revenueloan presentation to the angel capital assn

Revenue Based Financein two acts

Angel Capital Association, Seattle04 February 2011

Randall LucasRevenue Loan

Thursday, February 10, 2011

Act I: How to rip off Tom Cruise

or, Why Movie Investing is a “Risky Business”

Thursday, February 10, 2011

Act I: How to rip off Tom Cruise

or, Why Movie Investing is a “Risky Business”

Thursday, February 10, 2011

Act I: How to rip off Tom Cruise

or, Why Movie Investing is a “Risky Business”

Thursday, February 10, 2011

Step 0: Find some investors.

Thursday, February 10, 2011

Step 0: Find some investors.

• Unsophisticated ones.

Thursday, February 10, 2011

Step 0: Find some investors.

• Unsophisticated ones.

• (er, not like present company)

Thursday, February 10, 2011

Step 0: Find some investors.

• Unsophisticated ones.

• (er, not like present company)

• (You’re all much too smart...)

Thursday, February 10, 2011

Step 0: Find some investors.

• Unsophisticated ones.

• (er, not like present company)

• (You’re all much too smart...)

• (... or you will be after this presentation)

Thursday, February 10, 2011

Step 1: Use a Traditional Equity (or Partnership) Structure

Thursday, February 10, 2011

Step 1: Use a Traditional Equity (or Partnership) Structure

• Either way, what you sell the investors is a claim on the residual profits of the enterprise.

Thursday, February 10, 2011

Step 1: Use a Traditional Equity (or Partnership) Structure

• Either way, what you sell the investors is a claim on the residual profits of the enterprise.

• Let’s say we sell off 70% of the equity for $10 M.

Thursday, February 10, 2011

Step 1: Use a Traditional Equity (or Partnership) Structure

• Either way, what you sell the investors is a claim on the residual profits of the enterprise.

• Let’s say we sell off 70% of the equity for $10 M.

Thursday, February 10, 2011

Step 1: Use a Traditional Equity (or Partnership) Structure

• Either way, what you sell the investors is a claim on the residual profits of the enterprise.

• Let’s say we sell off 70% of the equity for $10 M.

Investors70%

YOU30%

Thursday, February 10, 2011

Step 2: Bundle Together Several Projects

Thursday, February 10, 2011

Step 2: Bundle Together Several Projects

• You trade more equity for talent contracts (actors, directors, etc.)

Thursday, February 10, 2011

Step 2: Bundle Together Several Projects

• You trade more equity for talent contracts (actors, directors, etc.)

• You trade another 20% ownership to the talent. But you’ve still got a hefty chunk.

Thursday, February 10, 2011

Step 2: Bundle Together Several Projects

• You trade more equity for talent contracts (actors, directors, etc.)

• You trade another 20% ownership to the talent. But you’ve still got a hefty chunk.

Thursday, February 10, 2011

Step 2: Bundle Together Several Projects

• You trade more equity for talent contracts (actors, directors, etc.)

• You trade another 20% ownership to the talent. But you’ve still got a hefty chunk.

20%

Investors70%

YOU10%

Thursday, February 10, 2011

Step 3: Have a Hit Movie

Thursday, February 10, 2011

Step 3: Have a Hit Movie

• Implementation is left as an exercise to the reader.

Thursday, February 10, 2011

Mission: Accomplished?

Thursday, February 10, 2011

Mission: Accomplished?

• Let’s say you spent the $10 M, grossed $110 M, and should have a profit of $100 M to distribute to the owners.

Thursday, February 10, 2011

Mission: Accomplished?

• Let’s say you spent the $10 M, grossed $110 M, and should have a profit of $100 M to distribute to the owners.

• ... but in Hollywood, it’s awful fun to be a hit-making producer on a roll.

Thursday, February 10, 2011

Mission: Accomplished?

• Let’s say you spent the $10 M, grossed $110 M, and should have a profit of $100 M to distribute to the owners.

• ... but in Hollywood, it’s awful fun to be a hit-making producer on a roll.

• ... and it’s a lot more fun to spend $100 M than it is to distribute it.

Thursday, February 10, 2011

Mission: Accomplished?

