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Should your new VC fund use Revenue-Based Investing?

You’re working on launching a new VC fund; congratulations!  I’ve been a traditional equity VC for 8 years, and I’m now researching Revenue-Based Investing and other new approaches to VC. The question I’m asking myself: should a new VC fund use Revenue-Based Investing, traditional equity VC, or possibly both (likely from two separate pools of […]

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You’re working on launching a new VC fund; congratulations!  I’ve been a traditional equity VC for 8 years, and I’m now researching Revenue-Based Investing and other new approaches to VC. The question I’m asking myself: should a new VC fund use Revenue-Based Investing, traditional equity VC, or possibly both (likely from two separate pools of capital)?

Revenue-Based Investing (“RBI”) is a new form of VC financing, distinct from the preferred equity structure most VCs use.  RBI normally requires founders to pay back their investors with a fixed percentage of revenue until they have finished providing the investor with a fixed return on capital, which they agree upon in advance.  For more background, see Revenue-Based Investing: A New Option for Founders who Care About Control.

This is part 4 of a 5-part series on Revenue-Based Investing VC:

From the investors’ point of view, the advantages of the RBI models are manifold. In fact, the Kauffman Foundation has launched an initiative specifically to support VCs focused on this model. The major advantages to investors are:

  • Shorter duration, i.e., faster time to liquidity.  Typically RBI VCs get their capital back within 3 to 5 years.
  • Consistency of returns. BJ Lackland, CEO, Lighter Capital, observed, “A well-run RBI fund will return more consistent returns for investors than a well-run VC fund, simply because the underlying assets have more homogeneous returns.”  
  • Antifragile, countercyclical model. We’re now late in the cycle of the historically cyclical equity VC industry. This should concern any traditional equity VC.
  • Can work for all levels of growth and all funding histories. Lighter Capital has funded companies with growth rates ranging from single digits to >500%. BJ Lackland observes, “Our customers are 10% VC-backed, 45% bootstrapped and 45% angel-backed.”
  • More attractive to women and underrepresented founders. Many of the leading RBI investors, including Decathlon Capital, Indie.VC, Lighter Capital, Corl, Feenix Partners, Clearbanc (which has a distinct model), and Founders First Capital report far higher rates of women and underrepresented founders pitching them and winning capital than traditional VCs see.  I explore the reasons for this in Why Are Revenue-Based Investors Investing in So Many Women & Diverse Entrepreneurs? 
  • Lower likelihood of writeoffs, assuming the VC is investing in companies with a clear path to profitability.
  • Greater transparency to limited partners. The RBI VC is valuing a set of debt instruments, as opposed to a traditional VC who primarily relies on valuations markups attributed to a company by outside VCs. These markups are often somewhat disconnected from a company’s “true” value. For an overview of these concerns, see Scott Kupor’s “When Is a “Mark” Not a Mark? When It’s a Venture Capital Mark”.
  • Underaddressed market. John Borchers, Co-Founder of Decathlon Capital, observed, “If you look at the Inc. 5000 data over the last decade, you’ll see that in any given year less than 10% of the 5000 fastest growing US companies have any institutional venture capital support. We think that this speaks to how large a market there is for RBI and other non-equity based approaches to supporting growth-companies who may not fit the traditional VC mold or be interested in taking venture equity.”
  • Less pressure to paint a picture of the company as growing to the moon. Many VCs lose interest in a company when it is clearly no longer hypergrowth, even if it’s still a successful company by most standards, e.g., Evernote.   BJ Lackland pointed out, “I was a VC many years ago. With RBI there’s a very different relationship between the entrepreneur and the capital provider. There’s less selling the big dream, pie in the sky, hockey stick forever. It’s more straightforward and healthy. This is because the RBI investor doesn’t sit on the board, isn’t the entrepreneur’s boss, can’t fire them from their own company, and doesn’t need to be sold a far off dream of milk and honey to provide capital. There’s no need to redline the business and put everything at risk to be a unicorn. Go big or go home makes sense for VCs, but doesn’t make sense for most entrepreneurs, nor for RBI investors.
  • More intimate knowledge of portfolio company performance.  A very common complaint of traditional equity VCs is they don’t have good visibility on their companies’ performance, until the board meeting (and sometimes even then!)  Kim Folson, Co-Founder, Founders First Capital, observed, “RBI financing is more intimate than traditional equity. Our founders have immediate accountability as to the accuracy of their projections.”  Many RBI VCs contractually require their companies to provide ongoing access to their financial data.
  • Potentially can use an evergreen fund structure.
  • Potentially could use SBIC financing. See Why The SBIC Doesn’t Work For Venture Capital Anymore vs. Small Business Investment Companies (SBIC) are an Attractive Alternative to Venture Capital. That said, I have not identified any RBI investors using this structure.

