There is a possible straightforward answer to the problem of top-line revenue vs. bottom line profit.
What if it were possible to invest in a company’s topline revenues only? An investor’s projected return would be based on a percentage of gross revenues, bypassing the complexities of the balance sheet in search of bottom-line profits.
Revenues are easier to understand and project than profits. Grasping one set of factors that affect revenues is easier than grasping the multi-dimensional factors that affect profit, so risk and reward of revenue investing can be quantified in a more straightforward manner.
This is the principle behind royalty finance.
This method provides a greater degree of certainty to the investor; returns in the form of current income begin to flow immediately, and they grow as revenues grow. The investor’s natural skepticism is decreased because he has better information, though it can never be eliminated (nor should it be).
The company must still credibly justify its revenue projections, and provide a failsafe mechanism to report, sequester and pay a percentage of revenues to investors.
But the investor is now on more solid ground in quantifying his risk, and his reward. Therefore, raising capital may become easier, and the greenlight decision to invest becomes more straightforward. Everyone benefits.
The revenue investor is focused on the growth of revenues. The rest of the balance sheet is less relevant to his direct interest as an investor, and unlocking its mysteries is less of an obstacle to making an informed investment decision.