Last Saturday night, I went out with old friends to a classic downtown restaurant called Alta.
Alta specializes in Spanish “tapas”—small plates that are meant to be shared.
As always, Alta was packed, and over a few pitchers of sangria we started fantasizing about how amazing it would be to own a small piece of it:
First of all, owning the place would mean we could always snag a great table…
But just as importantly, restaurants like Alta can be cash cows: year after year, their owners receive a steady stream of profits.
Historically, there’s been no way for ordinary investors to tap into the profits that businesses like Alta generate…
But recently, that’s changed—and today, I’ll show you how to get in on it.
Share the Wealth
Usually we use these articles to write about Equity Crowdfunding, where you invest in a private start-up and receive an ownership stake of the business in return.
In the future, if the start-up gets acquired or goes public, you can sell your shares and earn a great profit.
But today’s article is about a different type of start-up investing:
It’s called Revenue Sharing.
With revenue sharing, you can start earning a return from an investment immediately—even if the business never gets acquired or goes public.
You see, your returns come from the company’s revenues.
So for example, if a business does $1 million in sales this year and you’re entitled to, say, 5% of them, you’d get a check for $50,000.
And if we were talking about an always-popular business like Alta, you might get a similar check next year, and the year after that, and so on and so on.
To get a better sense for this type of investment, let’s look at a few deals…
Three Live Deals
To highlight the variety of deals that are available for investment, let’s look at three different types of companies offering revenue sharing: an online company, a clothing company, and a restaurant.
BlueHollar — An online marketplace that connects realtors with contractors.
BlueHollar enables realtors to post home improvement jobs on behalf of their clients, and then contractors compete to get the work. For realtors, this simplifies a challenging part of their business and helps them succeed.
In BlueHollar’s first 18 months of operations, it’s done nearly $500,000 in revenue.
It’s offering investors a 5% share of its revenues, with a “cap” of 2x. That means, once you double your money (i.e., earn 2x), the investment is complete. So if you invest $100, once you get back $200, you’ll stop receiving payments.
BolderBand — Premium athletic headbands and apparel made in Colorado.
Bolder Band specializes in great-fitting athletic headbands for men and women. In 2014, its first full year, it did over $3.2 million in sales. It then introduced winter apparel, baseball tees and more.
It’s offering investors a 5% share of its revenues. Investors who fund the first $200k of its $1 million deal have a cap of 1.75x, and later investors have a cap of 1.5x.
Peli Peli — South African “fine dining” in Austin, Texas.
This is an expansion of an existing restaurant brand. Peli Peli currently exists in Houston, Texas, where it was TripAdvisor’s #1 restaurant in 2015, and it’s been featured on CNBC’s “Restaurant Startup,” and Food Network’s “Cutthroat Kitchen.”
It’s offering investors a revenue share of 3% and 6% (depending on how much it raises), with a cap of 1.5x.
Intrigued by any of these opportunities?
Before you get too excited, let’s look at some of the risks of revenue sharing deals…
Devil’s in the Details
Hypothetically, investing in a business in exchange for a percentage of its revenues could be a smart move.
In fact, for the right deal, this could help you earn market-beating returns.
For example, if you invest in a deal and double your money in 5 years, that would equate to an average annual return of about 14%.
That’s not bad. It’s more than twice as much as the stock market typically returns.
And if a business grows very quickly, you’ll get your money back even faster—that means your effective interest rate will be even higher. For example, if you could double your money in 2 years, your annual returns would be about 40% a year.
But unfortunately, it also works the opposite way:
If sales are slower than expected, or if it takes time for the company to start creating sales at all, then your effective interest rate drops. You see, since these aren’t "traditional" loans, the terms of the payback period aren’t defined.
There are other risks, too:
For example, some deals have the right to defer distributions. And on other deals, investors are “unsecured creditors.” So if the company goes bankrupt, you’re unlikely to get any money back at all.
Is the Risk Worth It?
Now, if you had the opportunity to make 10x, 100x or more on these deals (like you do with the deals we usually tell you about), risks like these wouldn’t raise a flag.
But here’s the thing: most revenue sharing deals cap your returns at 2x.
Meaning, you’ve really got to make sure you understand the company’s prospects before you invest.
For example, let’s say a company is doing $1 million in sales and is sharing 5% of its revenues. That’s $50,000 a year it would share with its investors.
If the company is raising just $100,000, it could pay its investors back in 2 years.
That’s a good bet!
But if a company will only do $100,000 in revenues for the foreseeable future, and it’s raising $1 million, it could take decades for it to pay you back—so stay away!
There’s a big difference between a great company and a great investment…
So if you’re intrigued about a revenue sharing deal, you need to dig into the details. Make sure the bets you’re placing are great investments.
Happy Investing
Please note: Crowdability has no financial relationship with any of the start-ups mentioned in this article, or with any of the companies or platforms we write about. Crowdability is an independent provider of education, information and research on start-ups and alternative investments.
Best Regards,
Founder
Crowdability.com
