Andy Sack, Flush With $6M, Builds Revenue Based Financing Company That Could Disrupt Venture Capital, Startup Ecosystem

6/7/10Follow @gthuang

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people, including Arthur Fox, the founder of Royalty Capital Management in the Boston area. RevenueLoan represents the first major revenue-based financing effort in the Northwest—and one of only a few such projects around the country.

Sack says he first heard about the investment model about a year ago, through Thomas Thurston of Growth Science International in Portland, OR (whose work I wrote about last month), and Erik Benson, a managing director at Voyager Capital, who is leading his firm’s investment in RevenueLoan. “I’ve thought the venture capital model has some real strengths, and some real flaws,” Sack says. He adds that the revenue-based model “just resonated with me immediately.”

So at Founder’s Co-op, Sack and his team made a couple of investments with a fledgling revenue-based structure to test it out. Those deals were with Seattle-area Internet startups BigDoor Media and Nearlyweds. Sack says they “proved the concept with those two deals” and that “both companies are doing well.” But he admits those companies were earlier-stage than what RevenueLoan will seek to invest in. Sack says RevenueLoan wants to make a minimum of five investments a year, and is aiming to make 10 to 20 investments with the first fund.

The big question is what kinds of companies will fit this model? Sack says there are something like 30,000 companies that have annual revenues of a few million dollars but have modest annual growth rates—20 percent, say—that won’t attract VCs, who are searching for 10x home-run returns. Instead of chasing those same companies, Sack says he’ll focus mostly on technology startups with 50 percent gross margins, because that’s the field he knows. But the revenue-based model also can be applied to companies outside of traditional tech. Interestingly, Sack says he expects to make a number of investments in companies from places outside Seattle proper, like Aberdeen, Bellingham, Tacoma, and Olympia, WA, because those entrepreneurs tend to have less access to angel and venture capital. “I’ll be looking for companies not on the beaten path,” he says.

A couple of hypothetical examples of companies he’d consider investing in: a wine distributor that wants to use radio frequency identification (RFID) tags to change its distribution channel; or an organic pet food e-commerce site with a unique value proposition. Other promising areas include lead generation, online education, financial services, and Web hosting services, Sack says.

Over the past few months, I’ve also talked with outside experts about the merits and challenges of royalty-based capital in general—and whether it could reshape the venture investing … Next Page »

Gregory T. Huang is Xconomy's Deputy Editor, National IT Editor, and the Editor of Xconomy Boston. You can e-mail him at gthuang@xconomy.com or call him at 617-252-7323. Follow @gthuang

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