A Unique Take on Venture Investing feat. Robert Cote | Venture Capital

Hello, future billionaires. Welcome back to another episode of the podcast. We've got a very unique one today. So a lot of times we will bring on experts in not just real estate, but also private equity and venture capital. And so today, Bob, we talked with Robert Cody. And what do you talk about?

So this guy has a unique approach to venture capital. You've all heard about venture capital. We've talked about venture debt. Well, here's a new one, Venture Revenue Streams.

Yes. So tune in now to hear how he focuses on companies with IP, intellectual property, and is able to create an asset and then cash flow from that asset.

Very, very cool model.

If you want to check it out. And as always, we've got to give a very big disclaimer because he and his firm are raising capital. So you need to do your own due diligence. Us bringing him onto the podcast is not recommendation by any means, and you have to do your own due diligence. But if it's interesting, feel free to reach out. And we are just curious and want to bring this cool model to you guys and hope you enjoy the episode. This is the Invest Like a Billionaire podcast, where we uncover the alternative investments and strategies that billionaires use to grow wealth. The tools and tactics you'll learn from this podcast will make you a better investor and help you build legacy wealth. Join us as we dive into the world of alternative investments, uncover strategies of the ultra-wealthy, discuss economics, and interview successful investors. Looking for passive investments done for you? With Aspen Funds, we help accredited investors that are looking for higher yields and diversification from the stock market. As a passive investor, we do all the work for you, making sure your money is working hard for you in alternative investments. In fact, our team invests alongside you in every deal, so our interests are aligned. We focus on macro-driven alternative investments so your portfolio is best positioned for this economic environment. Get started and download your free economic report today. Hello, Invest Like a Billionaire podcast listeners. Welcome back to another episode. I am Ben Frazier, your co-host, joined by Bob Fraser. And today we have Robert Cody, who is the founder and CEO of Cody Capital and is bringing a very unique perspective on investing in innovative technologies, right? So we've talked a lot about venture capital, private equity investing in this podcast. It's something that our listeners are very interested in, right? We're all kind of heavy into real estate. And Robert is, you know, through his 25-year history has created some pretty cool models of investing that are a little bit different than traditional venture capital and really focused on intellectual property. So we're going to dive into it. It's a very fascinating little niche here. Robert, thanks so much for joining us on this podcast.

You're welcome.

Well, give us a little bit of background on you. I mean, you've been doing this for, I believe, 25 years. Previously at your prior law firm, you were a top IP lawyer. You know, break down what is intellectual property for those, you know, like us that are, you know, maybe newer to the subject and, you know, what's so fascinating about this industry?

Well, I spent 25 years investing in companies that develop breakthrough innovations or what you can call IP. It's the thing we hear about being stolen by China and others. It's the actual technology, whether you call it a breakthrough innovation, IP, or technology, that's what we're talking about. So I help companies that develop breakthrough innovations scale the use of their technology, their IP. And I use the revenue sharing approach as opposed to an equity model, one to help these companies own more of their business and reap more of the reward, and one to be paid to wait instead of waiting 10 years to see an outcome that may in many cases for venture capital not come. Actually be paid to wait and then still participate in the outcome. And I realized that at my law firm where I was partnering with companies that had developed these breakthrough innovations, I could do a lot more good today when there's a, when there's a huge cry out there to bring advanced manufacturing back to America by stepping outside of my traditional practice and developing a mission. I'll call it an army, Cody's Army, around going out and actually funding many of these of hardware companies, companies building real physical products based on breakthrough innovations. So we give this country a chance to rebuild its manufacturing base in a way that it can be rebuilt. The old stuff's not coming back with a model that incentivizes these entrepreneurs to really do the hard work to build that business, which again is a revenue sharing model. And essentially that's my background and what I'm doing today. And I'd love to answer any sort of questions.

So just I'm going to break this down. So let's make it super simple. So intellectual property is patents and technologies, these kinds of things. So it's, so it's basically you create a breakthrough, you protect that by, uh, you know, by getting patents and other, other things. But so let's say you have this, have this breakthrough technology. And so you're an IP attorney by background, which means you're the guy that, that goes and figures out how to help companies protect this, right? That's the background of a basic IP attorney, right?

For, for a basic IP attorney, but I stepped beyond that.

I understand. I understand. I'm just breaking it down for our listeners.

Okay.

So, so what you, you did that for a while.

