Lighter Capital | Alternative Finance and the Subscription Economy

Comparing the Six Myths of Venture Capital to Lighter Capital

Wed, 17 Apr 2013 20:28:00 GMT

In the May 2013 issue of the Harvard Business Review, Kauffman Foundation Director of Private Equity Diane Mulcahy provides an amazingly simple analysis of the venture capital industry and its six biggest myths, which she busts.

The myths are:

Myth 1: Venture Capital is the Primary Source of Startup Funding

Myth 2: VCs Take a Big Risk When They Invest in Your Company

Myth 3: Most VCs Offer Valuable Advice and Mentoring

Myth 4: VCs Generate Spectacular Returns

Myth 5: In VC, Bigger is Better

Myth 6: VCs are Innovators

The first is probably the one that is actually the most widely accepted as a myth, and yet, we as entrepreneurs continue to delude ourselves into thinking venture capital and equity investments in general are THE one and only route to success (what's that about denile not just being a river in Egypt?...)

Myth 2 is a fun one, because it is a direct critique of the venture capital firm general partners and their compensation structures. Ms. Mulcahy points out that it's not general partners' (the people with whom you interact and who sit on your board) money at stake, but limited partners'. These can be wealthy individuals, but are usually institutions like university endowments and retirement pensions. She's saying the GPs get paid even if the investments fail.

Myth 3 is another very interesting one, since unlike Myth 1, I think (and hear from entrepreneurs all the time) that this myth is alive and well. I would argue that this is THE biggest myth of the six. As I mentioned, at this point entrepreneurs understand that the number of VC deals is tiny, even if that doesn't stop them from thinking that they'll still be one of them. But very frequently I hear, "I understand it will cost me 40% or more of my business, but I'll get great intros and mentoring". Ms. Mulcahy turns that on it's head.

The remaining three myths are pretty well debunked at this point, especially in light of Ms. Mulcahy and team's industry-shaking report 'We Have Met The Enemy... And He Is Us", where the Kauffman Foundation (a limited partner) analyzed 20 years worth of venture capital investments.

Lighter Capital and revenue-based finace is standing in the holes left by these myths.

Myth 1: While royalty capital or revenue capital doesn't work well for the pre-revenue pure startup, it is a vehicle that CAN BE the primary source of funding for growing seed-stage companies. We are pioneering Capital-as-a-Service ... providing as little or as much capital as you need, when you need it.

Myth 2: Lighter Capital RevenueLoans^TM are technically a debt instrument, and get paid back over time. We also lend less to any one given company than a VC might invest. In short, we're taking a little bit less risk than a venture capitalist would. But on the flip side of that equation, our potential return is much, much lower than an equity investment.

Myth 3: Ironically, like I mentioned above, I have always thought this is for sure the area where VCs' value really shines. But in the last six months I've made over 15 angel and venture capital introductions, helped several portfolio companies negotiate acquisitions, introduced partners, customers and vendors and introduced a couple companies to cheaper capital options (banks) once they 'out grew' us. And we've done a lot of the same for companies that aren't even portfolio companies. We tell prospective borrowers that we'll be anywhere on the spectrum that you want us to be: from silent money, to an active investor and partner. We're aligned with you for the success of the enterprise!

Myths 4/5: Look for some data from us soon presenting the average growth rates of our portfolio companies pre- and post-investment. Regardless of what our (or VC) returns are, Lighter Capital and revenue-based loans provide good returns to entrepreneurs.

Myth 6: Ha! More coming on this one, too.

Here's a link to a Kauffman Foundation article on the Six Myths of Venture Capital.

Tesla Launches Alternative Financing Option

Wed, 03 Apr 2013 20:06:00 GMT

The key tenet of revenue-based finance is that we, the investor, are aligned with you, the entrepreneur in revenue growth, all the while you maintain your ownership equity, because you believe it will appreciate and ultimately have a high cash-out value. We provide a similarly risky investment to equity, while you maintain the ownership upside.

With a product purchase (especially a luxury or niche one like a Tesla electric vehicle) in some ways the exact opposite is true. You expect the purchase to depreciate ("The second you leave the car lot...") and you hope to sell the product when you're done with it for the highest possible residual value.

Yesterday Elon Musk announced Tesla's new financing structure, which is similar to an RBF investment, but sort of opposite, like our example above. The company is essentially giving you the opportunity to lease the vehicle via monthly payments with a floor to the depreciation amount. It's geared to be owner-friendly and support your ownership value. Also, while we don't require personal guarantees, Elon Musk is PERSONALLY GUARANTEEING all new purchases under the financing scheme.

It's RBF for product purchases or sort of negative space RBF.

