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Ask HN: Are Royalty Investments attractive options to investors?

2 points by master-litty ↗ HN
A royalty investment is where an investor exchanges capital for royalties on one or more products, sometimes capped to a mutually agreed amount.

I believe these aren't pursued often because it's a complicated and expensive model for most business structures. As a result I'm having a hard time researching the general consensus about it.

Suppose I had a startup where it perfectly fit the model. Our company would sell products that are sold once to a single customer. Investors could perform a royalty investment by granting us capital once, then receive royalties on those kinds of sales until certain conditions are met.

Compared to traditional equity-based investments, I feel this arrangement can benefit both parties if arranged correctly. Companies can retain equity and investors could see larger returns quickly, especially if no exit strategy was being considered at the time.

How does HN feel about these types of investments?

3 comments

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brudgers
Typically investment structures take the form that they take because investors understand them and are familiar with them and the forms have risks profiles that are somewhat understood. This means the difficulty with a company seeking a different kind of investment for a new product has to both:

1. Sell investors on the future of the company's product.

2. Sell investors on the company's risk analysis of the investment form.

The effort on the second point is a distraction (grifting aside) because it takes energy away from creating a product and it has a lower expected return. In some ways, cooking up a new investment scheme might be easier than creating a product.

Anyway, there are industries that operate on a similar principle. Notably real-estate has investment syndicates with limited partners. A key difference is that real-estate investment is typically asset backed.

Good luck.

PaulHoule
These are a big feature of the current season of "Shark Tank". Kevin O'Leary seems to offer one to many if not most of the contestants.