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Revenue-Based Financing (RBF) For Entrepreneurs: Andy Sack, Co-Founder, RevenueLoan (Part 3)

Posted on Wednesday, Jan 5th 2011

By guest authors Irina Patterson and Candice Arnold

Irina: What kind of businesses do you prefer?

Andy: Think of revenue loan as growth capital for small to medium-sized businesses. The demand for that growth capital is really high. There aren’t many sources of growth capital other than traditional venture capital, sometimes angels. So, there’s a lot of demand. Probably the biggest filter is a gross margin and a clear revenue model.

Irina: Do you have a sector preference?

Andy: The sector we’re focused on is, broadly, technology. We look at a lot of software as a service (SaaS) companies.  When I say SaaS companies, it’s niche SaaS companies that either because of their growth rate or because of their niche are not particularly attractive to traditional equity players or, for that matter, traditional debt players.

We look at offline businesses as well. As long as they have the gross margins to support them, there’s interest.

Irina: Could you give me an example of an offline company?

Andy: A vitamin company, vitamins and supplements; insurance; companies with high gross margins but that are sort of off the beaten path. There are certain franchises that are interested in what we’re doing, and they have to have high gross margins to support a revenue loan.

Irina: What about the market size? Do you care about that?

Andy: We do when we look at making an investment. We do an overview of the company, which involves market, team, and product. But we’re more focused on actual results, historical revenue growth. We make money when we are good at filtering the world of opportunities for the specific companies that, with some additional capital, will really increase their revenues.

When we’re good at picking those companies, that’s when we make the most money. So, clearly, market size is a factor in our assessment of incoming leads.

Irina: What happens if the company gets acquired?

Andy: That’s usually not a bad thing. The money becomes due and payable at the time of acquisition and generally gets paid out of the proceeds of the acquisition.

Irina: What are your challenges?

Andy: The challenges are that we have a lot of inbound leads, so we have a challenge in sorting through them.

Basically, our success is dependent on our picking good companies that will grow. Those are the two main challenges.

There’s a third challenge that’s also present, which is that it’s a new financial instrument, so educating people about what it is . . . generally, people need to get comfortable with what it is that we’re offering.

Entrepreneurs totally understand how equity works. They totally understand how debt works. They have lots of examples on both sides.

This is a new, interesting hybrid that is appealing and has real benefits. The the flexibility of the money, the fact that it’s tied to revenues, the alignment of incentives, the no dilution, and the no personal guarantee are all interesting benefits. But it requires an entrepreneur to become comfortable with that.

Irina: Do you see any downside to your way of financing  for entrepreneurs?

Andy: From the entrepreneur’s perspective, no. I think it’s a great model; otherwise, I wouldn’t be doing it.

I think you’re going to see a lot more revenue-based financing deals from us, but also in the marketplace. It’s going to become a standard, and it’s going to become a very big market.

I think the main downside to revenue-based financing is that, particularly as companies grow, the cash flows associated with paying off a loan – any loan, even if it’s revenue based – it’s tied to success.

I still think that equity is a very important part of the financing stack, and businesses do need equity financing.

Irina: Could entrepreneurs do a combination?

Andy: Yes. In fact, one of the real benefits of  a revenue loan is that it plays very well with, sort of, broken or challenged cap tables. We also play very well with equity.

One of our deals is exactly a hybrid deal, and, I think, that works really well. For example, the entrepreneur – I’m not able state the name of the company just yet – is raising over $500,000 in equity and also taking $250,000 from RevenueLoan.

This segment is part 3 in the series : Revenue-Based Financing (RBF) For Entrepreneurs: Andy Sack, Co-Founder, RevenueLoan
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