(Note: there's been heavy critique of the announcement and financing structure, which Musk claims was very innovative. I would agree: the financing structure mostly just takes advantage of government tax breaks and marketing bravado.)

Applying Revenue-Based Finance Theory to Cyprus and the Debt Crisis

Fri, 29 Mar 2013 20:37:00 GMT

A year ago in the Harvard Business review Yale University Professor of Economics Robert H. Schiller proposed a, mostly theoretical, new take on national finance:

"Countries should replace much of their existing national debt with shares of the “earnings” of their economies. This would allow them to better manage their financial obligations and could help prevent future financial crises. It might even lower countries’ borrowing costs in the long run.... We propose that they pay a quarterly dividend equal to exactly one-trillionth of a country’s quarterly gross domestic product, the simplest measure of national earnings. We could call these shares “Trills.” A Trill issued by the U.S. government, for instance, would have paid $13.22 in 2010, in four quarterly installments. The payoff in future years would vary, of course. If the economy surprised us on the upside, dividends would go up; if it slumped, dividends would fall."

He is essentially proposing that fixed-rate national debt be replaced by a revenue-based financial instrument. His exact proposal is more like preferred equity than Lighter Capital's RevenueLoanTM debt instrument. Also, obviously GDP is not the best metric off which to base the repayments and he spends quite of bit of the article discussing and defending that selection. I won't reiterate that discussion here, but just say that to continue our comparison of his proposal to our RevenueLoanTM product a better analog to net cash receipts would be tax revenue. But that metric also has plenty of pitfalls.

Regardless, it is an interesting application and study of revenue-based finance.

-------

Well, just this week University of Cyprus Professor of Finance Lenos Trigeorgis published a follow-up post that was much less theoretical. He presents an interesting update to Schiller's idea with some details on how it might be implemented in a Cyprus bailout deal.

He opens with the exact mantra of revenue-based finance: investors are aligned with the borrow, and payments flex with business cycles.

"[EU politicians] have insisted (in principle, correctly) that troubled countries get their financial house in order as a condition for receiving bailout money. But the specific austerity measures chosen are killing any chance these countries have to grow, and therefore repay their lenders. This creates a vicious cycle, as the less borrowers are able to pay, the tougher the repayment terms get. Clearly, a new approach is desperately needed.... tie the interest from rescue loans to the rescued country's rate of economic growth. So, when the economy is in recession, the interest payment will be lower, helping the country to boost growth; when the economy picks up, interest payments will in turn go up, precisely when the country can afford it."

He makes an interesting observation about how the revenue-share obligation in effect smooths out boom and bust cycles, and helps prevent the spiraling bull-whip of higher-growth --> higher-spending --> more debt --> bigger crash:

"In essence, during recession, lenders will be subsidizing troubled euro zone members, giving them a much needed influx of cash, in exchange for a potential higher payout during good times. A side benefit is that the increased interest payment in good times would make it harder for Cyprus to get into bad spending habits when they feel flush with cash."

One of of his last points clearly bridges his proposal to classic RBF, as he mentions the classic industries that use royalties or revenue-sharing:

"We know that investors are willing to accept lower returns in the short-term in exchange for the chance at a higher payout later. Just look at the venture capital industry, the pharmaceutical industry, or the movie industry — all of which owe their success to actively managing portfolios with low probability/high growth prospects."

It's a pretty interesting, and potentially real idea, and follows the same exact tenets of our investment thesis: "Surely, it is worth considering alternative win-win solutions that effectively allow these countries to borrow revenues against a more productive future, rather than condemning them to decades of no growth."

Keep checking our investments page, and keep an eye out for this logo to join the others!

Bonus: Professore Trgeorgis has published a book on Real Options and clearly has an interest in it --- I presonally love his addition of convertible options into commodities.

Thoughts On Pricing Your Monthly Subscription Product

Wed, 13 Feb 2013 23:38:48 GMT

Here's an really good (if not slightly over-simplified) analysis of customer acquisition cost vs. life time value and how those two interact to guide how to price your SaaS product.

Obviously, in a vaccuum the first tennet of business is: you can increase profitibility by decreasing costs or increasing revenues. But the SaaS structure is slightly more interesting than that because of the subscription nature of the product and revenue (not a one-time sale like the classic b-school 'widget').

With SaaS, you can increase profitibility by decreasing acquisition cost per customer or by increasing the value of each customer you do acquire. This post discusses the latter and specifically the amount you charge them as a way to increase their LTV. (There are other ways, of course, like in-selling other products and services, or increasing the "life time" of the subscription [lowering attrition] -- this post focuses on product pricing. The key take away is how powerful the compounding is in the monthly subscription model and why this should urge you not to underprice your product. One point he does not make is how "grace periods" (lengthy free-trial times) can also hinder this curve's growth... the sooner they become paying customers, the sooner you get to the steep part of the red curve in the graph above.

