Can Startup Investments Provide Income?
Managing Editor’s Note: If you’ve always thought income investing was limited to dividend stocks and investment-grade bonds, today’s article will surprise you. It comes courtesy of venture capital expert Adam Sharp. Adam’s the Founder of Early Investing, a research service that teaches regular folks how to directly invest in the most exciting, explosive private companies in the world.
In the article below, Adam shares the new little-known investment anyone can make with as little as $100. Its high-yield return structure is designed to produce handsome, steady income… potentially 1.5X to 2X your money. If the idea of investing like a venture capitalist excites you, continue reading below, and click here to begin receiving Adam’s free Early Investing newsletter each week.
Not long ago, when someone said “income investing,” they were probably talking about investment-grade bonds and bank CDs.
Back then, it wasn’t hard to find a safe, steady 5%-plus yield.
Fast-forward to today’s low interest rate world, and you’ll find generating a 5% yield is far trickier.
The highest-yielding CD I can find currently pays 1.4% (and that’s for a three-year deposit).
Here’s a chart showing the declining one-year CD rate between 1983 and 2013…
Economists tell us low rates were necessary to prevent a depression, but savers paid a dear price for the “help.”
Today, “income investing” means many things: dividend stocks, peer-to-peer lending, real estate.
But the launch of equity crowdfunding has offered a new income alternative…
(Equity crowdfunding allows everyday investors to get in on the ground floors of the most exciting private startup companies, beginning with as little as $100. For more information, click here.)
Revenue share agreements.
These are investment contracts startup companies use to source capital. With this type of lending, a business receives a loan from investors and pays it back by sharing a percentage of its revenue in regular intervals until a target return (typically 1.5X to 2.5X the principal loan) has been achieved.
Let’s look at a live deal to get an idea of how these work.
A Craft Beer Revenue Share Deal
The company is offering investors 10% of net revenues until 1.5X their money is paid back (principal + 50%). Payments are made quarterly.
In this case, “net revenue” is defined as total sales minus shipping costs and returns.
Now let’s look at the fundamentals.
SAB is growing fast.
From 2014 to 2015, it more than doubled sales from $250,000 to $580,000. And the company says it’s on track to hit $1 million in 2017.
(Source: SAB Wefunder page.)
Helping to fuel this growth is SAB’s Evel Knievel-branded beer, “Evel Ale.” Here’s what the daredevil can looks like…
This deal has an interesting “sweetener” for early backers. And in this case, it definitely pays to read the details…
If you invest in the first $200,000, you get up to 2X your investment back instead of just 1.5X.
That’s a huge difference in returns.
So how long will it take to get that 1.5X or 2X return?
The answer will depend on the company’s growth and the total amount of money raised.
In the “Details” section of SAB’s Wefunder page, founder Martyn Buffler says he estimates a two- to four-year payback period.
If SAB can pay back the loan with interest in that time period, investors will be rewarded with a yield that beats just about everything I know of.
Of course, there’s always the possibility of default in these types of investments. They’re not secured in the same way a typical bond is.
Still, these types of deals can be extremely promising.
You can read more about the specifics of SAB’s promissory notes on its Wefunder page.
Verdict Still Out
To be clear, I have mixed feelings about these revenue share deals.
On one hand, the concept is fantastic, and potential returns are very high.
The thing that bugs me is this…
If SAB ends up raising the full million dollars, it could take a while to pay everybody back. As an investor, I’d be rooting for the round to be as small as possible. (To date, SAB has raised $133,787 out of a maximum $1 million.)
The $1 million maximum is specific to the SAB deal. Some startups choose to cap their rounds at $100K, $500K or somewhere in between.
Those types of offerings would have less “overfunding” risk and would probably pay back investors faster, on average.
For now, I’m holding off on investing in any revenue share deals. I’m primarily interested in equity deals, but I’ll continue to watch the space for attractive opportunities.
Overall, I believe we’ll start seeing more of these deals.
The concept of supporting a small business while simultaneously seeing a solid return has tremendous potential.
If one of my favorite local restaurants were doing one of these deals, I’d absolutely participate. The rewards for this type of investing go beyond money.
It’s fun to support local businesses you like, and this is a new, unique way to do that… while also providing the potential for strong returns.
Now that we’ve seen a fair number of successful revenue share offerings, many more will follow. 2017 should bring plenty of alternative income deals for adventurous investors.
Would you consider investing in a revenue share deal? Let us know by leaving a comment below.