Cypress Growth Capital, LLC is an investment firm providing growth capital to emerging and expansion stage companies in the southwestern United States. Our firm makes investments using an innovative royalty financing approach pioneered by our Senior Advisor, Arthur Fox. Royalty financing provides entrepreneurs and business owners with an innovative new alternative to traditional equity and debt instruments. Our principals are knowledgeable, experienced and successful entrepreneurs and operating executives.

Our firm invests primarily in technology-enabled business services and software companies with consistent revenue streams. As one of the first and largest royalty financing firms in the United States, we are actively deploying capital, having made several investments thus far in 2011.

We typically invest between $1,000,000 and $3,000,000 per portfolio company. The capital can also be deployed in tranches if that is a more practical solution for your company.

Royalty financing provides growth capital in exchange for a percentage of a company’s future revenue. The royalty is paid monthly and is based on a fixed percentage (the “royalty rate”) of the company’s monthly gross cash receipts. Royalty financing is structured as secured, long term debt with no fixed or minimum requirements for servicing or repayment. The actual dollar amount your company pays each month fluctuates with your revenue performance, providing a more flexible and adaptive payment structure than traditional bank loans. Royalty financing does not require a personal guarantee and, as a debt instrument, preserves your company’s equity.

A number of factors are considered when determining the monthly royalty rate, including the projected time it takes to return the principal amount, the company’s growth rate, gross margin potential, and cash flow, as well as the planned deployment of the growth capital.

Unlike an equity investor's position, our profits are capped. The royalty obligation ends when we receive a total sum equal to an agreed-upon multiple of the investment (the “royalty cap”). In most cases, a portion of the royalty payments is tax-deductible, significantly reducing the after-tax cost of the loan.

This, of course, depends entirely on the future sales and revenue results that the company achieves. Our modeling assumes that the royalty cap will be reached within five to seven years after the investment is made.

An equity investment is almost always more expensive to the successful entrepreneur compared to a royalty investment. The equity investor is frequently looking for a return of 10 to 20 times their investment within a five to seven year period. In addition, the entrepreneur may lose a controlling interest in their company. Compared to the cost of equity, royalty financing can be an affordable and prudent form of growth capital.

Lending organizations generally do not provide debt financing to emerging businesses. A working capital loan might be possible, but is heavily collateralized and of a smaller amount than is typically needed. In addition, the lender will often require a personal guarantee, putting the entrepreneur's personal assets at risk. Fixed monthly principal and interest payments are due, regardless of whether the company has sufficient revenue to meet the payments. These lenders normally have the right to quickly foreclose on delinquent borrowers, making this form of financing very risky for companies and their guarantors. In contrast, the royalty payments, as a fixed percentage of the previous month’s cash receipts, automatically adjust to changing business conditions. Personal guarantees are never required.

The royalty investment is structured as a long term, secured promissory note, which is shown, in the principal amount, as a long-term liability on the company's balance sheet.

We look for companies with $1m-$15m in annual revenue, at least a two year operating history, sustainable positive cash flow, and current gross margins (or gross margin potential) of 50% or greater. We invest in technology-enabled business services companies and software/software-as-a-service firms based in the southwestern United States. Unlike an equity investment, extraordinary growth and a huge market opportunity are not required. Further, Cypress Growth Capital’s investment success is not dependent on an exit event, e.g. a sale of the company or a public stock offering.

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