This point is relevant to the revenue-based finance discussion because RBF is only a good fit for companies with high-gross margins (ie. almost any software company), and probably more importantly, companies with gross margins that increase with scale (ie. almost any subscription software company). As the chart above shows, increasing the price of your subscription offering dramatically increases both the rate at which your revenue grows, but also the rate at which your margin grows.

Now, as commentors on the post have stated, changing the price has other, exogenous effects to business like customer conversion and attrition (I said it was overly simplistic), but still useful.

http://justinmares.com/why-real-businesses-dont-charge-5month/

Revenue-Based Finance is the Answer to the Series A Crunch

Tue, 22 Jan 2013 07:13:00 GMT

By now we've all seen the CB Insights Seed Investing Report. and numerous follow-up reports, analysis, commentary and advice (and more advice, and... even more) describing the impending funding shortfall for all of the startups that raised seed investments during the seed investment boom of the last 3+ years. If you haven't been following the gripping developments, the gist is this: Over the last 3 years the number of angel/seed investments has increased by almost 4x while the number of Series A investments has only increased by 65%. The hypothesis goes that there won't be enough "Series A Investments" to go around, and over 1,000 startups will be financially 'orphaned' for an investment 'evaporation' of ~$1B.

A good many cycles have been spent on this topic over the last couple months with many blog posts focusing on how YOU can avoid the crunch. Jason Calacanis via PandoDaily has had a couple good posts on the topic, including this one, which states that "a Series A is not the only way to grow a business" and "VCs are not the only source of funding". These points are dead-on accurate and I couldn't agree more. He also states the number of Series A financings could increase dramatically to meet this new, higher demand for funding. I disagree on this point; he's forgetting product-market fit.

The angel / seed investment boom will not translate into significantly more Series A rounds. These potentially 'orphaned' companies do need growth capital, however. But venture capital is the wrong product for them. That does not mean they are not good investments; it means they are great investments --- for a different investment model!

Companies are leaner than ever and many of them have a subscription-based product with very high gross margins. These companies can scale quickly with some additional sales and marketing fuel. They may not have the $1B exit opportunity, but they are healthy, fast growing businesses and need capital to keep the growth going. They are led by entrepeneurs who understand equity dilution and loss of board control and want to avoid it. This type of company is a perfect fit for revenue-based finance.

Importantly, in addition to investing using an innovative structure, we provide capital fast (dare I say, as-a-service?) -- we've funded companies in under two weeks from the very first contact. This is critical during this "crunch time", so the company can spend its time growing the business and not chasing after investors.

Certainly many startups that received seed or angel investments will land multi-million dollar Series A investments (with little to no revenue) because they are huge, society-changing opportunities. But there are relatively few of these opportunities (and always have been) and there are lots and lots of really awesome, fast growing software companies that have the ability to make a lot of money and grow significantly (this is new). The "Series A Crunch" is really just a shift in the economy where there are now more technology-based businesses then ever before. The historic way to finance the growth of technology companies was to exchange an ownership percentage for cash - equity investment - because the company needed a huge amount of capital to build out its tech infrastructure just to begin operating. The "crunch" is just the realization that that investment model is not necessarily the right fit for all technology companies anymore.

(Check back for a post on the flip side of this financing "crunch": the rise of alternative financing options on the credit side, which has been "crunched" since 2008! There really is a 'perfect storm' forming around small business finance with frozen credit markets and the explosion of tech startups looking for growth capital)

Cost of Capital... Again

Tue, 14 Aug 2012 00:29:00 GMT

Hello sports fans!

Long time, no bloj. Well, that's because I had the distinct pleasure of getting Salmonella earlier this summer, which knocked me out for ~3 weeks. Then, I picked up a sweet cold because my immune system had hit the big reset button.

But I'm back and excited to chat... again... about cost of capital, particularly how it relates to revenue-based financing.

I continue to hear that RBF feels expensive compared to other sources of capital, so I will continue to provide examples of how it's not -- at least until I start hearing how awesome RBF is compared to other sources of capital! ;)

I was looking through some old files the other day and found a presentation by Seattle-area super angel, and Voyager Capital Venture Partner Geoff Entress which discusses the target cost of capital for various stages of tech startup investment.

10% IRR = double your money in 7 Years

20% IRR = double your money in 4 Years

40% IRR = double your money in 2 Years

100% IRR = double your money in 1 Year

As a refresher, Lighter Capital invests $50k - $500k in companies with annualized revenue runrates of ~$300k to $5M and targets an interest rate between 15-30% (slightly higher IRR) with a 3x payback in ~5-6 years.