Right.

And, and then, then what you've done is figured out how, I mean, a lot of these companies, I mean, these potentially real big breakthroughs, right? Like you were talking about the, the guys that invented PCR, which is, which is, which is the genetic testing thing. Is that, is that right?

Do you know?

It's the way to amplify DNA and be able to see it so you can develop treatments, detect diseases. It's, Something that won the Nobel Prize actually.

So huge. I mean, massive. So this is an example of something. So they basically got this little golden goose that they figured out how to do something no one else could do, and now they want to release it to the world. So they would hire an IP attorney to protect it. But what you go is one step beyond that. So you figured out how to, as an investor, bring capital to these companies through revenue sharing agreements so that so that when they release this technology or manufacture something, that you actually get a piece of the revenue. Is that right?

Correct. Yes.

So it's very interesting. And you made, you made a point very quickly, but I want to expand on this. So it's, it's kind of like venture capital, but very different than venture capital. So I actually ran a VC company early in my, in my career and, and they, they do what's called the equity model, right? They actually put in money, you know, into your company. And take ownership in the company. And that's one model, but it is very expensive, as you mentioned. Yeah, you give up a ton of your equity. And then as an investor, it's also not always great because, as you pointed out, again, super rapidly, is that you gotta wait for an exit. So let's say you're waiting 10 years for an IPO or 15 years, or who knows what, right? And, or let's say there isn't an exit, the market crashes or something else happens and there's no exit. So So you've got this, this massive investment that, you know, the payday is a long ways out there versus a revenue sharing model where you've basically contracted to share revenues and you have cash flows from sales. So as they make sales, you have, you have revenue, so you get a revenue stream.

And I want, I correct, I wanted to, to, the model has proven to be much more acceptable to investors, even everyday investors. If you can create a model that's income-producing from the asset that you're investing in.

Well, heck yeah.

That's really like real property.

Doesn't like cash flow, you know?

Right, right. And that's critical because a lot of people see, and rightly so, equity models tend to be lottery tickets. I may, I wait 10 years, I may or may not see a return. And mostly venture capital is not returning what you expect they would return. In fact, performance is pretty poor. I wanted to change the game by having an asset that has a lot of value to it to protect you and to create a cash flow stream. So you're paid to wait that beats what you would get in a real property investment.

So it makes total sense. Makes total sense. So it's better from an investor's point of view because, hey, who doesn't like cash flow? It's also better from a company point of view, right? This, this, because they don't have to give up the company and like control of the company and you know, deal with, you know, potential board members and dilution issues and that thing. So it can be much more attractive to people to say, hey, I'll just pay a royalty stream on this.

And the companies love it for maybe 3 reasons. One, one of the challenges these companies face is they're building their business. They've entered markets, they're generating revenue, they have something nobody else has. So Revenues can be durable, but to get the customer to sign the contracts in that pipeline, they want to see financial stability. So we develop a program with enough capital support so the market knows they can deliver on their contract and we'll sign it. So we actually take these companies out of a catch-22 situation that's holding back a lot of growth. It primarily balances out.

You give them a stronger balance sheet and that kind of thing.

Exactly. And then we gate capital in against milestones to could be a contract-based, could be some, you know, FDA approval of a drug, you know, ahead of revenue, but you know, the revenues will follow. We consider it sacrosanct that the cash flows will be there and the revenues will be durable. So it's very, very important to know that the engine in the car, not just the team driving the car, is truly different and people are willing to pay for it.

So, so these companies that may partner with you, uh, Yeah, it's very difficult to get a giant contract. I know this for a fact, right? To get a giant, to have a customer get a customer contract if the customer's not sure you can produce it, right? Or manufacture it. So they want to know you have financial backing, you have wherewithal that, you know, you've got a big shark, so to speak, behind you who can write big checks, that kind of thing. And so you're funding, you're creating a a big, big, you know, funding a balance sheet, you know, a boost booster for them and a backing that lets them go sell more and then gating that with performance criteria. I love that. That's a tremendous model. And now one other point that you made that I think is super relevant here. And that is that the difference with venture capital. So venture capital focuses almost exclusively on high-tech, right? And, you know, those kind of things. And there's a gap in lower-tech, you know, so let's say someone who's manufacturing or has, you know, it's a product that doesn't scale as readily as software, which is ultimately scalable, right? So there's a big gap and this actually fits. So venture capitalists will not invest a lot of times in low-tech or lower-tech companies, and this model actually works for lower-tech companies or main—

