not* permitted to retain a copy.

(If you do want to leave employees with copies of certain information, make a non-Dropbox folder to put the files in, and give them that in a zipfile … or in a dedicated, separate Dropbox folder 😉

VI. General tips, OCD, and paranoia.

Your mileage may vary, but I do recommend the following:

  • * Use ONLY letters, numbers, underscores (_), dashes (-), and periods in folder and filenames.  Other characters are unlikely to, but may potentially, cause trouble across the various platforms on which Dropbox works.  (Plus, if you ever use such a filename in a URL, you’re guaranteed it’ll come out legible and useable; not so if there are spaces and other metacharacters.)
  • * Require a signed NDA from each employee or contractor before granting first access; store the hard copy in a paper file and the digital copy in the “executive” folder.
  • * Define some level of secure information above which you do NOT trust even the “executive” folder.  For us, that means crypto keys, financial account credentials, and usernames/passwords to important services; these all go in separately encrypted files that never get written to disk without going through encryption.
  • * Define some level of secure information which MUST go ONLY in the “executive” folder.  For us, that’s social security numbers and similar.
  • * Have a founders’ agreement / vesting agreement in place and signed before doing anything else.  It should be crystal clear what happens if things turn sour between you and your cofounder(s).  (I know this isn’t a Dropbox item per se, but it’s crucial IMO for peer-founded startups; trust me, I’ve been there.)  This agreement should also specify that anyone who leaves must promptly turn over any credentials (such as Dropbox passwords) to prevent “foot dragging” from holding the company’s data hostage.
  • * Have at least one computer connected to all Dropbox folders with a physically secured “Time Machine” or other incremental backup.  Yes, I know this is overkill.  But if you ever have to restore your entire business’s file
  • sharing system from scratch, you’ll be glad A. to have it there at Firewire/SCSI speeds, and B. not to be reliant on Dropbox 100% if, Heavens forbid, they go under.
  • * Think hard about what to do with laptops and volume encryption.  If a laptop gets boosted, chances are the bad guy will just pawn it, but more and more these things get scanned for saleable information (credit card numbers, social security numbers, user profiles, etc.).  You may or may not have a big risk here; if it’s 5 employees’ payroll data, the risk is probably acceptable, but if it’s 50,000 customers’ payroll data, it’s proabaly not.  Seek disk volume encryption on each individual endpoint (laptop) if you judge it necessary.

Comments welcome, of course.

Business Credit from the Trenches: Forum Postings Indicate Loosening

Filed under: educational — rlucas @ 7:16 pm
Tags: , , , , ,

When you think of credit loosening or tightening, you might think of senior loan officer surveys, the Fed Open Market Committee, FHLB standards or likewise.

But I like to keep my ear to a more organic source: forum posts on the Web.

And to that end, may I reference a recent post on Credit Boards at http://creditboards.com/forums/index.php?showtopic=459365

Astute observer of the ways of credit, “BobWang,” notes that he got two (!) offers for $100k business lines-of-credit in one day, unsolicited, in the mail.

(Now, to temper that, he also hints that these are part of financiers’ end-run around personal lending standards: the use of “business” lines with personal guarantees to essentially create credit cards that aren’t subject to consumer lending regulations.)

Nonetheless: glad to see that risk appetite is perking up and that the credit is starting to thaw.

February 3, 2011

RBF is hot, and heating up in Texas

Filed under: news — Christian @ 1:54 pm

Our beloved financing model – royalty based financing or revenue based finance (take your pick) – is apparently now the “hottest new development in venture capital”, according to the Dallas – Fort Worth Tribune.

This article does a good job of illustrating most of the benefits of RBF funding over other traditional models (VCs, banks, etc), but glosses over one important aspect: Flexible monthly payments.

I know that with the whole fiasco surrounding adjustable rate mortgages, we have all become gun shy of the “flexible monthly payments” wording.

But when that flexibility is tied to your company’s revenues (and not to some arbitrary number invented by some Wall Street flunkie), that means the flexibility works in your favor. Slow sales over the holiday season? An unexpected rise in gas prices impacted your revenues? Weather didn’t cooperate, and people couldn’t get to your store?

Whatever the reason for the down turn in your revenues, your RevenueLoan isn’t going to put you out of business like a typical bank loan would. Because your monthly payment is pegged at a percentage of your revenues. So your revenues drop, then your monthly payment drops, too!

The up side on this is where things get really interesting, though. If your revenues go up, your payments go up as well, and you pay off your loan sooner!

This flexibility means that RBF loans are probably one of the last places where there is still real Win/Win scenarios in small business finance.

January 24, 2011

Saving Google a billion dollars

Filed under: news — Christian @ 12:11 pm

We all have 20/20 hindsight, right?

Thomas Thurston of Growth Science International did a little “What If?” thought experiment and looked at what would have happened if Google had been funded with a royalty-based finance loan, as opposed to traditional venture capital.

The result was a savings of just under a billion dollars!!

That’s the kind of numbers that can make even the most jaded person sit up and take notice.

Financially doomed municipalities… and RBF to the rescue?

Filed under: Uncategorized — rlucas @ 9:54 am
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The naysayers — call them “bond market vigilantes,” call them “Cassandras,” call them “Chicken Littles” — have turned their attentions away from the nation’s banks and insurance companies to focus on the beleaguered state of our states (and cities and counties).

Financial blogger and sometime FT columnist Felix Salmon opines that very real (if, ultimately, indistinguishable from perception) circumstances could lead to states being “shut out” of the credit markets, as the specter of federally-countenanced state bankruptcy looms.  (In fairness, Salmon doesn’t think that the bankruptcies will happen, but he acknowledges that perception is reality here, when it comes to credit spreads, liquidity, and new issues.)

What does all of this have to do with RevenueLoan or Revenue-Based Finance? the gentle reader might ask.

Well, simply put: the states have two problems, and one of them is a financing structure problem.  Namely, they have fixed coupon debt that must be repaid on schedule.  Times will get better for Illinois, and California, and every other muni issuer who’s in a world of hurt right now.  But the fact that a new economic up-cycle may leave state coffers flush in a decade is cold comfort today when creditors face receiving scrip or other ersatz paper.  (The other problem is fiscal, with too much spending and not enough taxes, but that’s a whole other kettle of fish.)

But don’t think that we’re the only ones saying Revenue-Based Finance could have averted the muni woes we’re seeing today.  Last year, econo-guru Robert Shiller and his colleagues came up with the ultimate RBF instrument: the “trill.”  Simply put, the “trill” would be one one-trillionth of the GDP of the issuer (nation, state, etc.) — in effect, a small percentage of topline revenue.

Would it work?  Could it work?  Only, I think, if the issuer has significant potential for either sustained topline growth, or windfall / bumper crop years.  That could mean corporate taxes on boom-bust industries (commodity extraction? agriculture?), high marginal personal income tax rates that kick in during bubble tops as people sell appreciated assets, or simply extremely strong population and industry growth prospects.

An interesting aside for a Monday morning.  Alas, we won’t be solving this problem top-down — our contribution will be helping finance and grow those small businesses who will provide the backbone of a muni and national recovery.

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