I've added Lighter Capital to this slide....

I hope to post up a full blown debt vs equity vs RBF excel model in the coming days / weeks where you can tweak all the assumptions around amount of investment, company growth rate and exit timing and amount and get a very clear sense of cost of capital differences. Let me know in the comments if you have interest in this model -- if there's enough interest, I'll prioritize it.

Thanks,

Rob

VC Seed Rounds versus RevenueLoans

Thu, 19 Apr 2012 05:48:07 GMT

Elad Gil posted an excellent analysis yesterday, following on from Chris Dixon's post in March, on VC signaling regarding seed-round investments. He mentions 'bridge financing' (such as a RevenueLoan from Lighter Capital) as an alternative that eliminates the equity follow-on signalling issue altogether.

Here's the 140 character summary (give or take): A VC seed round investment is great for them. They can make 100 $100k bets for 2% of their portfolio (~$500MM) and then have more information on those companies than the rest of the market when it comes time for the Series A. That same investment feels good to the company because they get a TechCrunch article, what have you, touting how a top tier VC invested in their company. But when they go to raise their true Series A and that top tier VC isn't re-upping, it sends a very negative signal to the rest of the market.

My advice: resist, resist, resist that VC fan-boy urge! Bootstrap ("Your cap table is only clean once!"), borrow from friends and family, or secure non-dilutive growth/bridge financing like revenue-based finance.

Elad's post: http://blog.eladgil.com/2012/04/vc-signaling-coming-home-to-roost.html

And Chris Dixon's post: http://cdixon.org/2010/03/11/the-importance-of-investor-signaling-in-venture-pricing/

"Revenue-Based Finance 'Feels' Expensive"

Wed, 11 Apr 2012 00:53:59 GMT

Some times when working with entrepreneurs we get feedback that revenue-based finance (RBF) feels expensive. I've heard this enough times now, and seen enough poorly-informed comments on blogs and articles that I figured it was worth a formal blog post, and possibly series on the subject.

1. It doesn't just feel more expensive than a bank loan, it is. Just because we call it a "RevenueLoan" doesn't mean you get to borrow at the same rate as the US government. Hell, even Uncle Sam is having his own credit issues. Our investments aren't into sovereign super powers backed by the global reserve currency. Our investments are into high-technology, high-growth, early-stage, small team, asset-light businesses. Think of it like lending to an individual: We're not lending to the 45-year old in his peak wage-earning years, sitting on a pile of cash, looking to use leverage to purchase his second-home instead of paying cash out the door (but could if he wanted to) because it's cheaper for tax reasons. Hardly. We're lending to the college senior who is about to go into her second round interview for an engineering job at Apple. She's going to graduate from a good school, with solid fundamental skills and a couple good internships under her belt, but is essentially unproven in the market. Young, growing with the a lot of future wage-earning opportunity. And a lot of risk. It's not that she has bad credit. She just doesn't have any credit at all. The same is true for your start up. No one knows if it is credit-worthy yet. We're willing to take the risk, but the return has to justify the risk. That doesn't mean the rate is usurious, but it is certainly higher than the interest rate paid by AA rated Fortune 500 companies with 9-page balance sheets.

We like to think of ourselves as a large credit card for tech companies. And, in line with that capital as a service mission, we target a 15 - 30% APR. We're more expensive than a bank loan and about the same as an expensive credit card (but with a much higher limit).

2. Time value of money.

The time value of money is seldom mentioned during financing discussions, but it is a critical component to the RBF math. Look at Instagram! A $50M RBF investment with even extremely investor-friendly terms (50% of top-line revenue, uncapped, forever) would have still been cheaper, in a time value of money (internal rate of return) sense, than the $50MM equity round that they closed the week prior to the FB acquisition announcement…. which, I don’t need to remind you, cost the company $50MM….in one week. The IRR on that investment, by my calculation is: 497,237,713,464,852,000%. That’s certainly an expensive cost of capital.

This is obviously a corner-case, certainly (and more than a little bit bizarre — another topic!), but it is a real-world example that a revenue-share does not by default supersede ownership, particularly in times of very high P/E valuations and data-, users- and talent-based acquisitions.

