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Revenue Based Financing: Good Idea Or The BEST Idea Ever?

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Venture capitalist Andy Sack describes/promotes revenue based financing as a possible way for startups to get alternative funding. Simply put, this kind of financing is a way to structure a loan where an investor "buys" a percentage of future on-going revenues that a business earns. It's not an uncommon form of financing in the movie industry, and now it looks like at least one venture capitalist is using this type of financing for his fund.

This kind of loan isn't for everyone. (There's no perfect way to finance your creativity, anyway...) But who does this model really work for? Should filmmakers be the only ones who usually get these kind of deals? Could this model be modified so that a crowdfund could offer revenue based financing? Is there anything really interesting here?

initiated Oct 18, 2011 in Business Models by Michael Ho (2,370 points)   10 14 27

3 Responses

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My band recently instituted something like this. Since we were having trouble with resentment over certain members contributing more time or money than others, we started a "share" system. Each "share" gets you a share of future profits. We had a lot of discussion about whether we would let outsiders buy into this system, but ultimately decided yes with the caveat that shares do not equal voting power. So far we haven't had anyone outside the band want to buy in, but it has solved some major problems for my band. In addition to to curbing the resentment factor, we now are buying band equipment, have built a drum riser, working on more stage elements, and an upgraded merch display.

I think it would be awesome to get some angels or something like that to invest in a RBF. However, we're still so new that we haven't reached full sustainability quite yet.
response added Oct 18, 2011 by Matthew Bile (1,090 points)   3 6 15
@matthewbile -- That's an interesting set-up you have to manage the band and keep track of the funds.

I'm wondering how you have approached (or will approach) your fans to see if they'll kick in some cash. I just remembered that there's also platforms like that lets fans "invest" in startup bands. It doesn't seem to have taken off quite as well as Kickstarter, but it's not clear why not....

Maybe Sellaband makes it "too complicated" by allowing each band to have different revenue share plans... Apple's iTunes made a simple pitch that every song was "99cents" for a reason, and maybe the "chance to get a non-fixed revenue share percentage" sounds like too much to think about for most fan-investors.
@matthewbile -- FYI: Public Enemy tried SellaBand a while back, but they set their goal a bit too high.
@mhhfive I'm definitely checking out Kickstarter and will check out Sellaband as well. We're writing our third album now and I really want to give one of these fan funding options a try. The approach I'm taking is to make sure to have the album pretty much done before we ask for any funding. Also, one of the issues that I'm seeing is to set the rewards appropriately.

We've had some fans donate in the past. And it's crazy how they don't really expect anything in return. One guy donated $50 for our first album, so we gave him a free cd and shirt. Then donated $50 for our second album. Before we finished the ablum, he joined the army. When he finally came back on leave, we went to give him his cd and a new shirt, and he gave us another $100! We tried to give him more stuff, but he didn't want it. The kicker was that he rarely even came to our shows.
@matthewbile Two more platforms worth checking out: IndieGoGo and PledgeMusic.  They all have different features/elements that may or may not work for you.

By the way, I love the idea of offering "shares" like your band did.  Would you be interested in taking a version of what you wrote in that comment and posting it as a separate discussion starter as well?  I think it would be great to have a discussion around the idea as you set it up.
@mmasnick Thank you for the interest in the shares idea that my band uses! I'll work on making a separate post.
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What I want my favourite band to do next with their music creatively may not be the same what I perceive will make them the most money. Once I have invested in the band's future earnings, I have a conflict when I give them feedback. Every band needs honest feedback about their music from their fans, not a load of armchair pundits 2nd guessing the mass market appeal of their output.
response added Oct 21, 2011 by David Griffin (160 points)   1 1 1
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This definitely works/makes sense in some cases, but I can see a few potential pitfalls.  First is that once you involve a revenue split like that, it seems to take something away from the way fans view it.  I think this was a major part of the problem with Sellaband.  Fans don't want a part of the monetary profits.  They want to help the band succeed and to promote the band.  The incentives get a little screwy.  However, if it's a new sort of "label" perhaps it works.

Of course, once again, perhaps David Bowie led the way here with his Bowie Bonds, in which he sold off some of his future earnings as well.
response added Oct 18, 2011 by Mike Masnick (22,930 points)   59 99 160

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