Well, well, I think we better clarify. So these are high-tech companies, both groups. I think the better distinction is venture capital after the dot-com boom. You know how it works. They build their funds around what's hot, and that was software, digitizing the world with software, moving businesses online. And so that's where many of the funds have found their home. And it's where you build your track record. So venture capital, while we're moving manufacturing offshore, moved over and hardware building high-tech physical products, real products that need to be manufacturing, manufactured. They were moving over to software, digital products, much lower capital requirements, easier to model. And now their track records are built on that premise. It's hard to shift gears. So now that the world has shifted back to investing in breakthrough innovations that can change how we manufacture products, make them more sustainable, more circular, reuse their waste, we're actually creating models that are higher growth and higher profitability through efficiency. So green actually is an illusion. It's not just good for the environment today. Many, many, many physical product companies with breakthrough innovations are turning how we make products into advanced manufacturing that's sustainable and circular, but more importantly, high profit, high growth. It's truly high tech. In fact, it's more high tech than software. That engine in the car is difficult to replicate, takes many years to copy. And so you have high barriers to entry to competitors. So if you pick right, you've got a cash cow. If I want to use a cute word for it. Over in the software world, many, many competitors, even if I pick the best software company, Uber, I'm going to deal with Burger King and McDonald's, Lyft, and I'm going to have a lot of competition. And what venture capital has suffered with is, yes, I can go round and round and pump, pump up, pump and dump, I like to call it, the value of these companies. So I'm always showing great paper returns. But if you look at the end result 10 years out, those returns aren't there because they can't liquidate those investments. Too many competitors have emerged and there are too many options for consumers. And of course, for buyers, if you're looking to sell that business or take it public. So I want to draw a distinction. I would say that software is low-tech, more incremental improvements and easily replicated. And I would say that hardware or physical products that are based on breakthrough are the highest tech of all. Okay.

So are you filling a gap that is not being filled by traditional venture capital?

Correct.

So there's people that, there's companies that cannot get traditional VC, but that qualify for your model.

Correct. Because venture capital has shied away over 20 years from making physical products. I'll call it hardware. People who manufacture something. And at the same time, we moved manufacturing offshore, which compounded the problem.

Right.

They moved over to software where a guy behind a desk can code something up and hit copy and it's instantly replicated. Right. So you don't need all those assets.

So, so you are definitely filling a gap. That was the point I was trying to make.

Yeah.

That, that there's a gap that, that traditional VC, they're, they're never going to fund. And And you know, in manufacturing for sure, they just, there's very few, very little VC investment in manufacturing type businesses that produce because they're more difficult to scale rapidly and software is ultimately scalable as you point out.

And there's probably another point. So while it's very challenging to get venture capital today, if you're building a hardware business, meaning real physical products that need to be manufactured. When you get that capital, if you can, it comes at a very, very high price. The equity models for these companies when they're early revenue, if they need $30 to $50 million, which is typically the range that somebody who makes something needs to scale to justify customers signing that contract that you can build out the capacity to produce, meaning manufacturing equipment, production lines. To get that capital, you may have a $50 million need. You may have $5 or $10 million of revenue and be worth $50 million or $100 million in evaluation. So that $50 million is coming in and they're going to take half or more of your company's equity. And that's a real problem for these companies.

Yeah. And most entrepreneurs, that's the thing that's the most precious to them. You've ever watched an episode of Shark Tank, right? How many deals blew up over valuation issues, which is these entrepreneurs, this is my baby. I don't want to give up all my equity, but that, that's just the market. That's a fact. And it's the same, same, you know, we've actually talked about venture debt and, and, you know, venture lending, which is kind of, you know, very similar in some ways. You know, it doesn't have revenue stream kind of, it doesn't have as much upside as you have, but it's preferable to a lot of the companies that don't want to give up all their equity. They'd rather lend. But so this model has kind of a blend of, yeah, you know, cash flow and some security, plus you actually get a fair amount of upside because you're typically, I would imagine you're doing this on revenues even, right? So you're protected from the bottom line, which if they, you know, want to go nonprofit, unprofitable for a while, you don't, you know, you'd still make money because you're above the expense line. Is that right?

