On October 24th, 2013 Early Growth Financial Services and Lighter Capital held a joint webinar—Getting Your Ducks in a Row: Preparing Your Company for Investment Capital
We were excited to have Rob Belcher, VP at Lighter Capital, join David Ehrenberg, Founder and CEO of Early Growth Financial Services, in a discussion on how to get your company ready for finding investment capital. They covered a lot of territory—including what is essential in analyzing your business model and its economics, the funding options to consider including revenue based financing, pulling together a fundraising game plan, and what’s required with regard to documentation and due diligence.
Please check out the recording for the full webinar:
We had a great discussion and got some great questions from our attendees which we have answered for you below. If there are any further unanswered questions, please feel free to contact us—we are happy to help!
In extrapolating to calculate total potential value, are there rules of thumb re: % of segment that’s capturable?
No. Unfortunately it’s not that clear-cut. It really depends on the total market potential, the team, the innovations they are working on, the difficulty of capturing the revenue, how hot the space is, and what types of valuation similar companies are receiving.
If you are a service organization providing customized technology solutions, the market size can in fact be too large to quantify. How would you then define the market size?
I would first take a look at competitors and their total combined revenue. If there are no direct competitors, any other comparable industries or market segments could also be relevant, and could provide useful information for potential investors.
Do you require IP to be in escrow?
No, Lighter Capital does not require IP to be held in ESCROW. We require specific amendments to our loan documents that outlines trademarks, copyrights, domain names and patents, and these docs include assignment rights to Lighter Capital in event of default.
Have you heard of / use Preferential Royalties in place of Revenue Based Debt Financing?
If I understand the question correctly, I think this is the structure that some RBF investors are using whereby they purchase equity in exchange for a royalty. This structure has important tax and accounting differences to our loan structure (interest is NOT tax deductible) and has further implications for follow-on equity rounds. These structures can also be dilutive to the ownership table. We stick to a pretty simple loan structure that works just like a fully amortizing term loan, but with variable monthly payments.
Have any of your portfolio companies gone on for an equity round after raising revenue based financing with Lighter Capital? Has Lighter Capital converted to equity after financing based on revenue?
We answered the first part of the question during the webinar but the second question is a good one that we did not discuss. Lighter Capital does not convert into equity. It is a loan, and one of its biggest benefits is the lack of a need to ever discuss valuation. In the case of further investment capital, our loan remains intact as-is, or gets fully repaid and terminated at the time of closing the additional funds.