Royalty financing is a relatively new concept that offers an alternative to regular debt financing (loans and trade credit) and equity financing (venture capital and stock sales). In a royalty financing arrangement, a business receives a specific amount of money from an investor or group of investors. The money might be put toward launching a new product or expanding the company’s marketing efforts. In exchange, the investor receives a percentage of the company’s future revenues over a certain period of time, up to a specific amount.
-Source: Inc Magazine article
Some other interesting aspects of Royalty Financing – It doesn’t require the sale of the company. This means:
- Entrepreneurs retain control
- Investors start generating returns without needing a sale
- The company is more likely to stay in the region it was born in (vs being merged & moved to the acquiring entity)
This flavor of capital is less risky than equity, but riskier than debt. As such, it may be an attractive option for angel groups outside of major tech hubs (such as my own) to explore. In fact, we’re now actively looking to try out a few royalty deals. Stay tuned to see what we learn 🙂