Two things: we use a unique financial instrument, and we have an uncommon experience base.
First, Polus’ financial instrument is a hybrid between a loan and a revenue-share. This structure allows for a very low fixed payment (approximately 2% effective interest rate in Year 1), with the majority of payment obligations tied to how the company performs. Typical private or commercial bank loans have fixed payments over 3-5 years. Polus’ has a 90% variable payment over 10 years. For companies that are growing fast and need cash without a fixed “mortgage,” this structure accommodates inevitable ups and downs.
Second, Polus’ team is uncommonly suited to deal with companies like yours. We are not Wall Street equity types, Silicon Valley venture types, or spreadsheet jockey debt types. We’ve been entrepreneurs who have built and sold successful companies. We’ve been public and private company executives who have bought companies. We’ve been personal and institutional investors acting as passive shareholders or active Board members. We’ve been retained strategic advisors who roll up our sleeves for private and public company Boards and CEOs. We’ve done equity and debt capital raises, recaps and LBOs.
Most importantly, our DNA comes from the company side, even if we’ve spent a lot of time on the investor side.
Entrepreneur-friendly capital has two parts: a loan and a revenue share. The loan is a proprietary instrument from our national bank partner with terms unavailable to companies like yours.
First of all, it’s a 10 year term – almost all mainstream commercial loans are limited to 3-5 years. The only ways around this are to be a huge company and directly issue long-term bonds, or be a smaller company and pledge significant liquid (i.e. cash) collateral or personally guarantee the instrument.
Second, the rate is below what is commercially available. The rate is LIBOR plus some basis points, calculated monthly – the current LIBOR rate is found here. This is far below anything private companies have access to – personally guaranteed and heavily collateralized bank rates will be in the 5-7% range, and private debt rates (usually for companies with >$5M in EBITDA) will range from 12-18%.
Third, the amortization terms are extremely company friendly. In any typical commercial or private debt instrument, there may be a period of 6-12 months of “interest only” payments, but after that it is typically a “straight-line” amortization of 100% of principal over the term of 3-5 years.
Polus’ instrument requires a very small amount of the principal to be amortized annually (i.e. a low single digit percentage). The vast majority of principal is repaid at the end of the 10 year term, when companies can more easily pay it directly or re-finance it out with bank or private debt, for which it will be eligible for, given its more mature and financially low-risk situation.
We work with you to review three year historical financials and five year forward projections. Then we go through a diligence process together, and we arrive at a believable growth rate. We take that information and together agree on an appropriate amount of capital. Based on the amount of capital we agree on a percentage of revenue that we think will generate a fair return to Polus and be easily sustainable by the business.
In the end, the amount of capital you want may not fit the amount that we think is appropriate for the Polus instrument. For example, let’s say we have two companies who both want $5M in capital. One has $15M in trailing revenue and the other has $5M in trailing revenue. We will evaluate them very differently – based on rate of new customer acquisition, customer churn, increase in same-customer spending, etc. – to determine whether we can provide $5M to both.
Polus provides $1-$5M in capital to companies generating $5M-$15M in revenue. The “average” company appropriate for Polus generates $8.5M in revenue, a little less than $1M in EBITDA, and wants about $3M in capital. Statistically for the last 15 years, equity or private debt providers do not typically provide <$5M as their first investment. This is true because <$5M investments is not an efficient amount for the most common fund sizes to generate target returns.
We provide $1M-$5M of capital because it’s what we have found to be most needed. We find this to be true for two reasons:
1. Companies who have survived the “infant mortality phase” of businesses (i.e. when their revenue is <$5M) typically do so without outside investment – they have bootstrapped to survival. This means these companies know the value of a dollar and have been very efficient and successful in growing their businesses while being under-capitalized. These companies don’t need or want more capital than they can use effectively.
2. Of the 236K businesses in the U.S. (out of 6M total) generating between $5M-$15M, 80% are asset-light, high gross margin, service-related businesses. These companies do not, by definition, require huge capital expenditures to grow. This capital-light model is what allowed them to survive and grow in the first place – low capex, high gross margins, and leverage-able G&A.
These companies generally need cash to support growth on a proven business model – working capital for lots of new customers, more sales and marketing reps, more customer account reps – and not big one-time spends (i.e. product development, equipment purchases) characteristic of capex-intensive businesses or early stage companies.
The short answer is we have access to $45M to invest through Polus. The long answer is that our structure is not a typical “fund.”
Traditional VC, PE, or private debt firms create 10 year limited partnership funds with start and (desired) end dates with a set amount of capital. This determines what kinds of businesses they can invest in, in what timeframe, and under what terms.
