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”


Step 0: Find some investors.



• Unsophisticated ones.




• (er, not like present company)





• (You’re all much too smart...)





• (You’re all much too smart...)

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


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.




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

Investors70%

YOU30%


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

20%

Investors70%

YOU10%


Step 3: Have a Hit Movie


Step 3: Have a Hit Movie

• Implementation is left as an exercise to the reader.


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.




• ... 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.


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


Step 4: “The Producers”


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.




• ...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.


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


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

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


Omar from “The Wire”


Omar from “The Wire”What about the owners?


Omar from “The Wire”What about the owners?

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


Act II: Surely There’s a Better Way



• or, RBF to the Rescue



• or, RBF to the Rescue

• and, stop calling me Shirley.


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...







• Temptation to spend free cash...

• on the wrong sorts of things.


RBF, a Hybrid Approach



• No Exit Required




• Relatively easy to monitor / verify

• Cash revenues are more objective






• Less agency risk (not eliminated)






• Less agency risk (not eliminated)

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

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


“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



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.


Dangers of RBF


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?


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.


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.


Please Stay in Touch

• Randall Lucas

• [email protected]

• 617-905-7467

• www.revenueloan.com


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http://www.revenueloan.com

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RevenueLoan presentation to the Angel Capital Assn

Economy & Finance

Transcript of RevenueLoan presentation to the Angel Capital Assn