I’ve written about Royalty-Based Financing aka revenue-based financing as a source for small business financing before. (Check out my blog at http://blog.smallbusinessgrowthcapital.com/2010/12/revenue-based-financing.html and http://blog.smallbusinessgrowthcapital.com/2010/12/revenue-based-financing-illustration.html). Here’s an example from CFO.com with companies that have actually used it. – Tiffany C. Wright
For Start-ups, Another Source of Cash
Royalty-based financing gives start-up companies a nondilutive, albeit expensive, source of funds.
Alix Stuart – CFO.com | US
Last year Velico Medical Systems, an aging Beverly, Massachusetts- based start-up with no products and no revenue, needed some money. The company had been “in perpetual funding mode,” CFO Tom Fitzgerald told a gathering on Tuesday hosted by The Capital Network, a Boston-area networking group. It had worked on products related to the handling and storage of human blood without any success. A new effort, which involved spray-drying human plasma, seemed promising, but prospects for a new source of equity capital were not as bright.
As it happens, Fitzgerald didn’t need the equity capital. Instead, he went back to a venture-capital firm that had previously turned down the small life-sciences company and emerged with a fresh infusion of cash through a nontraditional financing arrangement known as royalty-based financing.
In this arrangement, companies agree to pay a stream of income, or royalty, to the investor. The royalty can simply be a percentage of gross revenues or, as in Velico’s case, conventional royalty payments for intellectual property. Velico turned over the rights to royalties it received from a patent-licensing agreement it had with a large biosurgical-products company to the VC firm, OrbiMed Advisors. In exchange, Velico received a lump sum of money, free and clear of any future obligation. The deal closed last October, about eight months after the initial discussions about it.