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Webinar Recap – Revenue-Based Finance: How Does It Work and Who Is It For?

On September 17th, Lighter Capital hosted our second webinar, “Revenue-Based Finance: How Does It Work and Who Is It For?”

Thanks to all who tuned in to watch! We received a ton of great questions during the presentation, and several more have landed in our inboxes over the last couple days. All Q&A is posted below, and if there are any further unanswered questions, please feel free to contact us—we are happy to help!

Many people asked us to post the name of the book that Rob mentioned during the webinar. It is Early Exits: Exit Strategies for Entrepreneurs and Angel Investors (But Maybe Not Venture Capitalists) by Basil Peter and you can check it out on Amazon here.

Lighter Capital’s Investment Criteria

  1. What’s the one thing you advise companies who apply to really nail to qualify? What’s the best thing to prep for?

  2. To qualify for our financing, you must be doing at least $15k in revenue (in net cash receipts, not accrual accounting basis) per month for 3 months, be growing, not burning a ton of cash, with a clear path to profitability and a good plan for use of funds. We do not fund businesses without existing revenues and we will not refinance existing debt such as founder buyouts. If you are going to do any kind of formal fundraising, you will need to have all your corporate documents in order, including financial statements and a cap table. We encourage you to hire a great accountant to make sure your financials make sense- this will allow the funding process to move along more smoothly. Our next webinar will focus on “getting your ducks in a row,” for any kind of formal fundraising, so stay tuned!

  3. How much detail do you need re: use-of-funds?

  4. We need to see a clear plan for the use of funds that will grow the business. We really like it when a company knows their cost of customer acquisition, churn, customer lifetime value, and how their plan will ramp all of those things up.

  5. How do you determine the 1.5 – 3.0 range for a particular company?

  6. We play with 4 levers: The total amount paid (cap), the revenue loan rate (RL rate), the success fee, and the total amount of the investment. Your question is looking at the cap, and this moves inversely with the success fee and the RL rate. For example, if you want to pay a lower cap than 2x, we can offer that to you at a higher RL rate. Additionally, risk is a factor that we look at when setting the cap. Higher risk, earlier stage businesses typically will have a higher cap.

  7. Can the $15k/month requirement be an average, or does each month need to be greater than 15 for 3 months? i.e. what is months are something like 30k,2k,18k,6k,…

  8. The general trend must be growth and the average of the trailing 6 months must be higher than $15k.

  9. Do you lend to B to B service/support companies?  If so what type of criteria are you looking for?

  10. Yes, and as with all our investments, we look for high gross margins and scalability.

  11. Do you invest at all in businesses that are not software related?

  12. Currently, no. We like software businesses because of their high gross margins and scalability.

  13. Would you do anything with an oil technology?  Or are you tech as in computer online only?

  14. See above.

  15. Do you just operate in the US, or do you lend to Canadian companies too? Other countries? Do you invest in active businesses based overseas and doing international business?

  16. We currently only invest in companies based in the US. We are exploring technology-enabled solutions that will enable us to invest in companies all over the globe.

  17. Can I apply for credit from Brazil?

  18. See above

  19. Given differing state usury laws, are there some states where you do not do business?

  20. Right now, we haven’t found any states whose usury laws we violate but whenever we enter a new state we spend time understanding their laws to make sure we are in compliance.

  21. This is a perfect fit for our needs.  Can we contact you directly via the email provided if the standard application might not apply?

  22. We strongly encourage you to use our online application because it will speed up the process on both ends. Please do explain what makes your business disruptive or exceptional in the appropriate fields on our application.

Lighter Capital’s RevenueLoan Structure and Practice

  1. Any way to prepay the loan?

  2. Yes, the loan can be pre-paid, but unlike a term loan or mortgage, to pre-pay our loan you will need to pay the full amount of principle and pre-determined interest.

  3. Since there is no fixed interest rate or payback time how do we book the liability for interest and principle on the balance sheet?

  4. RBF can be structured a number of different ways, including options to convert to equity. Ours is structured more like a term loan, with principle and interest paid back over roughly 4 years, and will appear on the balance sheet just like a term loan or mortgage.

  5. Is the interest tax deductible?

  6. Yes, the interest is tax deductible.

  7. Do you have any resources for larger deals say over ten mil.?

  8. People use RBF for all kinds of projects. We have a network of RBF investors that behave a little more VC’s in that they invest out of a fixed fund. In contrast, we operate more like a bank. For a bigger investment, say in biotech and pharmaceuticals, we can make appropriate introductions within our network of RBF lenders. Our investment limit might change someday soon (we recently upped our limit to $1M) but unless we change our structure or extend lending to later-stage businesses, it is unlikely that we will ever invest more than $10M.

  9. How do you verify if the client has additional debt?

  10. We search UCC filings for institutional debt. Loans from founders and angels are typically on the balance sheet. If a company has an “off-the-books” loan that they do not disclose to us, then that company is in default of our loan agreement.