Right, exactly. And we should, let's drill into the model second and I can explain kind of what those returns look like, but I want to hit couple of points. The other thing that these companies love is not only am I giving them the capital support they need to get customers to sign, you know, and gating it in so my investors are protected. We're not just putting a chunk of money down. We're making a commitment. So I'm protecting my investors. I'm not diluting these companies because I'm sharing in revenues. The point you just hit very, very well. And I'm solving a need that can't get that capital from venture capital. And then finally, I'm doing something that very much value, which is I'm going to protect what they have. I'm one of the leaders, not only investing in intellectual property, but I'm one of the leaders in protecting, and that's an art much more than a science that requires that you be able to walk blindfold through the darkness. I like to say, to be able to feel your way And only experience, deep experience where you're dealing with many battles on many different fronts over many years, does one be able to— is one able to be able to craft a way to protect what you have, to protect the engine in the car. And I care as an investor about the engine in the car because that's security. I'm going to underwrite that value and I'm going to develop a path to liquidate it. Because I know somebody else in the market, usually multiple people want the diamond that this company holds in its pocket. So I've created, like in real property, an asset that protects your capital. There is no protection in venture capital equity investing. So for investors, I'm changing the risk profile. They're secured by an asset that will get us our capital back if something goes wrong. Right?

So you're, you're bringing your expertise in asset intellectual property to bear to, and you have a huge stake in the quality of that intellectual property. So you're going to protect that. So it makes total sense.

Talk a little bit about that. Cause I think that is a unique aspect as a differentiator from traditional VC.

Right.

And something as real estate investors like us that, you know, we always come back to the collateral, right? Ultimately you have collateral. So in a liquidation scenario where you've done a revenue share agreement, you know, but that only works if the company's generating revenue. If they, you know, go bankrupt or the technology isn't accepted, what's kind of the, you know, I'm sure it's probably different for every company, but what's the value that you can kind of extract from the IP itself if you peel away the company that created it?

So I'm going to use the word brick and mortar assets. We're actually securing the brick and mortar assets of the company. So let me step back and explain what that means. So if I come up with an innovation, it actually creates cascades of innovation, meaning many, many different ideas or inventions. As I figure out how I'm going to build a product, there's a lot of challenges. So you tend to have a large portfolio of innovations. Those are protected by patent rights or trade secrets. You keep it secret if people can't understand what you're doing by looking at your product or your equipment, and you patent it when they can because it's your only way to protect what you have. So there are a couple of different ways to do it. And so I'm valuing not only the actual portfolio of technology or IP and the rights to protect it to make sure that The buyer knows he will have that monopoly he's paying for. Protection is really critical in the world. You don't want people copying it. You lose the benefits. So secondly, I'm valuing the physical equipment that I'm funding, the plants and equipment that I'm helping capitalize to build the new product. And so both the ideas and how to implement them, as well as the physical equipment Give a buyer a turnkey solution so they can get in the business if something were to go wrong. So I like to say, if you think about it, it's an IP property and it's brick and mortar based, physical based. It's real property based in a lot of ways. And I want investors on this and listeners to understand we're not talking about some intangible idea that I can't grab with my hand.

So it's usually a combination of the idea, but also physical assets that are used to scale the technology.

Can we, you know, we've been talking conceptually, which I love, but can we get into a couple just real examples, like a real company that really did this and the actual deal that was made? And if you need to kind of not mention the exact name of the company or something, that's fine. But the real deal, how it really worked out for everybody and all, and just go through, let's just, break this down real practically?

So there are a lot of elements to that. So you can kind of bring me on the straight and narrow if I go off, off. But the, the, I try, the model is developed to be simple. I want to be your partner. So I don't want to be in a heavy negotiation over what's the value of your business and how much equity is counter to that partnership. Right. And it can break down a relationship.

Can you give us an example of just a particular example?

So I want people to appreciate The model, let's take an example. So let's take a company that's developed a brand new breakthrough called NanoCarbon. Okay. And imagine that that NanoCarbon is like a grain of sand at a billionth of an inch, and I can control the structure of that grain of sand at a billionth of an inch, and I can put billions of those grains of sand in a coating. And I can coat them on a window and you can't see it, but every one of those grains of sand is not only blocking heat from your building, like, like existing windows in new construction, but instead of reflecting it away, it's converting it, every grain of sand into electricity. So imagine a world where I can coat every building and turn it into a solar panel that is a coating you can't see with your eyes. Imagine the change. We could bring in the world, renewable energy and solar energy can be available everywhere. And that's an example.

