Royalty-Based Growth Capital: A New Way to Fund an Emerging Business

Prior to Cypress Growth Capital, Ed Mello and I co-founded an advisory firm that helped emerging software and tech-enabled business services companies grow their top line revenue. After 25+ years in the IT consulting and software industry, it was work that we enjoyed. During that time we observed a consistent challenge facing our entrepreneurs: how to weigh various growth capital options against the impacts and restrictions that went with them.

Go the equity route, give up increasingly valuable ownership and control. Go the debt route, put up your business (and probably your home) as collateral, and face a daunting set of restrictive covenants that keep one foot on your accelerator, the other on your brake. Or, just keep bootstrapping, but miss real opportunities to scale.

Enter Arthur Fox - serial entrepreneur, innovator. For over 20 years Arthur has developed, refined and pioneered a royalty-based investment structure that he first deployed in the Boston area. His technique seemed to provide entrepreneurs a compelling additional capital option. Once we met Arthur and heard his story, we were “all-in.” Ed and I formed Cypress Growth Capital in 2010. Arthur joined us as a senior advisor.

Since then we have continued to focus our attention on tech-enabled business services and software businesses. We have invested in more than two-dozen companies. The market response has been overwhelmingly positive (see Success Stories). We have proven Arthur’s model at scale.

The model is pretty straightforward (there’s beauty in simplicity). We provide up to $5M million in growth capital -- meaningful capital, enough to make a real difference. We also can provide the capital in a series of optional tranches, providing the entrepreneur with more flexibility. A company then makes monthly royalty payments that flex with the performance of the business. Those payments continue until their total reaches a cap. When the cap is reached, the obligation is fulfilled.

No personal guarantees. No restrictive covenants. No loss of equity (other than a small warrant) or control. No back-end balloon payments. An entrepreneur has the freedom and authority to “play offense” with his or her growth capital.

For a company with healthy gross margins, strong growth opportunities, and high exit expectations (but only if and when they want to exit), a royalty-based growth capital option from Cypress offers a compelling alternative.

Bart Goodwin