An Introduction to Revenue Based Financing Solutions for Technology Ventures in Emerging Asia

by Jennifer Sung
09 March 2021

Fund-raising can be an arduous journey for early-stage technology ventures. Whether you are focusing on investments in marketing to expand your customer base or bridging working capital gaps to meet the holiday season demand, your funding needs are diverse and critical for growth.

Historically, early-stage entrepreneurs have sought debt capital from friends & family and angel investors. Ventures become eligible for venture debt at a much later stage. Banks funding is not available to many as they are still on their way to profitability and may not have the required vintage.

Enter – Revenue Based Financing

What is the fuss all about?

Revenue Based Financing (also known as Revenue Sharing or Royalty Based Financing) is a method of raising capital for high growth early-stage ventures where investors invest growth capital in exchange for a % of monthly revenues. Revenue Based Financing is non-dilutive debt capital where the investor purchases rights to a portion of revenue earned by the venture. The repayments rise and fall in line with the venture’s revenue growth, providing relief in the event of small dips during the term. This form of financing aligns the goals of the investor and entrepreneurs providing a win-win situation

Revenue-based financing was first used by oil investors in the early 20th century to finance oil and natural gas exploration. Later, pharmaceutical industries, energy companies, and even Hollywood, started adopting Revenue Based Financing Solutions. In the 1980s investors started offering this form of financing to early-stage companies. RBF blends the best of formal credit and venture capital.

The Investment Structure
  • Principal Amount: The term sheet outlines the committed principal which may-be disbursed in lumpsum or tranches or on achievement of certain milestones as negotiated. The capital is free to be utilised in any growth initiative at the discretion of the entrepreneur
  • Monthly Revenue Share Payments: Every month as small percentage of your revenues will be directed towards repaying the investor. Since the amount of this repayment is linked to your actual revenues, you don’t have to worry about a fixed debt obligation in event of a seasonal slowdown
  • Redemption Premium: The investors return on the loan is FIXED. Your monthly payments end at the end of the loan term or when the investor has recovered the principal + redemption premium whichever is earlier. In the event of a slowdown, the monthly payments are adjusted in the last few instalments to make good for the redemption premium committed to the investor.
The result is Founder-friendly Debt Capital Solutions
  • Like equity, RBF investors are incentivised to help the company grow, because faster growth means faster repayment and a higher Internal Rate of Return
  • Like debt, there is no dilution to ownership or control, since RBF investors usually do not take any warrants, equity, personal guarantees, or board seats
Cost of Capital

The total cost of revenue-based financing is a one-time processing fee and a fixed redemption premium. Redemption premium will vary from company to company and be largely based on the stage, nature, and level of risk associated with your business. The redemption premium is capped and negotiated upfront, leaving no room for surprises. In any case, the redemption premium will be lower than the cost of diluting in case of equity investments. RBF is founder friendly capital designed to help your venture grow, with you firmly at the helm.

Duration of the financing

Duration of RBF can range from 12 – 24 months. But the effective duration of the debt will depend on the growth of your business. Given the revenue linked monthly payments, the faster you grow, the faster the debt can be repaid.

Pros of RBF
  • Non-dilutive growth capital: Many entrepreneurs worry about handing over a large portion of equity and control of their business at an early stage. Revenue-based financing becomes a good non-dilutive alternative for such founders. As the company grows, founders are rewarded with a higher percentage of their equity than they would have with equity financing
  • You stay in control: By supplying flexible, non-dilutive capital under revenue-based financing, entrepreneurs maintain control and lead their business with their vision intact. This leads to healthier, more sustainable growth over the long run
  • No personal guarantees: Traditional business loans often require personal guarantees of the founder. Revenue-based financing does not require personal guarantees, which means founders can get the capital they need without putting their personal assets on the line
  • Flexible repayments: The fixed monthly interest payments under traditional loans are not compatible with the volatility early-stage ventures experience. Since revenue-based financing bases monthly payments off a percentage of top-line revenue each month, this flexibility ensures monthly payments are not a burden
  • Ease of access: While closing an equity funding round can take months, Revenue Based Financing is swift and can often be accessed in a matter of several weeks
  • Cheaper than equity: Owing to its non-dilutive nature, revenue-based financing is a good way to finance your growth and capture more upside from the growth of your business in the long run
Cons of RBF
  • Only revenue positive companies are eligible: Early stage, pre-revenue start-ups are not eligible to acquire revenue-based financing. RBF investors look for consistent monthly revenues, gross margins and growth factors which are missing at this stage
  • Monthly payment obligation: Unlike equity financing, revenue-based financing requires active monthly repayment. Although the monthly payment amounts are flexible, it can cause a company to be tight on cash, especially while in the start-up phase
  • Expensive: Compared to traditional bank loans, revenue-based financing may be more expensive in the long run due to its perpetual nature
Is RBF the right fit for your business?

While Revenue Based Financing is a founder friendly way to access debt capital, it may not be a good fit for all business models. RBF is not start-up funding, its growth financing for revenue positive ventures with potential to scale rapidly. Companies that operate with high gross margins and subscription-based revenue models (SaaS) are often great fits for revenue-based financing due to their sticky revenues and ability to scale.

Profitability is not a requirement for revenue-based financing as cash runway, positive unit economics, and projected growth are used to determine if your company can cover the monthly payments.

Interested in RBF? Get in touch