• Let’s say you spent the $10 M, grossed $110 M, and should have a profit of $100 M to distribute to the owners.

• ... but in Hollywood, it’s awful fun to be a hit-making producer on a roll.

• ... and it’s a lot more fun to spend $100 M than it is to distribute it.

Thursday, February 10, 2011

Mission: Accomplished?

• Let’s say you spent the $10 M, grossed $110 M, and should have a profit of $100 M to distribute to the owners.

• ... but in Hollywood, it’s awful fun to be a hit-making producer on a roll.

• ... and it’s a lot more fun to spend $100 M than it is to distribute it.

Thursday, February 10, 2011

• (The fancy word for this is “Agency Risk.”)

Thursday, February 10, 2011

Step 4: “The Producers”

Thursday, February 10, 2011

Step 4: “The Producers”• Tragically, all of the other movies in the

“bundle” show a big accounting loss.

Thursday, February 10, 2011

Step 4: “The Producers”• Tragically, all of the other movies in the

“bundle” show a big accounting loss.

• ...so, there are no profits to distribute.

Thursday, February 10, 2011

Step 4: “The Producers”• Tragically, all of the other movies in the

“bundle” show a big accounting loss.

• ...so, there are no profits to distribute.

• You miss out on your 10% of $100 M, sure... but you got to spend $100 M, which was more fun.

Thursday, February 10, 2011

Step 4: “The Producers”• Tragically, all of the other movies in the

“bundle” show a big accounting loss.

• ...so, there are no profits to distribute.

• You miss out on your 10% of $100 M, sure... but you got to spend $100 M, which was more fun.

Thursday, February 10, 2011

Thursday, February 10, 2011

• (The fancy word for this is “Accounting Fraud.”)

Thursday, February 10, 2011

• (The fancy word for this is “Accounting Fraud.”)

• (But fancy words can be hard to prove.)

Thursday, February 10, 2011

Omar from “The Wire”

Thursday, February 10, 2011

Omar from “The Wire”What about the owners?

Thursday, February 10, 2011

Omar from “The Wire”What about the owners?

Thursday, February 10, 2011

Omar from “The Wire”What about the owners?

“Man, money ain’t got no owners ... only spenders.”

Thursday, February 10, 2011

Act II: Surely There’s a Better Way

Thursday, February 10, 2011

Act II: Surely There’s a Better Way

• or, RBF to the Rescue

Thursday, February 10, 2011

Act II: Surely There’s a Better Way

• or, RBF to the Rescue

• and, stop calling me Shirley.

Thursday, February 10, 2011

Act II: Surely There’s a Better Way

• or, RBF to the Rescue

• and, stop calling me Shirley.

Thursday, February 10, 2011

Retrospective: Characteristics of Movie Financing

Thursday, February 10, 2011

Retrospective: Characteristics of Movie Financing

• Too uncertain for fixed payments

Thursday, February 10, 2011

Retrospective: Characteristics of Movie Financing

• Too uncertain for fixed payments

• Too hard to monitor for equity.

Thursday, February 10, 2011

Retrospective: Characteristics of Movie Financing

• Too uncertain for fixed payments

• Too hard to monitor for equity.

• (How do you think Francis Ford Coppola would act in a board of directors meeting?)

Thursday, February 10, 2011

Retrospective: Characteristics of Movie Financing

• Too uncertain for fixed payments

• Too hard to monitor for equity.

• (How do you think Francis Ford Coppola would act in a board of directors meeting?)

Thursday, February 10, 2011

Retrospective: Characteristics of Movie Financing

• Too uncertain for fixed payments

• Too hard to monitor for equity.

• (How do you think Francis Ford Coppola would act in a board of directors meeting?)

• No clearly defined “exit event”

Thursday, February 10, 2011

Retrospective: Characteristics of Movie Financing

• Too uncertain for fixed payments

• Too hard to monitor for equity.

• (How do you think Francis Ford Coppola would act in a board of directors meeting?)

• No clearly defined “exit event”

• Temptation to spend free cash...

Thursday, February 10, 2011

Retrospective: Characteristics of Movie Financing

• Too uncertain for fixed payments

• Too hard to monitor for equity.

• (How do you think Francis Ford Coppola would act in a board of directors meeting?)

