Venture Investors have been investing more speculatively than necessary — not based upon their selected investee companies or projects — but in terms of their “all or nothing” deal structure, which usually is based upon the occurrence of an event (such as an acquisition, going public or some other exit) which provides capital recovery as well as gain, if any. While waiting for this event, the investor either doesn’t receive cash flow at all, or receives some debt service payments if the deal was structured as a loan of some sort, plus equity. Most important to note is that most investors are not truly looking at the investee’s fundamentals and inherent profitability as a free-standing entity. This not only affects the deals selected (i.e., flash versus fundamentals), but it puts the investor into an uncertain period of little or no income and limited liquidity.
I am proposing a less speculative and more liquid deal structure based upon the use of Revenue-Based Royalties as capital recovery devices (to reduce risk over time) and as a means of generating a stream of positive cash flow to the investor. And this cash flow, if sufficient, can be re-invested to maximize total portfolio return.
The method is simple. Regardless whatever the other particular details of the deal structure, add a net revenue-based royalty (as set forth in the illustration below). This approach can also have the effect of making many a less-than-glamorous early-stage enterprise look considerably more attractive. I believe it would make more money available to small businesses and middle-sized enterprises that are less than revolutionary in measuring their intellectual property or market capitalization potential.
This approach is much “cleaner” than profit-sharing in that it does not permit subjectivity or manipulation of the numbers. It’s simply elegant: The investor takes a look at the investee’s bank statement, multiplies the non-investment, non-loan, cleared deposits (ostensibly the proceeds from sales activity), multiplies that number by the applicable royalty percentage expressed as a decimal, and is paid appropriately.
- Entrepreneurs Need a Better Way to Cash Out (blogs.hbr.org)
- An Idea Getting Tougher To Fund: Venture capital (alleywatch.com)
- Eric Hippeau on His Firm’s New Fund and Where It’s Shopping Now (strictlyvc.com)
- NIN Ventures Raises $5 Million on Crowdfunder for its Next Generation Tech Fund (crowdfundinsider.com)
- Contextly Launches Its Editorial Tools To Find “Related Content” That’s Actually Related (techcrunch.com)
- PreMoney Inside Look: Corporate Venture Capital Is Hot Again (500.co)
- Top new venture franchises begin to emerge: VCJ (pehub.com)
- How does one go about becoming a Venture Capitalist? (gust.com)
- Angel Investing: Fools Rush In Where Family Offices Dare To Tread (alleywatch.com)
- Smart Investors, Not VCs, Are Funding Growth-Stage Cleantech Startups (theenergycollective.com)
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