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Thu September 20, 2012
How do you bankroll a tomato battle in Seattle?
One of the hardest things about starting a company is getting someone to bankroll your idea. Venture capitalists are only interested in companies they think will have explosive growth, like Google or Amazon in their infancy. And getting a bank loan these days can be tough.
Some pioneering Seattle investors have stepped into that void. They’ve come up with a new way of funding startups, and they’re helping to get some creative companies off the ground.
Like Tomato Battle. That's the brainchild of Max Kraner and Clint Nelsen, two young Seattle entrepreneurs. A couple of years back, Kraner and Nelsen were snowboarding and brainstorming. Nelsen said, hey, let's recreate that tomato fight that takes place in Spain every year, where people throw rotten tomatoes at each other.
And thus, Tomato Battle was born.
`Best mess ever'
On a sunny summer day, hundreds of people in Seattle are flinging tomatoes at each other. They’ve crowded into a parking lot behind Pyramid Alehouse south of downtown, dressed in togas and tutus and Viking hats. But in a couple of minutes, you can’t tell what anyone is wearing - they’re all the same shade of red, globs of tomato dripping off their faces.
"This is the best mess I've ever made," said Grant Hawley, as he wiped tomato slime off his face.
Would he ever do it again? "Absolutely."
Tickets for a tomato battle cost as much as $50. Nelsen says 2,000 to 3,000 people come to each event and they’re hosting eight this year all over the country. So this is a good business.
The way they got the company off the ground was through serendipity. Nelsen shares office space with Seattle angel investor Andy Sack. Nelsen and Kraner had just thrown up their Tomato Battle web site and sold a couple of tickets when Sack walked by and asked what they were doing. He liked the idea and proposed that he invest in it – but with a new kind of financing.
Instead of doing a traditional venture capital deal in which Sack would buy a stake in the company, Sack proposed a loan. Something called a revenue loan.
"We’ll invest in a company in exchange for a percentage of gross revenues," Sack said. "So as revenues go up, we get paid more. As revenues go down, we get paid less."
Instead of a bank loan, where you owe the same amount every month, loan payments in this case rise and fall as money comes in. Kraner and Nelsen say that is perfect for their business.
"We are very seasonal, so in the winters when we’re not making any money, we’re not making any payments," Kraner said.
"(We) just shut down. We go ski," said Nelsen.
Sack says a revenue loan offers other advantages. Entrepreneurs get out free and clear once the loan plus interest is paid off. They don’t give up any ownership of their company like with traditional venture capital. If they later sell their company, they get to keep all the money instead of divvying it up with venture capitalists.
Why investors like revenue loans
Investors start to get money back right away instead of buying a stake and waiting years for a payoff. Sack says that’s why he started a new company in 2010 called Lighter Capital to make revenue loans after he made a string of investments in 2008 that went nowhere.
"I probably made 30 investments, mostly angel investments, and of those angel investments, the overwhelming majority of them were zeros," Sack said. "So avoiding zeros as an investor is what was appealing."
The idea of revenue financing has been around for a long time. It’s been used in industries like mining and entertainment. Applying it to startup companies like Tomato Battle is new – and Lighter Capital has been at the vanguard.
There are some downsides. John Scrofano runs an online wedding planning business called Nearlyweds in Seattle. He took venture capital and a revenue loan in 2009 from Founder’s Coop, which Andy Sack also helps run. Scrofano says he doesn’t regret taking a revenue loan, but in hindsight, he would have rather plowed that money back into hiring more people that early in his business instead of making loan payments.
"Typically when you’re a startup, you want to preserve cash to be able to reinvest in your business and grow it really aggressively," Scrofano said.
Clint Nelsen of Tomato Battle says he has no regrets. That revenue loan bought 200,000 tomatoes for the first event, paid for cleanup and got the company off the ground. They’re hoping to pay off the loan by next year.
Is it painful at all to write that check?
"Writing any check is painful, but if anything, we’re both happy to be writing that check because we realize what that’s led to and the place that it’s allowed us to get to," Nelsen said.
What that’s led to is thousands of people getting to splatter each other with tomatoes till they have blobs of it in their ears and they smell like they’ve taken a bath in marinara sauce. One tomato fighter, Sally McGowan, steps off to the side for a break from the madness.
I ask her what she thinks of it.
"Amazing! Crazy!" McGowan said.
McGowan says she’d do it again. That’s what the Tomato Battle guys and their financial backer, Andy Sack, are counting on. They’re hoping there will be lots of people willing to spend money on a gigantic food fight keeping the company in business and paying back that loan.