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

1. Revenue Based Finance
in two acts
Angel Capital Association, Seattle
04 February 2011
Randall Lucas
Revenue Loan
Thursday, February 10, 2011

2. Act I: How to rip off
Tom Cruise
or, Why Movie Investing is a “Risky Business”
Thursday, February 10, 2011

3. Act I: How to rip off
Tom Cruise
or, Why Movie Investing is a “Risky Business”
Thursday, February 10, 2011

4. Act I: How to rip off
Tom Cruise
or, Why Movie Investing is a “Risky Business”
Thursday, February 10, 2011

5. Step 0: Find some
investors.
Thursday, February 10, 2011

6. Step 0: Find some
investors.
• Unsophisticated ones.
Thursday, February 10, 2011

7. Step 0: Find some
investors.
• Unsophisticated ones.
• (er, not like present company)
Thursday, February 10, 2011

8. Step 0: Find some
investors.
• Unsophisticated ones.
• (er, not like present company)
• (You’re all much too smart...)
Thursday, February 10, 2011

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. Step 1: Use a Traditional Equity
(or Partnership) Structure
Thursday, February 10, 2011

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. 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. 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. 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. Step 2: Bundle Together
Several Projects
Thursday, February 10, 2011

16. Step 2: Bundle Together
Several Projects
• You trade more equity for talent contracts
(actors, directors, etc.)
Thursday, February 10, 2011

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. 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. 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. Step 3: Have a Hit
Movie
Thursday, February 10, 2011

21. Step 3: Have a Hit
Movie
• Implementation is left as an exercise to the
reader.
Thursday, February 10, 2011

22. Mission: Accomplished?
Thursday, February 10, 2011

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. 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. 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. 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. 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. • (The fancy word for this is “Agency Risk.”)
Thursday, February 10, 2011

29. Step 4: “The Producers”
Thursday, February 10, 2011

30. Step 4: “The Producers”
• Tragically, all of the other movies in the
“bundle” show a big accounting loss.
Thursday, February 10, 2011

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. 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. 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. Thursday, February 10, 2011

35. • (The fancy word for this is “Accounting
Fraud.”)
Thursday, February 10, 2011

36. • (The fancy word for this is “Accounting
Fraud.”)
• (But fancy words can be hard to prove.)
Thursday, February 10, 2011

37. Omar from “The Wire”
Thursday, February 10, 2011

38. Omar from “The Wire”
What about the owners?
Thursday, February 10, 2011

39. Omar from “The Wire”
What about the owners?
Thursday, February 10, 2011

40. Omar from “The Wire”
What about the owners?
“Man, money ain’t got no owners ... only
spenders.”
Thursday, February 10, 2011

41. Act II: Surely There’s a
Better Way
Thursday, February 10, 2011

42. Act II: Surely There’s a
Better Way
• or, RBF to the Rescue
Thursday, February 10, 2011

43. Act II: Surely There’s a
Better Way
• or, RBF to the Rescue
• and, stop calling me Shirley.
Thursday, February 10, 2011

44. Act II: Surely There’s a
Better Way
• or, RBF to the Rescue
• and, stop calling me Shirley.
Thursday, February 10, 2011

45. Retrospective: Characteristics
of Movie Financing
Thursday, February 10, 2011

46. Retrospective: Characteristics
of Movie Financing
• Too uncertain for fixed payments
Thursday, February 10, 2011

47. Retrospective: Characteristics
of Movie Financing
• Too uncertain for fixed payments
• Too hard to monitor for equity.
Thursday, February 10, 2011

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. 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. 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. 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. 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. 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. 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. RBF, a Hybrid Approach
Thursday, February 10, 2011

56. RBF, a Hybrid Approach
Thursday, February 10, 2011

57. RBF, a Hybrid Approach
• No Exit Required
Thursday, February 10, 2011

58. RBF, a Hybrid Approach
• No Exit Required
• Relatively easy to monitor / verify
• Cash revenues are more objective
Thursday, February 10, 2011

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. 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. 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. “What-If:” The Movie
Bundle Example
Thursday, February 10, 2011

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% = $0
Thursday, February 10, 2011

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% = $0
Thursday, February 10, 2011

65. Dangers of RBF
Thursday, February 10, 2011

66. Dangers of RBF
Thursday, February 10, 2011

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. 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. 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. Please Stay in Touch
• Randall Lucas
• rlucas@revenueloan.com
• 617-905-7467
• www.revenueloan.com
Thursday, February 10, 2011