Why I Started Sage Growth Capital

“See a need - fill a need!” This line from the movie Robots accurately describes why I started Sage Growth Capital. Over the years, my exposure to the various sides of the angel investing industry led me to realize there were several large holes in the traditional angel/venture capital model, and like Rodney the robot, I set out to create a solution (with the help of some friends, of course!) 

The Problem with Venture Capital 

Angels invest using the same model as VCs. Specifically, they fund early stage companies in exchange for ownership in that company. The objective for both investors and entrepreneurs is for the company to grow exponentially and to “exit” by being acquired or going public, thus paying off their early investors. A few of the problems with this model:

• Successful exits take time. As an investor, the rule of thumb was “I need to see a reasonable path to getting 10x my investment back in 5-7 years”. The reality is that everyone - investors and entrepreneurs alike - always underestimate the amount of time it will take to get to that positive exit. Several recent studies show that the actual time to a successful exit is 10-15 years! Besides the time value of money, why is this a problem?

  • Investor fatigue. In our first local angel fund, 96% of the investors invested in a full unit individually. By the fourth fund, that number was less than 67%. What we found was that investors wanted to continue to participate, but because of the lack of positive exits they were over-allocated to the asset class and were limiting the amount they would invest going forward. 

  • Founder fatigue. It takes a lot of energy, commitment, time and sacrifice to run a startup and it’s difficult to keep that going for over a decade, especially when the founder is (usually) not getting paid a market salary and their ownership is dwindling due to successive rounds of funding. 

• Companies sell equity because that’s the only option.  I have spent a lot of time talking to companies about their capital needs. Most of them expected to raise equity investors because “that’s what you do” to grow your business when you aren’t yet bankable and bootstrapping is too costly. Many are often surprised to learn that taking equity investors effectively committed you to selling the business in order to pay those investors back. This was often not aligned with their personal goals for the business, but they did it because they did not feel they had a choice. 

The Search for an Alternative

It bothered me that as investors, we are constantly telling entrepreneurs they must innovate, but we have not done so ourselves. Angels use the same venture capital model that has been around for over a century with very few improvements. In 2017 I attended a session at the Angel Capital Association Summit where the presenter discussed a revenue-based stock redemption model that he was using. I started researching revenue finance and learned that there was a lot of experimentation going on with the model, but the stock redemption version was not very practical for most companies. I was convinced that a variation of that model that was closer to lending would work better for my local angels and entrepreneurs. 

While my partner Kevin and I had a lot of experience with all aspects of equity investing as well as raising and administering funds, we did not have the expertise needed to underwrite and structure a revenue-finance deal. Then the stars aligned and I met Molly. She had recently left her role at Lighter Capital (the pioneer in revenue-based lending) in preparation for her move to Boise. With our combined expertise, we proceeded to raise Sage Growth Capital Fund I in 2019, and Fund II in 2022.  

The Sage Solution

We have written extensively in other blog posts about the mechanics of our model so I won’t restate them here, except to say it has been a success in solving the pain points mentioned earlier in this article. The main reason for this is our returns are not dependent on exits. Since we get paid back on a monthly basis based on the performance of the company: 

• Our interests are aligned with the entrepreneur around increasing sales, not driving for an exit at any cost

• The entrepreneur is not forced to sell their business to pay us back

• We are dedicated to ensuring all of our portfolio companies are successful, not just the few who have the potential to provide exponential returns

• Once we are paid back, we go away and the entrepreneur does not have to give up their ownership

• If we do our diligence correctly, our investors get their money back in 3-4 years on every deal

I am proud of the fact that we have effectively achieved our goal of “filling a need” by providing a wider range of options to both entrepreneurs and investors. For more information on our model or the benefits of our revenue finance, visit our website at www.sagegrowthcapital.com.

About Sage Growth Capital

Sage Growth Capital makes revenue-financed investments in companies at any stage who need growth capital. It is our mission to provide a more flexible funding option to growing companies who do not fit traditional equity or lending models. To learn more about Sage Growth Capital or to apply for funding visit: www.sagegrowthcapital.com.

About Revenue-Financed Capital

Revenue-financed capital (RFC), also referred to as royalty financing, revenue share or revenue-based financing (RBF), is a non-dilutive form of growth capital where investors receive a percentage of monthly revenues until a set amount has been paid. RFC differs from equity financing as the investor does not obtain ownership of the company and it differs from debt financing as there is no collateral required and payments are variable. RFC is designed to empower entrepreneurs to grow their businesses with non-dilutive capital that aligns with their sales cycles.