Entrepreneurs invest a great deal of energy in creating funding pitches for investors; the purpose of this article is to indicate what I, as an advisor to companies and investors in revenue royalties, need to know if I might be able to help in the structuring of a funding proposal using revenue royalties.
It’s all about the product:
First, tell me the amount of capital you are seeking and what its deployment will permit you to produce. Will it be a product or service for which you can prove there is current demand? What will be the proof? Why will there be a demand? Is it the uniqueness or superiority of the product or will you just be good at marketing the product? Have you had relevant marketing experience?
Product pricing is always a critical decision, and too often it is based on the product provider’s cost, instead of being based on the customer’s likely value assessment. What are the prospective customer’s alternatives? Will the price set be sufficiently profitable to provide funds for further marketing of the product?
For a possible revenue royalties transaction, you will be projecting annual gross revenues (top line) based on actual product sales — so how will the product be marketed? Will you be able to set the price at a level generating sufficient profits to pay for further marketing of the product? Have you had prior contact with prospective customers and in what capacity? Will you have competitors and if so, do they have a dominant incumbent position, are they likely to be major competitors, and what are your differentiators? Why is your product better, and what does “better” mean, exactly? Will some of the new capital be used to make these improvements in competitiveness?
Will the amount of money sought be sufficient to create a product which will be wanted and needed by the customers you have identified, and will they will be willing to pay the price you assume? You also are implying that your company will be able to fend off competitors. What do you believe will be the reasons for your success?
If we get through these gates, then — great, the product is believed viable and now we come to how we should believe that you or your associates have the experience necessary to create the product with the amount of funding sought.
Who are you and what is your and your associate’s relevant experience? Will you have a Board of Directors of experienced people, including outsiders not employed by the company? Who are they and what is their background and basis of involvement? A Board of Advisors with expertise in your field is also useful; such a Board is less cumbersome than a Board of Directors, which has legal and fiduciary duties. Their advice and contacts can be a potent asset and demonstrate to investors that you have done your homework, engaged with the market.
How many employees will be working to both create the product and operate the company once selling the product?
Is there any debt already in place or contemplated, and how is the company presently owned? Do you wish the company to still be substantially owned and controlled by the present owners 5 years from now, or is the company being built as a short-term project, with a view to seeking an early exit — a flipper?
Because you have come to me, knowing that I believe revenue royalties are the best and most logical means of investors financing early-stage companies, what do you believe should be an investor’s fairly targeted Internal Rate of Return for a 10-year royalty, covering all revenues from all sources? Make sure you know that IRR is different from ROI, which are different from an effective interest rate, and can illustrate that.
If you wish to complete (on a coded name basis is ok) the data required in using the website calculator http://rex-basic.com/ When you’ve read a little of what is explained there, go to http://rex-basic.com/sign_up and enter the information requested there. I will review and respond with comments.
If you complete the online form, just send me the Username and Password used, and your email address. If you do not complete the online form, send me as much of the required data as possible and I will try to fill in the blanks. At a minimum I will need: the amount of capital sought, 10-year projected annual revenues and your projected Net-After-Tax profit margin in five years. Regarding the projected revenues, just let me know the first year projection of revenues and a Compound Annual Growth Rate (CAGR) of revenues for the balance of the 10-year period. If you have deeper insight and can give me the first five years’ annual projected revenues, and a CAGR after that for years 6 through 10, that’s even better.
The above will require effort on your part and mine. No one said it was going to be easy. I have a certain amount of time to devote to this kind of inquiry, but I will try to assist as many good companies as I can. Good companies are the source of strength and employment in a sound and growing economy, and a base of benefit to the community and society. With a revenue royalties investment, good companies can provide a fair, consistent and growing source of income and may reward investors well. Royalties can keep those companies under the control of their enthusiastic and highly-motivated founders — often the best way to deliver sustainable success.
Arthur Lipper, Chairman
British Far East Holdings Ltd.
+1 858 793 7100
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