3. More to the point, capped deals are almost always cheaper than equity, with the only exception being if the company fails, in which case equity is of course the cheapest form of financing. I think the market knows this, but for a variety of reasons executives are irrational in their financing decisions, which goes back to the title of this post and how the investment feels expensive. It's a feeling based on irrational and uneconomical decisions and priorities.

a. First, the math: a 3x cap does not mean a 300% cost of capital. We, here at Lighter Capital target repayment in 2 to 7 years, and we alter our caps accordingly. We target an APR of 15-30%. So while the cap changes, so does the maturity date— but the cost of capital does not. Quite literally, an equity investment can cost you an infinite amount of money, at an infinite rate of return. (I'm going to follow this post up with some specific case studies to compare the outcomes of RBF vs equity, so stay tuned... I know you're on the edge of your seat!)

b. Now for the psychology:

i. Time horizon: entrepreneurs confronted with a 3x repayment obligation (which includes principal, so really only 2x ‘cost’), feel this obligation immediately… it is forefront in the mind. Meanwhile an equity “repayment obligation” is vague and undefined in magnitude and time horizon. Also, the RBF repayment obligation starts immediately and is on-going, requiring continued commitment. An equity “repayment obligation” comes after the acquisition, the press releases and after everyone is already rich, spraying eachother with champagne, so it “feels” less costly and less onerous, despite being completely the opposite in both respects. This is the challenge of the a priori versus a posteriori cost analysis.

ii. Lastly, there is the VC-fanboy phenomena, where raising money from a VC, particularly one who blogs a lot, is some sort of milestone for an entrepreneur. In these cases, entrepreneurs who raise a VC round feel as though just raising the round is “making it”. These entrepreneurs are willing to suspend their disbelief at the cost of capital for the perceived value / sensation of being let in behind the velvet rope and “in da club”.

We have worked with some amazing entrepreneurs that are growing their businesses to amazing scale, perhaps without ever having to dilute themselves with an equity invesment.

Nowadays it is so much cheaper and easier to start a technology company… you no longer have to purchase extensive (and expensive) hardware… you can just spin up some instances on AWS. And similarly, these companies require a different form of financing from the traditional VC path. They don't need as much money, they start generating revenues sooner and they therefore don't require as big an exit (in part because there's less dilution) to make the founders successful and happy.

Like I said above, stay tuned for further case studies and analysis around the cost of capital and cash flow / capital outlay questions.

Instagram Should Have Gotten a RevenueLoan!

Tue, 10 Apr 2012 18:53:44 GMT

By my calculations, the IRR on the $50MM equity investment that closed and funded exactly one-week prior to the Facebook acquisition announcement, which doubled the investors' money, is: 497,237,713,464,852,000%.

Now that's an expensive cost of capital!

Introducing: Design-A-Loan, from Lighter Capital!

Thu, 22 Mar 2012 23:37:50 GMT

This week we launched a new feature on our website creatively called: "Design-A-Loan" !

With a minimal amount of data and a couple clicks of the mouse, you can design the financing option that works best for your company and situation.

Check it out at: https://secure.lightercapital.com/designaloan.aspx or just click the pic below!

HiveMine Named One of "KMWorld's 100 Companies That Matter in KM"

Wed, 14 Mar 2012 18:53:02 GMT

HiveMine, the Seattle-based enterprise expertise identification (people, documents, and conversations) and exchange solution provider and Lighter Capital portfolio company, was recently named as one of the '100 Companies that Matter in Knowledge Management" by KMWorld. This is quite the distinguished list, which includes IBM, Oracle, Apple, MicroSoft, Google, and SAP.

Here is the article and list of 100 companies. And here is HiveMine CEO Peter Holland's "View From the Top".

Congrats to the HiveMine team!

Lighter Capital Named Finalist for Washington Technology Industry Association’s Technology Accelerator Award

Thu, 09 Feb 2012 20:56:00 GMT

We're excited and honored to have been selected as a finalist in the WTIA's Annual Awards. We announced our selection in a press release today which I've copied below.

Thanks, WTIA!

Lighter Capital announced today that it has been named a finalist for the Technology Accelerator Award as part of the Washington Technology Association (WTIA)’s 17th annual Industry Achievement Awards (IAA). The awards recognize Washington state companies, organizations and individuals who best demonstrate technology and service innovation and excellence. For more information and to register for the event, visit: www.washingtontechnology.org/IAA

“We’re fortunate to live and work in a state with such a diverse and vibrant technology community, said Susan Sigl, president and CEO of the WTIA. “These finalists represent the most creative and innovative companies and individuals in our industry and deserve the highest congratulations.”

Lighter Capital provides revenue-based financing to small businesses to fund growth in return for a small percentage of future years’ revenues. Lighter Capital and revenue-based financing is intended for early-stage businesses that have established success and are primed for growth, but are cash-constrained and need access to capital with no dilution, no loss of control, and no fixed repayment schedule.

As a pioneer in providing revenue-based loans to startups, Lighter Capital is responsible for bringing the funding application and negotiation process online – enabling applicants to have complete visibility into every aspect of the evaluation process. Additionally, Lighter Capital provides its portfolio companies with access to a unique set of support resources, such as executive counsel and marketing assistance.

