Andy Sack has been working behind the scenes for more than a year. Yes, we know he’s been busy bringing the first session of TechStars, the startup bootcamp, to Seattle this fall. He’s also been co-leading Founder’s Co-op, the seed-stage investment fund, for the past couple of years. But just when you think the Seattle tech entrepreneur and angel investor has his hands full, he busts out with a new venture. This one could have even greater implications for startups, entrepreneurs, and innovation—and not just in Seattle.
It’s called RevenueLoan, and Sack is the founder and CEO of this new company. Its goal is to provide capital for promising startups in the Pacific Northwest, and across the country, using a different kind of investment model called “revenue-based financing” (sometimes called “royalty-based financing”). Before we get into exactly what that means, here are the hard facts. RevenueLoan has raised $6 million from Seattle-based firms Voyager Capital, Summit Capital, and Founder’s Co-op, to make investments and support operations. Sack says he will remain a partner with Founder’s Co-op, but will step away from co-leading that fund to focus on RevenueLoan and TechStars. (Founder’s Co-op will be led by Chris DeVore and Geoff Entress.)
The idea of RevenueLoan is to make investments in the range of $100,000 to $500,000, Sack says, targeting companies that already have between $500,000 and $5 million in annual revenue. Instead of taking an equity stake in the company like a traditional VC firm would, RevenueLoan will receive a percentage of future revenues (typically 1 to 10 percent). The investor can generate a maximum of a 3-to-5 fold return on his investment. That’s the “revenue-based” part of the equation, and the goal is to open up a wider range of companies to invest in, where the investment returns will flow if the company is able to execute on its business plan. Such an investment model doesn’t depend on a company going public or getting acquired, like traditional venture capital.
Since the IPO market has been in a drought for years, and acquirers in such an environment can afford to drive a hard bargain, this revenue-based model definitely has appeal. After all, early-stage investors are starving for some way to generate returns. And for entrepreneurs, it can offer a new way to get the capital they need for expansion, while allowing them to spend more energy executing on their business plan rather than chasing the all-important “exit” that VCs crave.
“We’re going after a segment that is today underserved by traditional equity like VCs and banks,” Sack says. “It’s a huge market.”
Revenue-based finance is not a new idea. As I first described in a feature last October, the model dates back to traditional mining companies and government economic development programs. Since the early 1990s, it has been applied to early-stage technology startups by a handful of
