Revenue Lending

Revenue LendingI recently had the chance to sit down with BJ Lackland, the CEO of Lighter Capital, to talk about life, revenue loans, and Lighter Capital. Below is a transcript of most of our talk.

JW-smallJW: BJ, what’s the first thing you think about in the morning when you wake up?
BJ-smallBL: My five-year-old daughter usually comes and knocks on my head to wake me up. Like many entrepreneurs, I often wake up thinking about my potential customers and my current customers, and what we can do to help entrepreneurs get to the next level. Lighter Capital looks a lot like our customers – we are a relatively new and growing business that is technology driven.

JW-smallJW: Tell us what a revenue loan is.
BJ-smallBL: RevenueLoans are basically royalty agreements that provide long-term growth capital to entrepreneurs. It’s a structure that sits nicely with banks, VCs, and angels. Essentially, it’s a loan that is paid back based on a percentage of your monthly revenues. Our loan term is structured over five years, but it doesn’t have any predetermined interest rate or payment, which makes it different from traditional bank loans. If you grow fast, your loan will be paid back quicker. If you grow slower, your loan is paid back slower. It all depends on the ebb and flow of your revenue. Like a VC, our interest is aligned with the entrepreneurs, but it’s not dilutive. Your performance dictates our returns. We lend to companies all around the USA and also Canada and are on average funding 4-5 companies a month.

JW-smallJW: How many of your portfolio companies are VC-backed?
BJ-smallBL: None of our portfolio companies are VC-backed. Our companies are primarily pre-series A and we are typically their first institutional investor. So their funding sources, prior to us, typically come from a mix of friends & family, bootstrapping, Angels (via convertible debt), and banks. Though the banks are usually only providing smaller lines of credit that are not really designed for growth capital. Banks find it hard to lend to SaaS and technology companies due to their lack of physical assets or inventory.

JW-smallJW: What’s the primary objection you get from entrepreneurs?
BJ-smallBL:  I think the biggest one is not really an objection, but more a learning curve issue and understanding how our RevenueLoans work.

JW-smallJW: Are there other players in this space?
BJ-smallBL: There are other people in the market who do revenue-based financing. Some with a regional focus or funds that target bigger loan amounts, like $5M or more. We currently lend between $50,000 to $1m. Some angel groups and incubators are also exploring how revenue-based financing might work for their start up as an alternative to further equity in the early revenue generating stage.

JW-smallJW: What about Kabbage and On Deck? These online lenders have been gaining a lot of traction.
BJ-smallBL: Kabbage and On Deck are designed to provide purchasing power to eCommerce merchants for things like working capital. For example, if you sell cups on eBay and it costs you $1 to purchase a cup  – it can be challenging to have sufficient working capital to buy enough inventory to get a bulk buy discount. Kabbage will lend you  $10,000 to help you do that. Other common uses include making payroll when there’s a lag due to outstanding accounts receivable.
The online technology they use can help you get cash extremely fast. However, it is expensive–IRR (internal rate of return) ranging between 50-110%–and it’s designed for short-term cash needs instead of long-term growth capital. Lighter Capital tries to leverage technology to make the underwriting process easier and faster, but we definitely still have a high level of human interaction with our borrowers. The way we use technology is to collect, gather, and normalize data from your accounting software (Quickbooks), CRM, and social networks (LinkedIn) to do the due diligence and verification we need in order to close the loan.

JW-smallJW: Can you talk a little about the current funding themes in the industry?
BJ-smallBL: Today the cost of innovation is dramatically reduced. In the past you may need 30 employees and $3M to start a company and develop a product. Today three developers can create a new product if they just work in the evenings and weekends for a year. As a result, we see a few interesting trends in the funding world. First, venture capital is definitely becoming the less common funding source for technology entrepreneurs. Since 2001, the number of VC firms has fallen by about 50%, while we’re still setting records for the capital deployed. In the past a $100M fund was considered huge, and now there are plenty billion dollar funds. This means the remaining funds are growing bigger, but the spread of capital is tighter.  If a startup can show traction early, as investors, you can be more selective. In the past, Series A was your first institutional money. Today, the early stage money is diminishing and the seed is becoming the new Series A and the Series A is becoming much more delayed. This is creating a gap for alternative forms of financing – from micro-VC to super angels, to peer-to-peer lending, crowdfunding, and revenue-based financing like us. The good news is that there are more options for the entrepreneurs which gives them a much bigger say in how the ultimately grow and capitalize their businesses.

Questions from the audience

Q1: If I borrow from you, how does that flow into my financial statements and capital structure?

BJ-smallBL: We’re a debt structure so the loan will be recognized as a long-term liability on your balance sheet. We will give you a monthly statement that shows the breakdown between principal and interest. Unlike a bank, which imposes financial covenants and personal guarantees to ensure your business stays within certain financial ratios – and they can get their money back if things start looking shaky. That’s not something we require.  We often are junior institutional debt and subordinate to banks. We are however senior to convertible debt.

Q2: So is the loan effectively secured against future revenue streams:

BJ-smallBL: Sort of. While the loan is secured against the assets of the company, in general SaaS and tech companies don’t have a lot of physical assets as in the way a manufacturer or retailer does. We are banking on the company generating growing, sustainable revenues in order for us to meet our return goals and be paid back. It’s why we like to see subscription and contract based revenue streams.

Q3: There seems to be a big gap between where you play and other forms of funding. Do you have any plans to increase the amount you can lend to individual companies?

BJ-smallBL: I agree – that the “in-between round” of $1M to $2M can be really challenging. Currently the maximum amount we can give to any company is $1M, but we see plenty of need for slightly bigger amounts and will we hopefully increase our upper limit in the not too distant future.

If you want to learn more Lighter Capital about visit

About Lighter Capital

Lighter Capital was founded in 2010 in Seattle with the mission to fill the funding gap for early stage companies. Lighter Capital is a tech-enabled lender that provides revenue-based financing to growing technology companies that have made some traction and are generating revenue.

About Joe Wallin

Joe Wallin focuses on emerging, high growth, and startup companies. Joe frequently represents companies in angel and venture financings, mergers and acquisitions, and other significant business transactions. Joe also represents investors in U.S. businesses, and provides general counsel services for companies from startup to post-public.
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