Is this a real company?

Yes, a real company. Okay. So tell me the deal.

Tell me the deal.

So yeah, so I'm going to get to the model now. So what I tell companies is give me a 5-year revenue plan. Simple. We'll worry about discounting that plan in a minute, but give me a 5-year revenue plan. And I want to figure out what revenue royalty or what percentage of revenue, what revenue share, which is the way it works, will get me back 100% of that capital.

In 5 years.

Correct.

So 20% per year-ish.

Correct. That's the beauty of it. Once you get comfortable that I can underwrite that IP asset and like a piece of real property, protect your capital, you can look at that as a true yield every day, every year on your money. That's the magic of the model and the way we structure it. And we keep it pretty simple. I'm not negotiating valuations. Give me a 5-year rate. Now, the art here is you will typically get one revenue projection if you're a venture capitalist, which he's motivated to see because he's going to put a multiple on it based on comps and he needs to double his money every round. So he's in on the game. Do you follow?

Robert, I think I've read, you know, 500 business plans in my days. And I think I can count on one hand the number of entrepreneurs that ever met their revenue projections, right?

That's exactly. So now here's the art of it. We are not in the business of taking anybody's IP. We are not repo men. In fact, if I've got to do that, I consider my business over, right? Reputation matters. I'm unlocking an asset, the engine in the car that has value that would bring many, many more investors into what was considered a lottery ticket business and make it look more like real property investing. And that's the art of this. And I want people to appreciate that, that security we hold in the asset. I'm not just exercising that willy-nilly. But it really sobers up a company in discounting that revenue trajectory once they know that the diamond in their pocket is at risk. So you'll see that revenue trajectory or that plan come down by 50% or more. And we model our share of revenue on that high confidence revenue plan that puts the asset at risk, not the pie in the sky plan that gets these hump and dump valuations that look good on paper, but never get realized in an exit.

Yeah, very cool. And so when a company is like deciding to potentially work with you, do they already have some of this IP protected or is it something where you're really coming with a value add with obviously your background expertise and helping them really create a strong, you know, fortress around that?

So I'll use the line again, you have, when you've done this many years, you learn to walk blind through the darkness. Yet See. And what I'm going to say there is that 25 years of doing what I did, investing in and protecting, takes you through so many wars and battles that you become the IP pre— you become the predator in the IP circle of life. And you want the predator in the IP circle of life because he knows how to capture the market. He knows how to capture what you own. And the answer to your question is, is usually The CEO is worried about building the business. He believes that his business is like the Field of Dreams. If you build it, they will come. What he doesn't realize, and only a guy like me who spent so many years helping companies to build industries with breakthrough innovation, what I know is that if you build it, they will look to steal it and you better protect it right. So the answer is I come in and provide an invaluable service to figure out how to better protect what you have, because we're going to take the engine in the car and we're going to sell our own cars, and then we're going to scale the use of that engine with manufacturers around the world that can sell their cars too. And we can grow this business faster, create more value for investors, and have an asset that's protecting, that grows in value with every partnership around the world. Much, much better than betting on the guy Who's driving the car? The team, the one team. I'm betting on many teams now, but the key to it is understanding how to protect that asset because you are sharing it. And that's the art of IP investing versus venture capital investing.

So how do you protect it internationally?

Right?

Because in America, we have great IP protection laws, but you know, abroad, they're not as strong. And in fact, it's common practice to steal intellectual property, right? So how are you, you know, helping protect companies that want to expand internationally or need to expand internationally to hit their revenue projections?

So that's a big question. I'll try to give a simple answer. Um, it's a big question. So I always tell companies, if you can keep it secret, keep it secret. Yep. Okay. So if you can sell half the recipe or license half the recipe, like Coca-Cola, right, is not patented, right?

It's better to have a trade secret, which— there you go, right?

