[Updated 9/30/09 2:15 pm. See below.] Seattle-based Founder’s Co-op, the seed-stage fund run by Andy Sack and Chris DeVore, has been busy as of late. The peer-to-peer angel group has made two startup investments that have come to light this month. The financial details of the deals haven’t been announced, but something interesting may be brewing here.
Here are the two Seattle-area startups that have been funded:
—Nearlyweds, led by Porter Bayne and John Scrofano, is a maker of “social wedding software.” The company, which has been in business since 2007, designs personalized wedding websites for couples for a flat fee. DeVore announced the investment on his blog yesterday. The amount wasn’t disclosed, but Founder’s Co-op typically invests $250,000 or less.
—BigDoor Media, led by Zango founder Keith Smith, is still under wraps, but its website says it’s “building a completely new, automated content monetization platform for online publishers.” According to a regulatory filing on Sep. 1, BigDoor received $250,000 in equity funding, and Andy Sack (a former Zango board member) is listed on the form as a director. Smith, reached by e-mail on Sep. 1, declined to comment, saying the company is still in stealth mode.
I’m wondering if these latest investments represent a new kind of early-stage venture funding. I haven’t confirmed this yet with Sack or DeVore (neither would comment on the deal structure for this story), or with the startups in question. But earlier this summer, DeVore posted some intriguing thoughts on his blog about a type of investment model called royalty based financing (RBF).
DeVore described the model as “secured lending, but rather than requiring a fixed coupon and repayment period, the lender obtains a claim on a fixed percentage of gross revenues until an agreed-upon multiple of invested capital (typically 3 – 5x) is returned. RBF investors trade steeper default, timing and rate of return risk for richer potential returns than those offered by traditional business lending.”
So it sounds like the idea is to trade equity in the company for a certain amount of revenue per year—of course, this approach only works for post-revenue startups. DeVore went on to talk about “bringing the RBF approach to riskier, earlier-stage investing, where investors retain an equity position as an option on a future liquidity event, while receiving a portion of the expected return in the form of cash flows.”
Back in June, a related post in GigaOm said of such an approach, “In the middle ground between bankruptcy and an IPO, where millions of small businesses reside, it would provide a return for investors. That compares with today, which finds them stuck, waiting for a big payout that may never come.”
In DeVore’s post, he said his group was looking into the new investment model. “We’re trying it on for size, and—at least for some of our investments—this model may wind up being a better fit than the traditional venture approach,” he wrote. “Most of all, we love the idea of breaking the mold in our industry—early-stage investing—in the same way we hope our companies shake up the status quo in theirs.”
I could see this model working with Nearlyweds, which offers a paid service and has been in business for a while. But BigDoor Media is pre-revenue, so the fit isn’t as clear. I will have more on royalty based financing soon, as it pertains to the broader investment community, so watch this space.
[This paragraph added after speaking with Founder’s Co-op.] Reached by phone about Nearlyweds, DeVore confirmed the investment was less than $250,000. He couldn’t comment on the deal structure, but it sounds like Nearlyweds has a compelling offering in the wedding software space that fits well with Founder’s investment strategy. “It doesn’t feel like existing free products have hit the nail on the head,” DeVore said. “They can create a step function in quality, and in what share of the market they have.”
