Revenue Financing + Traditional Equity Continued

Last week’s post Revenue Financing + Traditional Equity as the Future of Startup Funding struck a nerve and resulted in a number of comments and questions. Generally, the big idea is that most regions have sub-standard angel communities because the angels don’t make money on their investments. Without regular, positive returns, angels drop out and the community is constantly treading water. The idea for a revenue financing component is to recycle money back into the community sooner — ideally in less than five years as opposed to today’s 7-10+ years — so that angels have a good experience and stay active.

Revenue financing plus traditional equity prompted a number of questions. The big question: how might it work? Here’s a hypothetical example:

  • Angels invest $500,000 into a seed round at a $3.5M pre-money valuation ($4M post-money valuation after the new investment is included)
  • When the startup hits $4M in trailing twelve months revenue (the initial seed valuation becomes the revenue target), ideally within five years (that’s what the entrepreneur’s projections said!), the startup pays the original seed investors back, plus 20%, over the next 18 months (paid monthly as a percentage of revenue)
  • The 1.2x returned to the seed investors becomes similar to negative participating preferred equity whereby that amount is deducted from the investor proceeds at time of exit

Now, 99% of all tech startups never achieve $1M in sales in a calendar year, so most startups, even with six figures of angel investment, will never hit the revenue threshold to trigger payments back to the seed angels. Yet, if some small percentage of angel-backed startups do hit it — say 3% — then more money will flow back to the community faster.

Changing an entrenched format, like typical startup funding terms, is a tall order. When startup communities with limited angel investors come together to improve the recycling of capital, revenue financing should be a consideration.

Revenue Financing + Traditional Equity as the Future of Startup Funding

Today’s standard startup funding model whereby entrepreneurs pitch angels, VCs, and family offices for money in exchange for preferred equity is mostly a challenged, broken process. Outside of the money regions that focus on grand slams, and startups generally with revenue traction and significant growth rates, investing in startups is a great way to lose money.

The majority of angel investors I know have lost money investing in startups.

Perhaps they aren’t good investors. Perhaps it’s the entrepreneurs’ problems. Regardless, this isn’t specific to our region. It’s the same in all regions outside the money centers.

Stories of investors writing a check for $25k into Uber and turning it into $100M permeate the media, yet are so rare it’s laughable. Only, it fuels the stories and desire for more people to become investors.

One potential angel investor described it to me as wanting to spend 1% of his net worth on angel investing so that he could generate a new income stream and be less reliant on his day job. Unfortunately, the chance of that happening is slim to none.

There’s a perpetual cycle of regions trying to improve their local startup investing community. New angels come online and write some checks. They lose their money, and because of the poor outcome, will never do it again. Rinse and repeat each economic cycle.

Well, what’s the solution?

The funding model needs to change.

Over the last few years a new form of startup funding has emerged, but still represents a tiny part of the market: revenue financing. Revenue financing is code for a loan that’s paid back via a percentage of revenue. If the startup does better than expected, it’s a super high interest loan. If the startup does as expected it’s a high interest loan. If the startup does worse than expected, it’s a high interest loan paid back over a longer period of time.

Of course, a high interest loan requires the startup to pay back the debt, which takes cash away from growing the business. And, in the angel world, making 15% per year on the investment takes away the excitement and dream of making a 100x return.

The future of startup funding outside the money regions should be a mixture of light revenue financing and traditional equity.

Light revenue financing, such that the investor gets 1.2x their money back in five years, keeps startup money flowing in the community.

Traditional equity, such that there’s the potential for huge upside, keeps the imagination dreaming.

We’re near the peak of this cycle, and too much money is chasing too few high quality deals, making it a great time to be an entrepreneur. Only, this too will change — it always does.

When we come out of the next trough, and it’s time to re-evaluate the startup funding model, a combination of returning capital to the community on a consistent basis and equity upside will result in a more sustainable and successful eco-system.

A structural change in startup funding is needed. Light revenue financing plus traditional equity will improve the startup world.

When the Increased Startup Burn is Cooling Growth

Recently I was talking to an entrepreneur that went through a challenging period of trying to force growth that never materialized. The playbook is fairly common: raise outside financing, hire a bunch of people, and expect growth to increase. Only, not only did growth not increase, it actually went down. What gives?

Burn was increased with the expectation that more of the same would increase the growth rate. Only, it merely magnified an existing issue: customer acquisition wasn’t repeatable.

Spending money to grow faster when a repeatable customer acquisition process doesn’t exist actually makes things worse. Much worse.