Exactly. And so, um, you can either keep it secret, which is often a challenge to keep it completely secret like Coca-Cola does, or you can sell half the cake and provide the inputs for the rest of the cake so that half the secrets or on this side of the pond or in a secure location that you can trust. That's really, really important. That's one way. If you're selling a physical product, people are pretty smart at reverse engineering. And it's not just China, you know, everybody's got a competitive basketball team and every team wants to compete. And it tends to be human nature to figure out and learn from what others are doing. Rightly or wrongly, right? So you have to understand that if they can reverse engineer, now you need to get in the game of patenting. So that's the other aspect to hit a second area. And that's an art in and of itself because you need to patent in markets where you have effective enforcement. The US, Germany, uh, believe it or not, you're going to love this. China has built one of the— has built a state-of-the-art legal system to protect intellectual property rights for Chinese companies and any company around the world. And you'd laugh at that and say, what? WTF? How could that be? Well, when you need to license your companies into the American market and global markets, you better have strong protections in China because they want to come in your market. So your, your patent minefield is holding them out of China. And now you can legally license your way through cross-licensing into America, American market, European market. So even China has got in the patent game. They file at a pace, patent applications at 4 times what Americans do today. They're truly in the game of patenting what they have, and it's an economic weapon now, legally put in place, that helps get them into markets so they don't have to fight their way in. Interesting. I think that people wouldn't appreciate China would actually be protecting intellectual property rights.

That's really interesting. So, so how do you, like when you're looking at the right companies to invest in and to create a, you know, structure like this in, in your fund or otherwise, what do you look for? Right? Because there's gotta be an element of, you know, maybe if you go too early stage or pre-revenue, you're kind of more banking on the come. That doesn't really suit your model as well as, as maybe someone that's, got some existing proven market, but needs to scale, needs help, you know, really creating a fortress around their IP and leveraging some of the background. What do you look for in kind of your ideal, you know, target companies?

So I look for a company that has a product that implements innovations, IP, And I want to make sure that those innovations, that IP, are highly differentiated, meaning there's nobody else that can sell something that provides to customers the value proposition, because in the end, it's all about value. I want that value demonstrated in a pipeline, both pre-sales and a pipeline that I can validate to make sure that actually people see that value. Just like the business plan you may get from those 500 startups that you've looked at, Bob Fraser, you, you know that what people tell you needs to be validated to some degree. I need to trust the customers to tell me they appreciate the value. So you're underwriting a contract base as well. So you want to see a real contract base and that demonstrates the value of this intellectual property. So you get comfortable. That the revenues will be durable. As you're scaling out to meet demand, you want to make sure somebody's going to buy on the other end of that scale out. And that's pretty critical. And you want to make sure the pipeline is validated because you want to give them that larger pool of money that will be gated in over, let's say, 18 months, 24 months. You want to make sure many customers will buy so we can scale the company more quickly. That catch-22. Of having the customer, but not being able to demonstrate the guys who have to check the box, can you do it? That's a real struggle for many of these companies that build physical products. I'm solving that. So hopefully that answers the question.

Yeah, that does. It's interesting too, you know, going back to the Shark Tank comment earlier, you know, you see some of these deals being made where they're not actually asking for equity. They'd rather just get a royalty or a revenue share. And when you do that, you know, you think about the benefit.

You should call it Mr. Wonderful investing.

Mr. Wonderful, right?

It is.

People do make the reference every time I tell them I have the revenue share model.

But the benefit is you don't have the operational risk, right? You're just getting paid on the top line.

There is some operational risk here, sales risk, but not bottom line risk.

Not bottom line, which is great. The flip side of that, actually, it's interesting because I was talking with a guy the other day And he's, you know, been scaling his business with, through this partnership affiliate agreement where he has this kind of revenue share just based off revenue minus ad spend. But he's now having to incur additional costs on, you know, fulfillment of his product that he didn't anticipate early on as they scaled this up quite a bit. And now the incentives are misaligned, right? Where he doesn't want to keep scaling because that, you know, 30% of the top line or whatever he is getting is now way more expensive than it was early on. So do you ever find that as you kind of go longer in this cycle with a company that early on they needed the capital, so they're willing to give up more, but now does it create any disincentives down the line because their cost structure is greater than they anticipated?

And to add onto that, you know, an equity investor looks very negative on Worldly Arrangement or revenue sharing arrangement because, you know, that's, again, you're going, you're taking from the top line, right? So that's, you're getting the sweet nectar, you know?