  11. Is the loan collateralized generally, or not?

  12. We take a UCC filing and the loan is secured. When we work with companies that don’t have other financing in place, and most of our borrowers do not, we are first in line and therefore senior secured. Also, since we tend to work with companies that don’t have a lot of assets, we will ask for any assets like IP, patents, trademarks, and domain names. It is unlikely that we will ever possess and sell those things if a company goes south, but it is one of our only ways to ensure that the entrepreneur stays committed to the business- you can consider it a “don’t quit provision”. If the company has existing bank financing, we will typically subordinate to it. If it is friends and family money or convertible angel debt, we will ask to be in front (ask the investors to subordinate to us). In either case, the point is to have an institutional investor take the lead the on a work out or transaction if the business goes south. We have the expertise to do this, while angels and friend and family investors almost always do not.

  13. Do you provide additional financing with growth of revenues like a line of credit?

  14. We do not provide a line that can be drawn down and paid back indefinitely- we are not set up to manage that. However, we have provided follow-on investments with over half of our portfolio companies. These companies have grown their revenues under our initial investment to the point where they can take on another round of funding from us on better terms. This means that their royalty rate and/or cap is lower for the second tranche. Our financing will scale along with the growth of your business. In contrast to VC funding, where you typically have one shot at a multi-million dollar investment to last you 12-18 months, we prefer to provide you with just as much capital as you need for your project. That way, we can keep your cost of capital lower and follow up with another investment when you are ready to put it to work. This also de-risks the investment on our end.

  15. Is the monthly payment rate adjustable? or fixed throughout the term?

  16. The monthly rate is fixed. The total amount that you pay adjusts according to your monthly performance.

  17. This is a great financial product.  Do you see banks trying to compete with you?

  18. We make investments in early-stage, high risk businesses, and we don’t expect banks to be interested in competing for our customers anytime soon. Even tech banks like Square One and Silicon Valley Bank tend to invest in larger, more mature businesses. A bank could certainly offer an RBF investment to a different target market, and it would be an advantage to us for RBF loans to become more widespread- we would spend less time educating potential borrowers.

Lighter Capital’s Added Value Services

  1. Who are your direct competitors and what are your advantages?

  2. Lighter Capital offers experience, technology, and added value through our partners. The RBF space is young enough that each RBF lender has a unique focus, so we do not have a direct competitor. We have done just under 3 dozen RBF investments, which is more than all the RBF lenders combined, so we have experience as an advantage. In addition, we use our own technology to facilitate the evaluation process to make the diligence process faster, easier, and “lighter” on both ends. Lastly, we are a preferred BizSpark partner, which means that we can offer our borrowers significant credits for Microsoft offerings, including $60k in Azure hosting. If you would like to look into other RBF lenders, you can get started with this list:

  3. Who else is doing this in a structured manner like this?

  4. See above

  5. It’s a plus to say “we’re VC backed” with partners and prospects. Can we leverage/name drop your name/financial strength like that?

  6. Basil Peters, author of Early Exits, would argue that VC backing is not a “plus” for your business. One analogy is that working with VC’s is like putting a rocket ship on your back- you’ll either shoot to the moon or blow up along the way. If you think it is a point of pride to raise VC money, we encourage you to do some research and make sure that it is the right path for your business. VC backing certainly comes with benefits but it can also be a rough path. Lighter Capital does add value as an investor- we promote our companies and make introductions, but we will not fire your CEO or tell you how to run your business. Additionally, gaining credit with us can help you secure favorable terms from with banks when your business is ready for it. Lastly, please see above for more on added value.

  7. Are there any periodic mentoring sessions/ review of business?

  8. We collect monthly financials and actively monitor our portfolio companies so that we can take action when we see or predict underperformance. We can make introductions, assist with PR, and give as much mentoring or advice as you would like.

General Questions on Revenue-Based Finance

  1. How do you see the new crowdfunding rules affecting RBF and angel investing?

  2. We are a long way from open and non-accredited lending. As a balance sheet lender, we might be interested in opening up our own lending platform for the crowd to access in the future. For RBF, the amortization process is mathematically complex and would be difficult for friends and family to calculate and service.. We feel that it is more important to find a capital structure that is appropriate for your business, and the source of the capital is secondary.

  3. Not sure why this would work on a movie.

  4. Unlike bank loans, RBF investments view future revenue streams as collateral. This makes sense for a big budget movie like Waterworld that expects huge box office revenues. We like to work with companies with existing revenues, so investing in movies isn’t of interest of us, but the model does work well for films.

  5. More to a previous point, how do relations with existing equity investors typically play out?

  6. When a company takes on funding from any source, all shareholders will need to buy-in to the deal. We have not yet uncovered a typical scenario for the process of reaching shareholder consensus. We can only say that when all shareholders have a similar vision for the long-term goals of the business, decisions come much faster than when expectations are misaligned.