Last week, we flagged the new demand for the “demand dividend” as an alternative to venture capital-style investment terms. ImpactAlpha’s archive includes examples of the revenue-based repayment structure, which allows investors and entrepreneurs to share risk and create liquidity events.
“We’re huge fans and advocates for these alternatives,” tweeted Aner Ben-Ami, managing director at the Candide Group. “We’ve also learned these profit/rev shares work only in a limited set of cases.” Ben-Ami’s use cases:
- Later-stage financing. Revenue-share structures that work for later-stage companies may be harder to adapt to earlier stage companies, says Ben-Ami. For smaller companies, says Ben-Ami, “the growth trajectory required to repay investors starts to look a lot like the kind of ‘hockey stick’ projections that the venture capitalists are looking for.”
- Other alternatives. For companies that are too big for revenue share, but too small for VC funding, equity buybacks, or redemptions, might be a better fit. With equity redemptions, investors buy shares and hold them until the company is able to repurchase them, via lower cost debt, for example. One advantage: “Investors are not taking money out of the company during the crucial early years of growth, and instead are reinvesting into the business,” Ben-Ami says.
- Selecting the right capital. Cathy Clack and CASE at Duke’s Fuqua School of Business have compiled more than a dozen financing mechanisms, including variable repayment debt, recoverable grants, convertible notes and crowdfunded equity. Their Smart Impact Capital platform helps entrepreneurs raise the right type of capital for any stage, geography, industry and impact area.