A lot of angel investors today are offering and moving to a different form of investing which centres on offering both capital appreciation and a revenant income for small businesses, organizations and start-up companies. When you look for capital for your business, you can possibly use this kind of debt-equity hybrid that will allow you to get the capital you need to kick start your business while at the same time offering less of an equity percentage to an angel investor.
Royalty based financing is a sort of cross breed which brings together debt and equity into security. However, it should be taken into consideration that that the best people for royalty based financing funding are businesses which have very high margins and moderate operating costs. As your business will be required to provide a healthy cash expense, organizations that have low margins cannot really afford to disburse and offer large percentages of gross revenues to the angel investors. Firms that offer services, technology businesses, software firms and other specialty service organizations are main prospects for royalty based financing from angel investors as they can afford the debt portion of the note.
The royalty based financing was not really popular amongst the angel investors some time back, but now it is slowly picking up with the angel investors who offer their investment capital and funds needed to the organization in return for a specific amount or percentage of royalty on the firm’s sales and deals, which can be monthly, quarterly or yearly. It means, that the angel investor, in return for his offer to invest in your business, would continue to receive royalty on sales or deals from your business over an indefinite period of time.
Royalty based financing, in most situations, is subdued debt, meaning, that other loans take priority over this note in the case the business fails and assets liquidate. The advantage for an angel investor here is that they can quickly recover their initial investment which they offer to the firm if the business does well and get a large capital appreciation on their equity participation.
In royalty based financing, the angel investor buys a certain percentage of future sales. This is basically an advance to the company. Generally, this type of finance is common to angel investors in the energy sectors, but now it’s becoming more common for technology organizations too. This type of financing offer by angel investors works well for established firms that have an existing product or service and rising companies that are about to launch a product or a service with high gross and net margins.
More firms today are turning to the debt-equity hybrids like royalty based investing, in order to make sure that they get an ongoing stream of cash which assists them in recovering their initial funding into your business. The concept of royalty-based financing is not that difficult, it simply means that instead of buying equity in a juvenile firm, an angel investor offers and agrees to obtain a percentage of the firms’ monthly revenues, up to a limit of, say, 3 to 5 times their investment. So, instead of waiting 5 or 10 years for a start-up company to go public, an angel investors’ offer to the company, in form of investment capital can start getting returns immediately. This move means that angel investors can fund a much bigger range of start-up firms than just those that typically obtain venture backing, the ones that have the potency to grow big, fast. Angel investors who offer royalty financing in addition to equity live up to their fullest potential.
Let us see as to why the angel investors invest in any business in the first place:
- Like equity investors, royalty investors have the chance to re-live their entrepreneurial experiences and give their lessons learnt to young entrepreneurs ahead as well as their help them with business contacts. Royalty makes it easier to manage mentoring, because the angel investor here doesn’t have the power of decision-making. The royalty investor attends the advisory board or acts as a non-voting person in the board of directors.
- With royalty based financing as an offer, the angel investor gets his or her return soon, from every month’s income as opposed to a sale. Royalty based investments not only offer a competitive IRR, but do them at lower risk, thus allowing angel investors to balance their investment listing with more-income-oriented investments. This might allow angel investors to lower their overall risk exposure without lowering their return.
- With royalty based financing, you could round off dilution for your portfolio firms and open a new source of deal flow from venture capitalists. With royalty in hand, you become a resource for their later-stage funding which are not quite profitable. To add to that, the royalty financing option can offer and enable angel investors to extend the platform for their own portfolio organizations which need more funding to grow but are averting a venture-capital-funded way to a substantial solution.
- Royalty based financing allows and offers angel investors not only to accelarate economic activity with their investment, but to improvise the capital market by assisting to fill the crack between bankable debt and equity. When this gap is unfilled, growth plans come to a halt. Good royalty dealings are not done because there are not yet enough angel investors who want to participate.
- When angel investors have equity and royalty based financing, both as options, they can secure more great deals. An angel investor with only equity to offer looks for an early-stage start up firm with a huge market and clear way to an exit event. By offering royalty as well, angel investor’s potential deals include later-stage organizations, even those without a clear exit strategy. They just have to find what every investable deal requires and that is a firm team which profitably delivers their value added product or service in the market.
Thus angel investors offering capital in return for royalty in the company’s sales is catching up, and it is more convenient than equity based financing as the returns are large and quicker.