New sales reps are ramped up but the playbook doesn’t work, and now making quota is more diminished with fewer leads and less help.

New marketing programs are ramped up but the previous ones weren’t scalable, and now attention and expertise is spread over more initiatives.

New roles and responsibilities are created throughout the organization in expectation of increased growth, only these require more management time and attention taking away energy from the critical functions.

More isn’t always more. In cases where the fundamentals of the business aren’t working, more actually is a detriment and reduces the ability of the organization to execute.

Before raising money and increasing burn, insure the repeatability of the model. Trying to accelerate something that isn’t working makes things worse.

Focus, Focus, Focus – An Entrepreneur’s Challenge

Entrepreneurs see abundance in the world. An opportunity here, an opportunity there. This serves the entrepreneur well in the early days. Identify a need. Rapidly iterate. Earn product/market fit.

Only, at some point, instead of chasing the next shiny object, it’s time to focus. Instead of a default ‘yes’ it needs to be a default ‘no.’ This is hard for most entrepreneurs.

Famously, when Steve Jobs returned to Apple after many years away, he killed off most of the product lines and reorganized the company around a limited number of initiatives. Focus.

Focus becomes even harder when your startup is ‘hot.’ Everyone wants your time. Investors constantly ask for meetings. Media constantly asks for interviews. Organizations constantly ask for appearances. Ultimately, these are more distractions that make focusing difficult.

Take a few minutes every Sunday night and look at last week’s schedule and the upcoming week’s schedule.

What meetings were worthwhile?

What meetings weren’t worthwhile?

What are you excited about on the schedule?

What aren’t you excited about on the schedule?

Regularly take time to evaluate where effort is spent. Then, ruthlessly cut out the distractions.

Focus. Focus. Focus.

More Thoughts on the Next Level for Atlanta’s Startup Community

After last week’s post on Next Level for Atlanta’s Startup Community, a number of people chimed in with ideas. Let’s take a look at a few.


Ben Alexander highlighted eSports as a high potential opportunity for the region. Between Skillshot Media, Atlanta Reign, Hi-Rez Studios, KontrolFreek, and more, there’s real momentum. To achieve a critical mass, we’ll need 10x that many companies and thousands of employees in the industry.

Inclusive Entrepreneurship

Rodney Sampson offered a detailed analysis in his paper Building Inclusive Entrepreneurship Ecosystems in Communities of Color. Much is to be done in this area and Rodney should be lauded for his work.


B2C is much more difficult than B2B. Why? Human attention and desires are fickle compared to helping businesses do things better/faster/cheaper. With that said, a major B2C or DTC startup success story would do wonders to help the brand of Atlanta. Consumer products are always more exciting than business products.


This past quarter Atlanta companies raised $650M across 38 investments — the best Q2 ever — according to PitchBook – NVCA Venture Monitor. While the amount of funding fluctuates on a quarter by quarter basis, setting a new high bar with our best quarter ever is an indicator of progress. Funding is only one piece of the puzzle, but it’s an important one.

Atlanta’s startup community is making real progress, and has much work to do.

Keep the ideas coming.

Next Level for Atlanta’s Startup Community

Last week I was talking to an entrepreneur and the topic of the Atlanta startup community came up, specifically ideas to grow the community faster. Looking back over the last seven years, we’ve made substantial strides by adding Techstars Atlanta, Atlanta Tech Village, Backed by ATL, Engage, Atlanta Startup Village (14,000+ members!), several seed funds, two IPOs, four unicorns, and much more. Only, even with our continued success, there’s a feeling we haven’t accelerated the growth of the overall community enough to reach the next level.

In brainstorming what’s missing, several ideas came to mind:

Diversity and Inclusion

Programs like Startup Runway and It Takes a Village are helping address the diversity and inclusion challenges in the region but we need more, much more. Say there are 3-5 groups working on this for the startup community, we likely need at least 15-20 to make a big impact.


Looking at recent angel deals over the last 24 months, there are roughly 10 local angels that lead deals regularly (defined as 5+ deals historically). For every one that’ll lead and put a deal together, there are another 10 that participate because they trust the lead. With 10 lead angels and 100 secondary angels, there just aren’t that many regular angels. Many more startups raise angel money each year, but it’s almost always from a first time angel that isn’t a regular. We need at least 100 regular lead angels and 1,000 secondary angels — much work to be done.