“Being recognized by the WTIA is an honor and a tribute to the efforts of the Lighter Capital team,” said Andy Sack, CEO of Lighter Capital. “It’s also a testament to the success of the small businesses we’ve funded not only here in the Pacific Northwest – but around the country. At the end of the day, their success is our success, so we’re happy to share this honor with them.”

Best Alternative Loans for Small Business, per CBS News

Tue, 03 Jan 2012 19:41:39 GMT

Last week we were pleasantly surprised to see ourselves featured on the CBS Early Show in a piece by Carmen Wong Ulrich discussing the "Best Alternative Loans for Small Businesses". As startups and small businesses prepare to ring in the new year, it's usually also a time to plan for the coming fiscal year. You need to figure out a sales strategy, product development roadmap, and amidst all that, you need to make sure you have enough working capital to stay in business. So it was a really timely piece showcasing 3 unique ways businesses can raise capital when the banks aren't lending.

Among the more notable topics discussed by Ulrich:"

Business loans in 2011 fell to a 12 year low
B/w 1993-2009 65% of jobs were created by businesses w/ less than 500 employees
Since 2008, lending to small businesses has contracted by 54%

And I was pleased to see that Ulrich caught on to some of the same ideas we at Lighter Capital focus on:

There are small businesses doing well but need a boost, but the banks aren't lending, so what are you supposed to do?
A lot of small businesses are up and running, the owner is watching profits grow but can't access capital to build bigger and bigger profit

As the anchor says, "this seems much more appealing to a small business" --- we couldn't agree more. Catch the full story below:

I'm not just an investor, I'm a client!

Thu, 29 Dec 2011 19:43:12 GMT

Remember this:

http://www.youtube.com/watch?v=SDk_ZfYuyfY&t=48s

Well, I feel like ol' Cy Sperling.

My wife and I moved to a slightly larger house this week in preparation for our first baby due in April. She's 6 months pregnant and moving during the holidays meant many of our friends were out of town. For the first time in our lives we were going to need to hire movers.

Luckily, I had just heard of a company that could help us. ;)

We used Hire-A-Helper to search for, read reviews about and eventually book moving help. Total success and I highly recommend! The guys were prompt, efficient and friendly.

Where Do Entrepreneurs Get Their Money?

Tue, 20 Dec 2011 22:41:39 GMT

2:27 through the end... could not have said it better myself.

Hat Tip to BFeld where I saw this --> http://www.feld.com/wp/archives/2011/12/kauffman-sketchbook-where-do-entrepreneurs-get-their-money.html

Semi-frequently asked questions

Wed, 07 Dec 2011 00:06:26 GMT

In the past few weeks I've noticed a few recurring questions that I wanted to answer, for all to read. Some of this info is touched upon in our FAQs, but 1) some of it isn't, and 2) I'll trust you may be too busy building your business to peruse the deepest chasms of our website. With any luck, these questions will make it into our FAQ page someday. (we have a high bar for what "frequent" means...)

What happens to the RevenueLoan if my company is acquired?

First, you should celebrate! High-fives are my preferred method, but some people have taken to the fist-pound, or chest-bump. On the RevenueLoan side of things, you as a borrower would have a repayment commitment to uphold, which in the case of an acquisition can be done by "buying us out" of the loan contract. In our standard loan docs, we have an early buy-out clause, which gives you, the borrower, a set amount to repay to fulfill your obligation.

As an example, if your company is acquired within 2 years, you pay us 1.75x our principal amount, less the cumulative payments you'd made to that point.

I would also highlight, that because Lighter Capital does not have a board seat or other control provisions, we leave any acquisition related decisions to you the competent entrepreneur – as long as you continue to repay the RevenueLoan rate or have the capital available to buyout of the commitment.

As a cliffhanger, many of our deals have either warrant coverage or a success fee, which says that if your company is acquired or IPOs somewhere down the road, we get a small (1-5%) portion of the proceeds. This can be a bit confusing to entrepreneurs in the context of the rest of our loan terms, but rather than go into detail here, keep your eyes peeled for a warrant/success fee discussion on the blog sometime soon!

How do existing investors (angels, VCs) respond to the RevenueLoan structure?

Regarding angels, the general feedback we get from angels is positive - it actually gives them a bit of leverage, where your company gets more capital to work with without any additional dilution to investors, and there's no valuation event, which also keeps things simpler. Just to be fair in advance, the only negative response I've seen is that it's an increased cost (ie 2-5% of revenues/month) which some investors look at as cash that should be pumped back into the company at a time of growth.

What happens if for some unfortunate reason I end up with $0 in revenues at some point?

