John Landry was pitching Royalty Based Financing at the MTLC unconference last week.  In a royalty deal, a startup company gets a chunk of cash from investors, and then agrees to pay a fixed percentage of all revenue, starting immediately, until the investors have received some multiple of the original investment.  I heard about it last year from Andy Updegrove, who has been working on this type of royalty deal since at least 1993 - the date of this article on the subject.  I think it's time to take this type of financing seriously, for at least four reasons which I will list below.

Landry's argument: It solves the main problem with startup investing right now, which is that investors can't get paid back with a sale of the company.  There are 40,000 VC funded companies, and only 1,000 per year get sold, and 6 go to IPO.  That kills the VC partnerships that have to sell within 10 years.  With debt or royalty, investors can get paid back without a sale.

Updegrove's argument: Companies that are run by founders for cash, as opposed to run by VC's for sale, have better average economics and lower failure rates.  VC financing isn't right for these companies, but royalty financing is often a good fit.  Risk is further reduced for the investors if they fund the near-term launch of a specific product.

Singleton's argument:  I argued in a recent article that SaaS companies are great candidates for debt financing, because they have stable revenue and compressible expenses.  However, lenders make only a few percent on the deal, so they need to make loans of at least $500K at one time.  This means that they look for recurring revenues of at least $200K per month.  Royalty-based financing gets paid back over a longer time period and it can start at lower revenue run rates.  It might fill an important gap between first revenue, and the $200K/month level where a SaaS company is "bankable".

Availability of funds argument:  There are funds available!  Landry said that he is interested in investing through Lead Dog Ventures, his super-angel operation.  The biggest splash recently is from RevenueLoan, with $6M to start.  It's worth reading this article for a more detailed description of what they are doing.  Arthur Fox of Royalty Capital has been doing royalty deals since 1992.