The disadvantages to the investor:

  • Likely cap on returns. This structure scares many traditional VCs, because dramatic outlier outcomes are the drivers of returns in the traditional VC model. Every traditional VC aspires to a 5x, 10X, or 100x fund. But in practice, very few VCs will ever see returns like that. Any multiple above 3X is still very healthy and will put you well into the top quartile of VCs. 
  • Taxable as ordinary income, unlike traditional VC which is normally taxed as long-term capital gains. This means that a 2x return on paper can shrink to a 1.5x return after-taxes.
  • Collections risk. When a company exits via IPO or M&A, the cash can literally be sent directly to the investor. In the RBI model, the company has to send the money to the investor typically in monthly tranches. Depending on the company’s financial situation, they may not be happy to do so. There’s a tension between the traditional desired “founder friendliness” of a classic VC and the relationship between a debtor and the debt collector. 
  • You need to be a licensed lender. John Borchers observes that if a traditional VC expands into RBI, they will need to become a licensed lender, adhere to different regulatory requirements, and are more likely to come under SEC oversight.
  • Potentially fewer or no paper markups. Traditional equity VCs rely on new money coming in at higher valuations, which creates paper markups, allowing VCs to raise their next fund. For an RBI investor, valuation depends on how the RBI security is structured. If it’s structured as debt, then there’s no concept of a “markup” in valuation at all. Valuation is driven by the value of the loan, net of impairments, and the yield.
  • Potentially harder to recruit employees. Many people are interested in working in equity VC, so much so that there’s a whole business (GoingVC) focused on helping people get jobs in VC. People are very excited about the opportunity to work with companies that very rapidly grow into industry leaders, even though statistically most VCs will not invest in such mega-winners. RBI funds cannot offer this same level of excitement.

Bryce Roberts, cofounder of Indie.VC, reports, “We started small, with a group of 8 companies who were given $100k each, and a focus on helping them raise their revenue, not their next round….Among those initial 8, we saw average 12 month revenue jump by over 100% (from an average of $250k the year prior to our investment) with that average growing to nearly 300% after 24mo. “  In other words, his investments outperformed the typical VC portfolio.

Suggested further reading:

I posted this as a guest article on Techcrunch.  Note that none of the lawyers quoted or I are rendering legal advice in this article, and you should not rely on our counsel herein for your own decisions.  I am not a lawyer. Thanks to the experts quoted for their thoughtful feedback. 

Source: https://teten.com/blog/2019/08/20/should-your-new-vc-fund-use-revenue-based-investing/

Private Equity

Ordermark Funded $120M to Expand its Virtual Business

Virtual

Ordermark is based in Los Angeles, CA, one of the leading online ordering management solutions for restaurants and virtual restaurant concepts.

Ordermark was funded $120 million series C round funding. The funding was led by prominent technology investor SoftBank Vision Fund and joined by returning investor Act One Ventures. The grant will use to help more restaurants transition to online ordering during the pandemic and beyond.

The company’s software consolidates incoming orders from multiple platforms and sends them to a single printer. Ordermark also operates a company

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The post Ordermark Funded $120M to Expand its Virtual Business appeared first on Funded.com.