What's 3% of $0? The numbers don't lie, and if your revenues are $0, you pay us $0 – at least for that month. Our incentives are aligned with management, in that we expect companies that have revenues to endeavor to maintain and grow those revenues – which is why we restrict our investments to companies that already generate $200K/year or more. This flexibility in our funding model is especially great for companies with seasonal businesses or with lumpy cashflows.

How can I expect the funding process to go after you review my loan application?

We try to make it quick and painless for both you and Lighter Capital, but as light-hearted as we aspire to be, this is a real financial transaction that can have serious ramifications for both your company and our fund. So our funding process after we’ve discussed terms generally looks like this: First, we have a short list of diligence items that are primarily focused on better understanding your company's balance sheet structure, legal structure, and near-term business plans. Assuming everything checks out, we draft loan docs for your review, and get a wire queued up for funding. In the best case scenario, we've gotten this whole process down to about 2 weeks. The instances where this takes longer is most often because the CEO is busy dealing with more pressing issues in the business, or there are unusually complicated elements found in the legal or business diligence that require more work on our end. It should still seem a lot less painful than other funding services you've run into, and that's our hope. Give it a try to find out!

Our Explosive Countdown ends with an investment in fast-moving Hire-a-Helper

Thu, 01 Dec 2011 22:08:54 GMT

Today we announced the end of our Capital Countdown promotion and announced that HireAHelper has won our Explosive contest. Here's an excerpt of what we said:

The competition offered up to $500,000 to an early-stage company with explosive revenue growth. HireAHelper, the largest marketplace for consumer day labor, was selected out of more than 100 businesses that applied during the 3 month promotion.

"HireAHelper far and away showed the most growth potential to fit with our RevenueLoan structure," mentioned Andy Sack, CEO of Lighter Capital. "The Capital Countdown proved to us that there are a lot of really unique businesses underserved by existing financing sources."

HireAHelper will use the funds to expand its product offering and hire more developers.

"As we expand we wanted to find a way to keep growing quickly without losing control of the HireAHelper mission to improve the day labor industry,” added Mike Glanz, CEO of HireAHelper. “A RevenueLoan from Lighter Capital was the perfect solution: we don't have to slow down or change directions."

Based on the success of the contest, Lighter Capital plans to run new Capital Countdowns to fund early-stage companies beginning again in early 2012. Companies interested in participating in the next promotion should stay tuned by visiting the Lighter Capital website.

Lighter Capital invests in Vibrant Chocolate – indulgence that’s good for you!

Wed, 30 Nov 2011 18:49:00 GMT

Ever feel guilty about sneaking a chocolate? Vibrant Chocolate is your savior – Mike Arcuri, Vibrant’s CEO packed his gourmet chocolates with vitamins so you can feel better about having one (or 2, or 3) everyday!

Mike is a high-tech entrepreneur, fitness-buff and chocolate lover who teamed up with distinguished chocolatiers and pastry chefs from Tom Douglas Restaurants to develop the decadent Vibrant Chocolate menu.

You aren’t likely to find these treats on store shelves though, Vibrant Chocolate is using an ecommerce subscription model to sell its chocolates, which was a perfect fit for a RevenueLoan!

Small Business Saturday is just a marketing boom for big business

Wed, 23 Nov 2011 06:46:01 GMT

If you've paid much attention to Facebook ads or you watch your local news, you've probably heard of "Small Business Saturday" (SBS), an holiday shopping day created by American Express, now in its second year.

Supporting small businesses in a season when shoppers are increasingly spending their money at big box stores and online sounds like a great idea. If you're going to buy your Aunt Gladys a camouflage Snuggie, you might as well buy it somewhere local so your holiday spending budget goes back into your local economy and helps out "the little guy (or gal)." That's the idea anyway.

As an entrepreneur and someone who grew up in a small-business household, I have a soft spot for the small business owner. I viewed SBS with a sense of hope. Finally! A campaign during the biggest spending season of the year to encourage shoppers to go back to the local merchants! A reminder to consumers everywhere that there are still great local stores providing the same goods found online in a more personal environment where you connect with a local seller who can support the local economy, hiring local workers and buying other local services.

Despite my optimism, however, I had3 nagging questions:

Is it fair to assume that people aren't shopping at local small business, and how significant is the difference?
Does a “holiday” like SBS actually get people to shop then?
Even if people are shopping on SBS, does it get people to shop at small businesses beyond that one day?

Is it fair to assume that people aren't shopping at local small businesses anyways?

The whole premise of Small Bbusiness Saturday is that people aren't shopping at small businesses, so we tried to find out where people were shopping. Based on our results, only 14% of people usually shop at local small business - with other people either shopping online (34%) or at local big-box superstores (52%).

