RevenueLoan presentation to the Angel Capital Assn

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Randall Lucas' presentation about RevenueLoan to the Angel Capital Association, on Feb 4, 2011.

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RevenueLoan presentation to the Angel Capital Assn

  1. 1. Revenue Based Finance in two acts Angel Capital Association, Seattle 04 February 2011 Randall Lucas Revenue LoanThursday, February 10, 2011
  2. 2. Act I: How to rip off Tom Cruise or, Why Movie Investing is a “Risky Business”Thursday, February 10, 2011
  3. 3. Act I: How to rip off Tom Cruise or, Why Movie Investing is a “Risky Business”Thursday, February 10, 2011
  4. 4. Act I: How to rip off Tom Cruise or, Why Movie Investing is a “Risky Business”Thursday, February 10, 2011
  5. 5. Step 0: Find some investors.Thursday, February 10, 2011
  6. 6. Step 0: Find some investors. • Unsophisticated ones.Thursday, February 10, 2011
  7. 7. Step 0: Find some investors. • Unsophisticated ones. • (er, not like present company)Thursday, February 10, 2011
  8. 8. Step 0: Find some investors. • Unsophisticated ones. • (er, not like present company) • (You’re all much too smart...)Thursday, February 10, 2011
  9. 9. 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
  10. 10. Step 1: Use a Traditional Equity (or Partnership) StructureThursday, February 10, 2011
  11. 11. 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
  12. 12. 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
  13. 13. 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
  14. 14. 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. YOU 30% Investors 70%Thursday, February 10, 2011
  15. 15. Step 2: Bundle Together Several ProjectsThursday, February 10, 2011
  16. 16. Step 2: Bundle Together Several Projects • You trade more equity for talent contracts (actors, directors, etc.)Thursday, February 10, 2011
  17. 17. 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
  18. 18. 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
  19. 19. 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. YOU 20% 10% Investors 70%Thursday, February 10, 2011
  20. 20. Step 3: Have a Hit MovieThursday, February 10, 2011
  21. 21. Step 3: Have a Hit Movie • Implementation is left as an exercise to the reader.Thursday, February 10, 2011
  22. 22. Mission: Accomplished?Thursday, February 10, 2011
  23. 23. 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
  24. 24. 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
  25. 25. 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
  26. 26. 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
  27. 27. 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
  28. 28. • (The fancy word for this is “Agency Risk.”)Thursday, February 10, 2011
  29. 29. Step 4: “The Producers”Thursday, February 10, 2011
  30. 30. Step 4: “The Producers” • Tragically, all of the other movies in the “bundle” show a big accounting loss.Thursday, February 10, 2011
  31. 31. 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
  32. 32. 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
  33. 33. 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
  34. 34. Thursday, February 10, 2011
  35. 35. • (The fancy word for this is “Accounting Fraud.”)Thursday, February 10, 2011
  36. 36. • (The fancy word for this is “Accounting Fraud.”) • (But fancy words can be hard to prove.)Thursday, February 10, 2011
  37. 37. Omar from “The Wire”Thursday, February 10, 2011
  38. 38. Omar from “The Wire” What about the owners?Thursday, February 10, 2011
  39. 39. Omar from “The Wire” What about the owners?Thursday, February 10, 2011
  40. 40. Omar from “The Wire” What about the owners? “Man, money ain’t got no owners ... only spenders.”Thursday, February 10, 2011
  41. 41. Act II: Surely There’s a Better WayThursday, February 10, 2011
  42. 42. Act II: Surely There’s a Better Way • or, RBF to the RescueThursday, February 10, 2011
  43. 43. Act II: Surely There’s a Better Way • or, RBF to the Rescue • and, stop calling me Shirley.Thursday, February 10, 2011
  44. 44. Act II: Surely There’s a Better Way • or, RBF to the Rescue • and, stop calling me Shirley.Thursday, February 10, 2011
  45. 45. Retrospective: Characteristics of Movie FinancingThursday, February 10, 2011
  46. 46. Retrospective: Characteristics of Movie Financing • Too uncertain for fixed paymentsThursday, February 10, 2011
  47. 47. Retrospective: Characteristics of Movie Financing • Too uncertain for fixed payments • Too hard to monitor for equity.Thursday, February 10, 2011
  48. 48. 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
  49. 49. 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
  50. 50. 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
  51. 51. 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
  52. 52. 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
  53. 53. 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
  54. 54. 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
  55. 55. RBF, a Hybrid ApproachThursday, February 10, 2011
  56. 56. RBF, a Hybrid ApproachThursday, February 10, 2011
  57. 57. RBF, a Hybrid Approach • No Exit RequiredThursday, February 10, 2011
  58. 58. RBF, a Hybrid Approach • No Exit Required • Relatively easy to monitor / verify • Cash revenues are more objectiveThursday, February 10, 2011
  59. 59. 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
  60. 60. 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
  61. 61. 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
  62. 62. “What-If:” The Movie Bundle ExampleThursday, February 10, 2011
  63. 63. “What-If:” The Movie Bundle Example Traditional Equity: Gross revenue: $200 M “Real” costs: $100 M --- “Should be” profit: $100 M Misuse of funds: $100 M --- Accounting Profit: $0 Investor ROI: $0 x 70% = $0Thursday, February 10, 2011
  64. 64. “What-If:” The Movie Bundle Example Traditional Equity: RBF: Gross revenue: $200 M Gross revenue: $200 M “Real” costs: $100 M RBF Investor ROI: $200 M x --- 10% = $20 M “Should be” profit: $100 M --- Misuse of funds: $100 M Everything else: --- who cares, we got paid. Accounting Profit: $0 Investor ROI: $0 x 70% = $0Thursday, February 10, 2011
  65. 65. Dangers of RBFThursday, February 10, 2011
  66. 66. Dangers of RBFThursday, February 10, 2011
  67. 67. 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
  68. 68. 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
  69. 69. Plays Well with Others • 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
  70. 70. Please Stay in Touch • Randall Lucas • rlucas@revenueloan.com • 617-905-7467 • www.revenueloan.comThursday, February 10, 2011

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