The artist-activist community Creative Action Network had completed the Matter.vc accelerator program and outgrown its efforts at bootstrapping. It struggled to find a fit with traditional venture capital funding. Then it discovered the “demand dividend” investment model.
With the structure, a form of capped dividend, investors are repaid from company profits only after the firm hits a certain revenue threshold. Payments to investors stop once they’ve received a pre-determined multiple on their initial investment (in CAN’s case the multiple was 5x). The structure solves a variety of challenges associated with VC funding, including the “exit” problem. Investors are able earn a solid return without the firm ever being sold.
- Early use. The structure, popularized by John Kohler at Santa Clara University’s Miller Center for Social Entrepreneurship, has gained traction since its early use to facilitate an investment into a unit of Uncommon Cacao in Belize.
- Market test. The demand dividend, also called a variable-payment obligation, is being tested by Agora Partnerships in Nicaragua as a way to extend financing to women entrepreneurs based on cash flow rather than collateral.
- Plugging the missing middle. Adobe Capital has used the demand dividend as the primary investment structure for two funds aimed at the “missing middle” financing gap in Mexico.
- Alternative Capital Summit. Investors and entrepreneurs will explore, “financial instruments for the 80% of businesses that are underserved by traditional debt and venture capital,” in Denver, Colo., Sept. 27-29. Pre-register.