Have you ever wanted to invest in startups just like the sharks on Shark Tank but had no idea where to start?
Angel investing, what they do on Shark Tank, is super exciting to investors because who doesn't want to get in early on something amazing like angel investors Lori, Barbara, Mark, Daymond, Robert, and Mr. Wonderful?
When I first began exploring startup investing, I was excited at the sheer number of opportunities but bummed out for two main reasons – most startups wanted huge minimum investments and I couldn't see a way to generate immediate income.
But I solved both of those issues by looking for a specific type of crowdfunded startup investment – revenue participation.
These Days, You Don’t Have to Be Wealthy to Invest in Startups
In fact, you can help a provide much-needed funding (and reap a handsome return) with as little as $100.
The best part is that, if you do it right, that return is guaranteed.
Typically, when investing in startups there are a few ways to make the money back.
- The startup can get acquired. If a larger company buys the startup that you invested in, the amount you get back depends on how much you invested, how many shares you own, the valuation of the startup and the amount that it is acquired for.
- If the startup goes public.
- The startup gets big and begins to pay dividends.
The only problem is that none of these options are guaranteed.
However, by using Revenue Participation Notes (RPN) you will have an opportunity for more control.
But when you use a revenue share agreement or revenue participation notes, your return on investment is guaranteed because you are funding the startup with debt instead of equity.
Many startups use equity financing, where investors own a share of the company in exchange for capital.
With debt financing, investors are providing a loan to the company and like any other loan, it needs to be paid back on time with interest.
For instance; an investor pays in $100,000 in capital, with a promise of 20% of the future gross revenue equal to 3x his investment.
This 3x is known as a “multiple” and the investors gets paid until the company has repaid the investor three times the original investment, or $300,000.
This type of financing structure has advantages for both the investor and the founders.
It helps everyone get into a success mindset, where the goal is to build sustainable revenue as quickly as possible rather than look for an exit strategy.
It reduces conflict that can arise between investors and management because both parties are focused on generating revenue.
The investors are getting paid back the principal, plus a predetermined cut of the profits.
If the profits and growth come quickly, the investors get their money back faster.
If the growth is slower, they still get their returns, but over a longer timeframe.
The startups benefit because they maintain control over the company by not giving up equity.
They don’t have to put their personal assets at risk as they would for a standard loan.
How Do Revenue Participation Notes Work?
For revenue sharing to work, each party involved needs to have an equal understanding of where the money is coming from. How are the revenues collected?
The contract for the agreement needs to clearly outline the revenue details.
Make sure that the that those documents clearly explain how the revenue will be measured.
Define what event triggers the revenue that will be shared (will it be all purchases or just all online purchases through a website or just the revenues of one product?).
How often will the payments be made?
Are there any terms in the documents that can be misconstrued?
A well thought out agreement will help to prevent and resolve disputes along the way.
Where Do You Find These Startups?
There are several websites known as “crowdfunding platforms” that connect investors with startups, allowing them to form these types of partnerships with just a click.
Here is an example.
Boardwalk Hospitality, Inc. is now offering investors a guaranteed 14% ROI
Boardwalk Hospitality, Inc. is a company that raised $300,000 on WeFunder to put a Ben & Jerry’s franchise on the Venice Beach Boardwalk in Los Angeles, CA.
Through WeFunder, investors can contribute as little as $100 to the $300,000 and be guaranteed a 14% return.
WeFunder is a website where regular investors, who don’t have to be wealthy, can use their money to help businesses like Boardwalk Hospitality get the funds they need to get started.
The lower entry point is good for you as an investor because you don’t have to put a large amount on the line for a startup… which can be risky.
Boardwalk Hospitality took most of the risk away by offering the 14% promissory note, rather than equity.
The Boardwalk Hospitality page is similar to a crowdfunding page in some ways.
They have donor perks. People who give $100 get a lithograph of the iconic Venice Beach sign by Thomas Hussung and people who give $500 get a limited-edition print of the sign.
At $5,000 investors can have dinner with the founders, Klaus Moeller and Mike Meader plus the limited edition fine art print of the VENICE sign.
The site is tightly focused on why this is a good investment.
And using the WeFunder platform you can investigate any startup that you’re interested in to gauge their credibility.
They provided a lot of information. You can read a letter from the founders and see pictures of bios of everyone on the team.
They’ve calculated how much they can make in the busy months as well as in the offseason.
They included the minimum amount that they would need to break even.
They’ve included a detailed list of all the risks that they might face, including the possibility that they might choose the wrong flavors and end up wasting product.
They’ve included a timeline of their progress so far, including the training that they received to run a Ben & Jerry’s franchise.
They carefully outlined the terms of investment return.
According to their statement, they use a promissory note that accrues at an interest rate of 14% per year with the loan being paid back to investors for 36 months.
Their goal was to raise somewhere between $100K-$500K and by the end of the campaign 548 investors had raised over $500,000.
Lots of Revenue Participation Opportunities but do Your Homework
There are plenty of websites that offer investment crowdfunding opportunities, like the Ben & Jerry’s example.
In fact, Crowdfilings.com reports that there are currently 21 revenue share investment opportunities across the crowdfunding platforms they cover.
If you are thinking about trying it, understand the rules and regulations involved and don’t invest more than you are willing to lose.
That said if you want to invest in startups without gambling your money, keep your eyes peeled for revenue share opportunities.