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I hope you are right. I just saw a article i will share with you.
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Do Angels understand Royalty Financing, Welcome
From Wikipedia, the free encyclopedi
Royalty financing is done by selling the rights to a percentage of revenue
of a product or service in advance of the revenue being earned.
Traditionally this type of finance has been common to investors in the mining and energey sectors. Recently it has become more common within techonology companies.
Your right on with the Wikipedia definition, but I am finding it amazing how few Angels are aware of this type of financing for start-ups... Especially Angel Groups, which mostly just pattern themselves after VC's.... This type of financing would be a perfect fit for individual Angels looking to invest their money for unheard of high returns in the existing economic environment... In addition, my company offers the additional benefit of social responsibility, appealing to SRI's (see my website (www.awarenessaudiobooks.com).
I don't think its that Angels don't understand the model you are describing, they just prefer they equity model. If a business takes off, they want to experience the benefit of being an equity holder when the business is sold.
If you like royalty returns because you see it as a way to keep more money in your pocket, then an investor will also understand that this deal is working in your favor. Investors are extremely selective, so they have the benefit of having negotiating leverage (ie either you agree to their terms or you get no investment). Remember that investors are taking huge risks, so they should be compensated as such.
I disagree with your statement.... The primary reason for Royalty Financing in this case is to retain ownership of the company. Our expansion plans are interwoven with our IP and a sale would negate future growth for both investors and the company. Our business plan would provide investors 100% return on investment per year for a period of 10 years..... This plan is viable only for businesses with high margins such as ours. I believe this will be viewed as a very profitable investment by Angel investors when assessing the risk. Especially considering they will be earning returns from day one of sales, and not waiting the 3-5yrs for an exit plan to materialize.
Actually, it really doesn't seem like most angels are very familiar with royalty arrangements. We've seen tremendous interest and put together this presentation to answer their questions. For many investors, there's many advantages over traditional equity funding.
The single biggest is risk minimization by returning money quickly.
Not all Angels are equity focus. I know several that as long as the person has gray hairs, skin in the game and good venture. They will invest.
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I am involved with a start-up company offering Royalty Returns ( fixed % of gross sales) for investors. The offering, even cutting out business plan estimates in half, would provide an annual return of 50% on investment with no cap, and our plan runs for a full 10 years. This type of investment offers a return from day one of sales and has been used for many years in the entertainment and mining industries. The typical VC approach is to gain growing equity share in the business and push for an exit plan in 3-5 years, realizing no return until exit. With the state of the economy and no IPO's on the horizon, I believe this will become an increasingly popular investment option between Angels and high profit margin start-up companies.