Well, you're going to have to, just to make a comment on that, when you're in the hardware side of the house, which is where the gaping hole is in capital availability, you're also versus software where venture capital sits over in this hardware house where you're building real products. Based on breakthrough innovations to get capital in is heavily diluted, as we mentioned earlier. So I actually, we model out what a revenue share would look like over 5 years. We presume an exit within 5 years, and we actually compare the outcome for existing investors, equity investors, to the, you know, share of the pie that we're getting along the way and in the exit. And you can see essentially we're probably taking half of what a venture capitalist would take. And so the company reaps much, much more of the reward, both the people building it who you want to incentivize as well as existing investors. And so when you realize as an existing investor building this business and you get to market and you have this capital problem, here comes Cody with a way to not dilute you. And you can see that it's actually economically better for you, counter to what you were thinking would be the case.

Interesting. So what is the planned exit generally at the 5-year timeframe? Is there a buy-sell agreement at a certain valuation? Is it the company plans to sell? What's generally the expectation on an exit?

So we tend to model 5 years. Again, it's like the business plan that you handle or the pipeline that you're trying to underwrite, you never know what's real and what's not. And everything in my life and in every startup I've ever worked with always takes longer than we think, right? Always. So I tend to use a healthy 5-year kind of run. I think for anybody with something breakthrough, that's a timeframe in which they can really show well, right? They can really scale this business. And so we model 3, we model 5 years to get our money back, which is a 20% return per year. And then we ensure that we're getting another turn of preference, a 1x. So we're getting 2x total at that exit in 5 years. Okay. And we take a share of the exit based on looking at that revenue in year 5 and your profitability, putting in a value on the business. And figuring out what percentage would get me another turn. Now you're building this business. I'm still getting a percentage of everything above that. So I'm getting 1x along the way, 1x off the top as a preference because I'm a downside protector, right? I'm building this investment model from a perspective of protecting the downside so I can bring in millions of people, help many more of these companies grow and not make this lottery ticket. So I want the asset to be protected. I want them to get the cash flow, and I want them to be looking at a very high probability of a 2x on their money over 5 years gross. Of course, I get a share of the split stock, right? But it's a 2x return. And then we're still sharing in a percentage, the same percentage of the, of the, of the exit to buy out any continuing revenue stream. I tend to model getting a 3x gross. And if the company does better, you know, we do better. But a 3x gross and a 2x to my investors over 5 years is the way that I model this. Any questions on that?

But there really, you don't control the exit, right? And you can't guarantee an exit. I mean, you can't drive an exit. So this could be into perpetuity, right? That this thing goes, you know, and there's nothing you can do about it. But hey, there's worse things than getting cash flow in perpetuity.

So, well, I'm going to hit a couple of points that I think you guys will love as well, which are add-ons to what you just said. And that is now think about the dimension. I've added another dimension to an exit. I've added a cash flow stream. Venture capital is equity they can't trade. They've got to wait 10 years and hope for the best. Usually it's not a good outcome. Here I am betting on real differentiated properties that are cash flowing. I've underwritten the contract base so I know the cash flows are durable and I'm letting the company choose. No longer are you forced to exit because my fund needs a return. Really valuable to the company. And I'm stepping down my royalty in perpetuity. I'm always trying to make sure in perpetuity I'm taking off the top, so I'm not subject to the cost structure politics at the board level. So that I'm getting that 20% return on my money in perpetuity, or I can sell that stream to many, many, many funds that buy royalty streams today, including insurance companies who want to have that durable stream. It's very, very common in new drug discoveries that create royalties when the drug is sold. Those drug royalties tend to be sold to many, many different funds, insurance companies, et cetera. So I've added for my investors a new dimension that we can choose to exit at year 5 if we want, or we can stay in the game.

Awesome. Cool. Very cool.

Awesome. Well, Robert, I think we've hit time, but thank you so much for coming on the podcast and sharing this very unique model. I'm sure listeners will find this very interesting. So what's the best way for folks to find out more about what you guys are doing, if there's some interest?

So I would say you can go to our website, cotecapital.com, C-O-T-E, uh, capital.com, or to our IP Capital Fund, which is how you can invest with us either in the fund or in individual deals that you will see there. All breakthrough innovations that you'll find attractive. And that offering page is invest. CodyCapital.com. So either way, to learn more, we are hosting live Q&As to do more of a deep dive on some of the topics we covered here. And I would love to see many, many more investors join my mission and help bring advanced manufacturing back to America with a model like real property that they're familiar with, asset-backed, cash flowing.

So thank you. Thanks so much, Robert. Appreciate you coming on.

You're welcome. Thank you, gentlemen. Bye-bye.