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
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 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 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.
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.