The following excerpt is from Entrepreneur’s book Finance Your Business. Buy it now from Amazon | Barnes & Noble | iTunes
Serial entrepreneur Aamer Sarfraz knows that raising money to launch or grow your business is painful, and says he’s invented a better way.
Sarfraz aims to bring royalty financing to entrepreneurs. Instead of compensating investors with equity, entrepreneurs raising an R round through Sarfraz’s firm Draper Oakwood Royalty Capital will pay investors back with a small percentage of their future earnings.
A new option for entrepreneurs
Fundraising for your business “is an ongoing miserable process,” Sarfraz says. Banks are often not set up to work with entrepreneurs, and venture capitalists have to be focused on making an aggressive return on their money. “If you take perfectly nice, perfectly decent individuals and make them a bank or credit officer, they suddenly become very difficult to work with,” he says.
Sarfraz has both raised money as an entrepreneur and invested in other startups. His goal in establishing Draper Oakwood is to make “entrepreneur-friendly” capital, he says.
Here’s how an R round works:
Loans are paid back with a 5 percent interest rate.
An R round investment made through Draper Oakwood will be paid back by the entrepreneur as a percentage of future earnings at a rate of approximately 5 percent, explains Sarfraz. A business owner only pays back the loan in months when revenue is positive. If the business isn’t making money, then Draper Oakwood doesn’t get repaid that month.
You don’t give away any equity in your company.
Unlike a venture capital investment, Draper Oakwood doesn’t take any equity from a company it invests in. You keep full ownership in your company.
Loan decisions depend entirely on your revenue.
Unlike bank debt, Draper Oakwood doesn’t require personal guarantees. Instead, the capital investment firm decides whether to invest based on a company’s ability to generate revenue. That means it’s not for everyone. As appealing as an R round sounds for the right entrepreneur, it’s not a panacea for the lending market.
“It’s definitely interesting for the right types of companies but…