An Alternative Financing Option for Start-ups

When first-time entrepreneur Philip Vaughn recently began searching for start-up capital, he traveled down two conventional paths.

Mr. Vaughn, co-founder of travel-review aggregator Raveable.com in Kirkland, Wash., says he wasn't interested in forking over a large chunk of equity to venture capitalists or committing to ambitious investment-return expectations. He also considered a loan, but knew that banks had made it onerous for young companies like his to obtain debt financing.

"We're in a weird spot" but we have "a decent amount of revenue coming in," says Mr. Vaughn who expects Raveable's sales to grow two to three times annually.

So he's considering an alternative called royalty financing, in which a company pays back a loan using a percentage of revenue. Traditionally found in industries such as mining, film production and drug development, royalty financing is being seen more among technology companies and other early-stage firms with growth potential.

In the past year, new firms such as Arctaris Capital Partners LP in Waltham, Mass., Cypress Growth Capital LLC in Dallas, and Revenue Loan LLC in Seattle have sprung up to provide royalty financing.

The exact financing structure varies between investment firms. Arctaris, which is raising $200 million from institutional investors, is coupling the royalty financing with a five-year amortized loan. Cypress, which is putting together a $30 million fund, and Revenue Loan, backed by $6 million in venture capital, are attaching a small stock warrant as a safeguard in case the company becomes the next Google Inc.

Read more: The Wall Street Journal

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