• No clearly defined “exit event”

• Temptation to spend free cash...

• on the wrong sorts of things.

Thursday, February 10, 2011

Retrospective: Characteristics of Movie Financing

• Too uncertain for fixed payments

• Too hard to monitor for equity.

• (How do you think Francis Ford Coppola would act in a board of directors meeting?)

• No clearly defined “exit event”

• Temptation to spend free cash...

• on the wrong sorts of things.

Thursday, February 10, 2011

Retrospective: Characteristics of Movie Financing

• Too uncertain for fixed payments

• Too hard to monitor for equity.

• (How do you think Francis Ford Coppola would act in a board of directors meeting?)

• No clearly defined “exit event”

• Temptation to spend free cash...

• on the wrong sorts of things.

Thursday, February 10, 2011

RBF, a Hybrid Approach

Thursday, February 10, 2011

RBF, a Hybrid Approach

Thursday, February 10, 2011

RBF, a Hybrid Approach

• No Exit Required

Thursday, February 10, 2011

RBF, a Hybrid Approach

• No Exit Required

• Relatively easy to monitor / verify

• Cash revenues are more objective

Thursday, February 10, 2011

RBF, a Hybrid Approach

• No Exit Required

• Relatively easy to monitor / verify

• Cash revenues are more objective

• Less agency risk (not eliminated)

Thursday, February 10, 2011

RBF, a Hybrid Approach

• No Exit Required

• Relatively easy to monitor / verify

• Cash revenues are more objective

• Less agency risk (not eliminated)

Thursday, February 10, 2011

RBF, a Hybrid Approach

• No Exit Required

• Relatively easy to monitor / verify

• Cash revenues are more objective

• Less agency risk (not eliminated)

• “Pay me X% of topline revenue until Y”

• Y may be ROI, time limit, or “forever”

Thursday, February 10, 2011

“What-If:” The Movie Bundle Example

Thursday, February 10, 2011

“What-If:” The Movie Bundle Example

Traditional Equity:Gross revenue: $200 M“Real” costs: $100 M---“Should be” profit: $100 MMisuse of funds: $100 M---Accounting Profit: $0Investor ROI: $0 x 70% = $0

Thursday, February 10, 2011

“What-If:” The Movie Bundle Example

Traditional Equity:Gross revenue: $200 M“Real” costs: $100 M---“Should be” profit: $100 MMisuse of funds: $100 M---Accounting Profit: $0Investor ROI: $0 x 70% = $0

RBF:Gross revenue: $200 MRBF Investor ROI: $200 M x 10% = $20 M---Everything else:who cares, we got paid.

Thursday, February 10, 2011

Dangers of RBF

Thursday, February 10, 2011

Dangers of RBF

Thursday, February 10, 2011

Dangers of RBF• (Usually) a bad idea for fixed assets; debt is cheaper.

• Upside is (usually) capped; bad way to invest in the “next Google”

• Tax, legal, acctg are somewhat uncertain.

• Entrepreneurs unfamiliar; market education risk

• Co-investors unfamiliar; risk scaring off syndicate.

• Servicing is moderately complex; not just clipping a coupon.

• Hint: go with a knowledgeable partner, perhaps?

Thursday, February 10, 2011

RevenueLoan Vital Statistics

• Funded $6 M by Voyager Capital, Summit Capital

• Goals: Prove model, find market “resonance,” generate returns.

• 5 deals closed (3 as RevenueLoan per se)

• One “round trip”

• Three in repayment, one in grace period

• West coast / mountain West (today)

• $50-500k investments

• Minimum $1 M run rate, 50%+ gross margins.

Thursday, February 10, 2011

Plays Well withOthers

• Happy to “lever up” an angel equity round

• Less dilution for all involved.

• Happy to subordinate to hard asset liens

• Coexist with purchase money / equipment finance

• Happy to “service” larger rounds in syndicate

• For deal sizes over $500k total

• Happy to talk to YOU about working together.

Thursday, February 10, 2011

Please Stay in Touch

• Randall Lucas

• rlucas@revenueloan.com

• 617-905-7467

• www.revenueloan.com

Thursday, February 10, 2011