Polus does not use this method so that our investment structures can be flexible with each company. Polus has a pool of partners that contribute capital to Polus-originated investments. While these are similar to fund limited partners, the structure is not based on a closed, time-delimited fund entity. The total available capital from such partners can readily accommodate the number of investments that Polus can potentially make.
Two reasons: this segment has the highest density of good companies, and the lowest density of available and appropriate financing options.
Approximately 6 million companies generate revenue in the U.S. 5.7 million of them generate <$5M in revenue, 236K generate $5M-$15M in revenue, and 135K generate >$15M in revenue.
Over a 10 year period, the failure rate of companies is 70% in the <$5M segment, 10% in the >$15M segment, and 15% in the $5-$15M segment. That means there is a massive reduction in failure risk once companies reach >$5M. From an investment standpoint, that makes them about an 80% less risky than <$5M companies.
Over any 3 year period, <10% of all companies in both the <$5M and >$15M segments achieve annual revenue growth rates >20% above GDP. In the $5M-$15M segment, 40% of companies grow at >20% above GDP. That means it is statistically much more common for companies in this segment to grow revenue quickly.
When you combine these two factors, the $5M-$15M segment has the best risk/reward profile – companies have a much lower incidence of failure and a much greater incidence of growth.
Regarding financing options, the amount of capital required by <$5M companies is much smaller (i.e. <$1M), and is therefore more amenable to friends and family. Those that require >$1M have over 700 venture capital firms focused on “early stage” companies. Companies that are >$15M require more capital (i.e. >$5M) and are more likely eligible for traditional institutional financing options – private equity, private debt, and bank debt.
Companies in the $5-M$15M segment, however, are not structurally suitable for VCs, PEs, private debt, or bank debt. So from a rational standpoint, this segment is a perfect storm of low risk, high reward, little competition.
The reason we at Polus are doing this, though, is because we love the types of companies in the $5M-$15M segment. Companies are maturing into real businesses and have a shot at being really significant – it’s not a dream in a garage, it’s a real opportunity that can be realized with work, knowhow, and capital.
It’s just good fortune that the financing environment is such that the segment that is most exciting to us is also the segment that needs what we provide.
Yes. Polus receives shares from portfolio companies in the same class as the owners, with no valuation of the company required. The amount of equity is approximately 50% less than the average warrant coverage required by private debt instruments.
Polus does not require a Board seat in the companies receiving capital. That doesn’t mean our team members won’t serve on the Board and help, but it would be as an independent fiduciary under a separate arrangement.
Companies receiving entrepreneur-friendly capital from Polus must provide monthly financial statements and annual audited financials.
Your company receives capital from Polus’ national bank partner. The next month, your company makes two payments via ACH or wire transfer: one to the bank and one to Polus. The payment to the bank is based on the long-term, low interest, low amortization conditions of the loan. The payment to Polus is based on an agreed upon percentage of the top-line revenue of the month just passed – if revenue goes up, payment goes up, if revenue goes down, payment goes down. This continues every month for 10 years. At the end of 10 years, your company pays the balance of the principal of the original loan to the bank.
Yes. Prepayment to the bank is accomplished simply by paying off any remaining balance. Prepayment to Polus is accomplished by paying the agreed upon revenue share calculated off a 5% annual revenue growth rate projected over 10 years. Prepayment of the Polus obligation makes sense if the company is expecting to grow at a revenue CAGR of >20% over the remaining life of the agreement.
Yes. Polus has covenants to protect against fraud and bad-faith behavior. For example, a company may not set up a shell company to collect revenue separately from the company that has an agreement with Polus, which could be done to decrease the amount of revenue share proceeds due to Polus. There are no operating financial covenants dictating minimum coverage ratios, and other such covenants that typically come with private or bank debt.
You pay the same percentage of revenue regardless of amount of revenue, up or down. Let’s say you projected annual revenue of $12M, with monthly revenue of $1M, and the agreement with Polus is a 5% revenue share. If you would have hit $1M for the last month, you would pay $50K. Instead, let’s say it was a bad month and the revenue was actually only $500K. You would only pay 5% of $500K, or $25K.
A primary benefit of entrepreneur-friendly capital is that the obligation accommodates your reality, rather than accommodating our target returns calculated by a spreadsheet and enforced by fixed payments.
If a company defaults on the bank loan, then the bank has first lien on the company’s assets. With this arrangement, the bank will take ownership of the collateral provided by Polus and Polus will retain subrogation rights – Polus will then have first lien on the company’s assets. If a company defaults on payments to Polus, our equity would then take the form of a lien against assets to recover the payment obligations.
If you have other questions specific to your situation, please contact us. If you think Polus might be a fit for your capital needs, please complete the Fit Analysis form and we’ll begin the conversation.