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Virtual

Ordermark is based in Los Angeles, CA, one of the leading online ordering management solutions for restaurants and virtual restaurant concepts.

Ordermark was funded $120 million series C round funding. The funding was led by prominent technology investor SoftBank Vision Fund and joined by returning investor Act One Ventures. The grant will use to help more restaurants transition to online ordering during the pandemic and beyond.

The company’s software consolidates incoming orders from multiple platforms and sends them to a single printer. Ordermark also operates a company called Nextbite, a portfolio of 15 readymade virtual brands such as CraveBurger, Firebelly Wings, and HotBox by Wiz, a collaboration with rapper Wiz Khalifa. Restaurants can offer these delivery-only brands out of existing kitchens, opening up additional revenue streams.

Jeff Housenbold, the Managing Partner at SoftBank Investment Advisers, said. They believe Ordermark is a leading technology platform and innovative virtual restaurant concepts transform the restaurant industry. And they are excited to support their mission to help independent restaurants optimize online ordering and generate incremental revenue from under-utilized kitchens.

The rise of ghost kitchens and virtual restaurants, often referred to as the 3rd wave of food delivery, have paved the way for a broader addressable market for online food delivery.

The statement of Alex Canter, the chief executive officer behind Ordermark 2020, has been a tough year for restaurants. That’s why they are focus on providing products and services to help keep their doors open. This funding allows them to offer more restaurants with innovative ways to reach more consumers.

By: K. Tagura

Author statement:

Funded.com is the leading platform for accredited investors network worldwide. We monitor and provide updates on important funding events. Angel Investors and Venture Funding can be a key growth for a startup or existing business. Whether it is a first, second or third round financing having a strategic alliance with an Angel Investor or Venture Capital financing can propel a business to the next level and give the competitive edge.

Source: https://www.funded.com/blog/2020/10/ordermark-funded-120m-to-expand-its-virtual-business/

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Private Equity

Alternative Investments/ESG: Amundi Launches Sustainable ETF With Exposure To Japanese Stocks

The Amundi Index MSCI Japan SRI UCITS ETF offers exposure to large and mid-cap companies with outstanding Environmental, Social, and Governance (ESG) ratings in the Japanese market. The new ETF is an extension of Amundi’s range of sustainable ETFs.

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Alternative Investments/ESG: Amundi Launches Sustainable ETF With Exposure To Japanese Stocks

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Amundi’s new ESG ETF invests in large and mid-cap Japanese stocks.

The Amundi Index MSCI Japan SRI UCITS ETF offers exposure to large and mid-cap companies with outstanding Environmental, Social, and Governance (ESG) ratings in the Japanese market.

The new ETF is an extension of Amundi’s range of sustainable ETFs. (ETF Stream)

Amundi Index MSCI Japan SRI UCITS ETF

The ETF tracks the performance of the MSCI Japan SRI Filtered ex Fossil Fuels Index, which in turn is an equity index based on the MSCI Japan Index (the parent index). The index is representative of the large and midcap stocks of the Japanese market.

It excludes issuers involved in Nuclear, Tobacco, Thermal Coal, Alcohol, Gambling, Controversial Weapons, Conventional Weapons, Civilian Firearms, Oil & Gas, Fossil Fuels, Genetically Modified Organisms (GMO), and Adult Entertainment.

Its total expense ratio is 0.18%. No performance fees apply.

It is an accumulation fund and will be managed by Amundi Luxembourg SA, an entity that is part of the Amundi group.

The ETF is market-cap weighted and includes a 5% capping on issuer weights. It comprises 68 stocks, compared to 320 names in its parent index.

The fund’s largest holding is Nintendo with 5.6% weighting ahead of Daikin Industries with 5% and Sony with 4.7%.

It is listed on the Deutsche Boerse and Euronext Paris.