Seed Funds

We’ve seen several local seed funds emerge including Valor Ventures, Knoll Ventures, and Tech Square Labs with a couple unannounced ones in the works. Seed funds are an important part of the community as they have committed capital that has to be deployed in a designated time period, as different from angels who might never do another deal. In addition, a strong seed fund community provides more support to angels helping them see a potential funding path forward, especially due to Series A rounds becoming what used to be Series B rounds. With 5-7 local seed funds today, we likely need 15-20 to achieve the next level of scale.

Startup Hubs

The Atlanta Tech Village is now seven years old and helped establish the startup center of gravity in Buckhead. The ATDC has been the startup hub in Midtown for decades. Downtown has the excellent Switchyards. Now, Atlanta is booming around the Beltline’s East Side Trail and growth in the Perimeter is robust, making both areas logical spots for more startup hubs.

Peer Connections

Atlanta is a very inviting, informal town for entrepreneurs. Groups like the Entrepreneurs’ Organization and Young Presidents’ Organization have strong local chapters. Only, there’s a gap in peer connections for tech entrepreneurs to network with and learn from each other, as separate from the long standing existing ones that focus on tech executives and service providers. The best example to emulate is Mindshare in Washington D.C.

Entrepreneur Education

Imagine you’re a first-time entrepreneur and have just quit your job to create a company. Where do you go next? Showing up at a startup hub and plugging into the community is likely the best answer. Only, it’s a hodgepodge of events and programs, serving a variety of audiences. We need stronger programs geared directly towards helping tech entrepreneurs get going — bootcamps that cover the most important topics.


Easily the most nebulous, and possibly important, is how to tell the Atlanta startup ecosystem story better. Lots of B2B successes across MarTech, cyber security, FinTech, and health IT is excellent, yet doesn’t paint a memorable picture. B2B is the strength, but how do you make it exciting? Austin and Boulder are regularly mentioned in the national press. How do we get Atlanta on those same lists for startups?

What’s Next

Atlanta has rapidly become an R&D hub for companies headquartered elsewhere, and that serves a roll in recruiting talent to the region, but the real opportunity is growing the startup community with locally headquartered companies. Local startups invest more in the community, build greater wealth, and develop the next generation of entrepreneurs at a faster rate.

To get to the next level as a startup community, it’s going to take a substantial number of new success stories, many more organizations helping a variety of entrepreneurs, and a greater level of local investment. Atlanta has the basis of the platform, and with hard work plus a little luck, will be able to get there in 5-10 years.

Let’s make it happen.

What else? What are some more ideas?

Funding Climate Outside the Money Regions

Whenever I talk to a startup person outside our region (investor, journalist, etc.) they like to ask about the current funding climate in our region. Money is always a popular topic, especially when the economy is hot and startups are en vogue (bonus: public SaaS valuations are at an all-time high). Only, the funding climate outside the money regions (CA, NYC, etc.) hasn’t appreciably changed in the last 2-3 years.

More money is sloshing around on the sidelines waiting to be put to work. Limited partners have huge commitments in funds and venture investors are trying to put the money to work. Yet, this is primarily for growth/later stage investments when the metrics are solid and it’s clear the startup is going to win, simply a question of how much. For these growth/later stage investments, investors will travel. Distance is a pain but not that big a deal. If you can write a $50M check and underwrite a 3-5x return in 3-5 years, it’s a pretty easy ‘yes’, especially if there’s a direct flight (the money people still hate layovers).

Early stage investments — primarily post-seed and Series A — are still quite limited. The number of investors that focus on this stage (say, $750k – $3M in revenue) hasn’t appreciably changed, thus the number of startups that raise rounds in this stage hasn’t change (without more investors, the quantity of these types of fundings won’t increase). Investors at this stage often write checks that are larger than angels can put together, so it isn’t possible to bypass this funding source with more non-institutional money.

Seed/angel rounds are still the most challenging area. Idea stage startup are plentiful, but highly risk-loving capital is not. Local investors are still primarily wealthy people who didn’t make money in technology, and thus their appetite for startup investing is relatively low. To grow the angel community, we need to have more large startup exits. Today, there’s a strong cohort of local growth stage startups valued in the hundreds of millions and a few in the billions. Once this wave of startups, typically 5-10 years old, reaches exit maturity, expect the local angel community to ramp up and hit a new high.

While the funding climate hasn’t changed recently, the overall tenor of the startup community is humming along nicely. Look for the funding climate in the idea/seed stage to grow nicely in the next 3-5 years once we have a wave of big startup exits.