I had a delightful chat with Rob Wiltbank (Professor of Strategy at Willamette University, Partner with Montlake Capital) where I learned about some of the truly interesting innovations going on in royalty financing.
Royalty financing is (source)…
Revenue Capital (RC) is business financing based primarily on the sale or exchange of revenue streams. RC includes royalty-based financing, top-line income rights and a variety of other revenue-centric funding structures.
For example, an RC investor may provide a business with $250K in exchange for a 3% of the business’ revenue over a specified period of time, or until a specific payback amount is received. Regardless of the specific deal terms, RC encompasses funding structures where future revenue is the primary means of repayment.
This flavor of capital addresses a gaping hole in the "medium risk/reward" category. Too risky for banks. Not enough return potential for equity investors. But there are plenty of exciting companies with real potential in this area. Rob and other practitioners have created an trade association and are having their first conference in October. If they can crack the formula, they can help a whole new category of companies step on the gas, creating prosperity for everyone involved. Wish them luck!