ESG ETFs continue record run

European ESG ETFs continued their strong trend and set a record for assets gathered in a month (€3.9 billion), according to the latest Money Monitor report from Lyxor ETF for September.

Related Story:  Amundi Expands ESG Range With Two New ETFs

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Source: https://dailyalts.com/alternative-investments-esg-amundi-launches-sustainable-etf-with-exposure-to-japanese-stocks/

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Private Equity

Artificial Intelligence: Intel First To Deploy AI “On Edge” In Space

Intel (NASDAQ: INTC) has the distinction of launching the first onboard AI processing chip into space. Earlier this month, the European Space Agency and Intel announced the successful deployment in space of PhiSat-1, the first-ever satellite with onboard AI-processing capabilities. Launched from a rocket dispenser on September 2, the PhiSat-1 is positioned about 530 km above our heads, moving at a speed of 27,500 km per hour in a sun-synchronous orbit.

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Artificial Intelligence: Intel First To Deploy AI “On Edge” In Space

https://dailyalts.com/wp-content/uploads/2020/10/Intel-AI-Satellite-4-scaled.jpg

A satellite the size of a cereal box, carrying a camera and an AI chip, is now in orbit.

Intel (NASDAQ: INTC) has the distinction of launching the first onboard AI processing chip into space. Earlier this month, the European Space Agency and Intel announced the successful deployment in space of PhiSat-1, the first-ever satellite with onboard AI-processing capabilities. (Business Insider)

Launched from a rocket dispenser on September 2, the PhiSat-1 is positioned about 530 km above our heads. It is moving at a speed of 27,500 km per hour in a sun-synchronous orbit.

PhiSat-1

The satellite’s objective is to monitor polar ice and soil moisture, as well as to test inter-satellite communication systems.

The satellite carries a hyperspectral-thermal camera and an Intel Movidius™ Myriad™ 2 Vision Processing Unit (VPU). The latter is responsible for the AI heavy lifting operations onboard the spacecraft.

Myriad’s immediate function is to curate the huge mass of data captured by the camera.

AI at the ultimate edge – space

The big problem facing the scientists was the sheer volume of data generated by the hi-fidelity camera onboard the PhiSat-1. The camera unfortunately does not know how to differentiate between a cloudy and clear environment.

It, therefore, takes a large number of photographs that are useless because, at any given time, clouds envelop two-thirds of the earth’s surface.

The junk photos consume precious internet bandwidth to send down to earth. After all that, scientists would likely delete the unclear photos.

The scientists decided to use onboard AI (also known as “on edge” processing) to curate the photos. Myriad-2 would examine the images, trash the useless ones, and send only the good ones to earth.

By discarding the cloudy images at the source, they saved nearly 30% of bandwidth.

“Artificial intelligence at the edge came to rescue us, the cavalry in the Western movie,” says Gianluca Furano, data systems and onboard computing lead at the European Space Agency.

“Space is the ultimate edge,” says Aubrey Dunne, chief technology officer of Ubotica, the Irish startup that built and tested PhiSat-1’s AI technology. “The Myriad was absolutely designed from the ground up to have an impressive compute capability but in a very low power envelope, and that really suits space applications.”

Ubotica worked with cosine, the maker of the camera, in addition to the University of Pisa and Sinergise.

After three weeks of testing, the team could establish that Intel’s Myriad AI onboard the PhiSat-1 was working fine.

ESA then announced “the first-ever hardware-accelerated AI inference of Earth observation images on an in-orbit satellite.”

Satellite-as-a-service!

Scientists can now visualize multiple applications of AI on satellites.

For example, the satellite, during one orbit, could switch from spotting wildfires on land to rogue ships or environmental accidents at sea such as oil spills.

It could measure crops and soil moisture over farms and forests, and assess the ill effect of climate change on melting ice caps.

Related Story:   Satellites and AI Could Together Predict Wildfires Accurately

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Source: https://dailyalts.com/intel-first-to-deploy-ai-on-edge-in-space/

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