What Generates a Royalty Crowdfunding Return?
Royalty crowdfunding takes two forms: entertainment and venture. For entertainment, a creative individual—author, musician, filmmaker, painter—allots portions of his or her cash flow to investors in exchange for financial support. Rarely does this comprise all income streams, but rather a narrow portion of sales. Similarly, venture returns come from a slice of a company’s revenues, meaning the company holds no obligation to repay a debt and investors cannot influence the company’s dealings.
A third type of royalty investing, the natural gas/oil trust, has slowly emerged within the industry, though still largely untapped. If of interest, investigate EnergyFunders. Regardless of the investment model, however, royalties have been touted as “stable, fairly low-risk alternatives for investors.” This article aims to unpack aspects of this claim.
Benefits and Drawbacks of Royalty Crowdfunding Investments
Royalty investments circumvent traditional stock concerns like market fluctuations. Moreover, some perceive it as a smarter, cheaper alternative to equity or debt, though not without risk itself. Rather than owning a company or product, investors need not worry about performance after their investment term—nor do companies need to stipulate control provisions or deal with other stockholder procedures.
During the active royalty period, both investor and investee share a mutual goal: all parties want revenues to expand. This can also help motivate a company or product into reaching its full market potential, making it a lucrative deal for both sides.
Despite said benefits, a few counter-arguments exist. For instance, some users chimed in and disputed royalty investing on Quora. One issue brought up concerns gross profit margins and how divided royalties restrict market options (i.e. pricing). Furthermore, production levels change quarter-to-quarter, so investors may find their returns inconsistent compared to debt. Lastly, investor-investee agreements sometimes end in conflict whenever a contract contains ambiguities or fails to anticipate an event. Should this occur, it can become an impediment for future investors, depending on the contract’s term.
Above presents arguments both for and against royalty crowdfunding. It’s a growing sector with lots of potential: what are your opinions?
Michael Ibberson is an expert writer from Toronto, who specializes in press releases, blogs and research reports. He contributes to the Crowdfunding sector regularly, discussing the following topics: education/strategy, campaign promotion and campaign management.
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