So the answer is yes. We have a problem, and spending time and energy to bring customers back through the doors of local small businesses is worth trying to fix.

Are people planning to shop on Small Business Saturday?

First, does Small Business Saturday get people who usually don't shop at small businesses into the doors of local small business? If all this hoopla is going on to get people to spend just 1 day a year shopping at local small businesses, does it even accomplish that?

Unfortunately, not really.

A mere 4.7% of people surveyed who usually shop online or in big-box stores planned to do their holiday shopping on Small Business Saturday. This means that despite the support of non-profit business organizations, public officials, and 50+ major corporate backers (including Clear Channel, which claims to reach 238 million monthly listeners in the US), it only gets a sliver of the population to change their shopping habits. And that’s just on Small Business Saturday.

Will people shop at small businesses long after Small Business Saturday is over?

The point of SBS isn’t just to get consumers to shop locally on that one day, it’s to drum up awareness to shop at your local convenience store all year long. So, I expanded my questioning to the broader holiday season. For people who usually shop online or at big-box stores, will Small Business Saturday increase spending at small businesses throughout the holiday season?

No. I'm sorry, I was disappointed too.

As an effort to build long-term awareness for local businesses, the promotion seemed even less effective. Of the people we surveyed who said they usually shopped online or at big chains, an even lower 1.7% plan to do most of their holiday shopping at local small businesses. Put a different way, almost 99% of people shopping at supercenters and online e-tailers plan to keep doing what they’re doing – spending their money outside the local economy.

To add insult to injury - only 15% of people polled who usually shop at local small businesses planned to do their holiday shopping on Small Business Saturday. So the promotion with a goal of getting people to shop at small businesses, still isn't enough to keep small business shoppers away from the rock-bottom deals offered by big-box stores and online sales.

My conclusion

The big winner in Small Business Saturday is big business! Big-box stores, online superstores, and the big payment processors like American Express organizing the promotion. Now, I’m pleased as punch that they're at least thinking of the local merchants in all of this, but it looks like what’s really happening is some marketing genius in American Express has figured out that a promotion like this is the best way to gain market share of the small business spenders, while getting some goodwill with consumers – and a bunch of “likes” on Facebook (in this case “bunch” = 2.4 million).

It stinks of the same kind of greenwashing you see when BP talks about cleaning up our oceans. Or the son who only calls on Mother’s Day and thinks that counts as being a “good son”. (Trust me, that doesn’t fly in my family!) If AmEx really wants to support small businesses, they could change their fee structure to reflect the different economic needs of smaller business.

Small Business 2012?

Anyone want to join me for Small Business 2012? Why limit ourselves to just one Saturday a year, when we’d rather be sleeping in anyways? It’s so much more fun to buy from our friendly neighborhood stores all year long! Let’s spend our money at local* businesses, support small business owners and entrepreneurs with our wallets and not just puff pieces and rhetoric, and one-day promotions that don’t even seem to work.

*And no, I won’t cheat by buying from a “local” merchant down the street from my office.

Note: Data reflects a poll of 275 adults throughout the US, ages 18-70. Surveyed by Lighter Capital using SurveyMonkey and Mechanical Turk, over the week of 11/14-11/21.

4 Khan Academy videos entrepreneurs should watch

Mon, 21 Nov 2011 18:03:48 GMT

You may have heard of the huge impact the Khan Academy is having on early education - both in the US and around the world. It's a big enough idea that they've gotten some hefty donations, including a $5m from the O'Sullivan Foundation earlier this month. My impression of the site was that it was mostly a site relevant for primary school students to learn basic math and science. But a friend of mine was recently praising the site as a way to spend time - learning everything from brain teasers to US economic bailouts.

Over the weekend I decided to check out the site for myself and was surprised to see both some simple refresher courses on the Golden Ratio and some other middle-school era concepts, but as I scrolled down the list of videos, I discovered a whole section on Venture Capital and Capital Markets. If he can figure out how to get millions of 12 year olds to understand the quadratic equation, Khan should be able to give a halfway decent explanation of how to raise funding for a startup. after all - he both used to be a hedge fund analyst and has raised a solid amount of money as a non-profit.

I think these are all solid backgrounders to understand the basics of raising funding. If you start here, you may want to get a lot more in depth with resources like the Brad Feld and Jason Mendelson's Term Sheet series or the AngelHacks blog for some more in depth lessons.

Raising money for a startup

Getting a seed round from a VC

Equity vs. Debt

Going back to the till: Series B

Just for fun: Probability of playing cards

Not specifically fund-raising related, but this is a simple explanation of card probability. Not entrepreneur related, you say? Our own Andy Sack would beg to differ...