Revenue-Based Finance

Specialized lenders provide capital into an early-stage business and get paid back as a percent of future revenue.

Revenue-Based Finance (RBF) is a type of capital provided to growing businesses in which investors give funds in return for a pre-determined percentage of ongoing gross revenues. Repayments are due until the principal and a predetermined multiple of revenue are paid back.

Revenue-Based Financing is Not

Revenue-Based Finance is not an asset-backed loan. Previously, the only types of debt available to early stage business were loans that made a claim to the company’s balance sheet. Debt providers would be able to repossess cash if the company was generating cash on the balance sheet, or hard assets like “property, plant and equipment” – the line item on a balance sheet devoted to capital expenditures. 

Meanwhile, software companies were left out of the equation as an early stage tech company typically has a fairly light balance sheet: no hard assets, and cash flow deferred into the future, the greatest value being intangible. RBF is not new – it was used to finance oil exploration repackaged to fund growth companies. What is new is the use of RBF instruments to fund the early stages of private company growth.

Venture Capital vs. Revenue Based Finance

Venture capitalists want to own a part of your company, and likely get the rights to own more in future fundraising rounds if all goes well. Providers of revenue-based finance typically do not lay claim to ownership – they only claim a future share of your revenue. Revenue-based finance is known as “non-dilutive capital”, meaning that company owners do not give up any ownership to providers of this type of finance.

Example Firms

Lighter Capital | Bigfoot Capital | Earnest Capital | Decathalon Capital

Is revenue-based finance the right capital for your business at this stage?

COMPANY PERSPECTIVE

Benefits

Challenges

Key Performance Indicators

CAPITAL GIVER PERSPECTIVE

Benefits

Challenges

Key Performance Indicators

When it Works Well

Quick Decision Process

The Revenue-Based Finance process is fairly quick and data-driven and does not require a laborious process to find funders and complex term sheet negotiations. Terms are fairly standard and companies report receiving RBF within days and weeks. 

Company Has Revenue 

Once the company is up and running and has revenue and the ability to demonstrate a gross margin to help finance future growth, they are eligible to be considered. Companies with higher growth rate for revenues, or predictable revenues such as in Software-as-a-Service or other as-a-Service business models, tend to fare better in RBF terms.

Growth Phase Ahead

RBF loans are ideal for companies going through a growth phase or growth surge, when getting ahead of demand. 

Challenges to Revenue Based Finance

Revenue Gap at Early Stage

Early stage companies that are not certain about their business model, or who have substantial upfront investment, are not eligible for Revenue-Based Financing. Deeptech, cleantech, robotics, or large scale data pipeline developers likely need to rely on large scale grants and equity to start. These companies may have to take equity-diluting terms from angel investors or early stage VCs. RBF may be considered later on in the company’s growth, but cannot fund that first phase. 

VC Funded Can Outspend

Consider RBF in context. If you are in a heavily funded sector or category and your competitors are raising substantial capital, they may put that to use in order to create a winner-takes-all or winner-takes-most outcome. Planning a long term strategy that leads from bootstrapping early growth to funding growth only through RBF may leave you exposed if venture funding accelerates.

 

Draws Money Away from Investing

RBF requires monthly payments, whereas equity-based capital like VC does not. Founders may find themselves tight on cash in any given month, so it’s important to choose the right amount of funding for the company’s growth stage.

 

Trends in Revenue Based Finance

Specialized RBF

When a finance provider for RBF becomes specialized in a specific type of business, like Software-as-a-Service, they can use benchmarks from the larger loan base to develop data-driven loan factor agreements. Other sectors like Podcasting have started to attract specific RBF offerings. 

Podfund provides funding and services in exchange for a percentage of total gross revenue (including ads/sponsorship, listener support, and ancillary revenue such as touring, merchandise, or licensing) per quarter. 

Earmarked for Impact

A number of RBF instruments have been developed to address the needs of impact investors. Why would this alternative finance type be so appealing to impact investors? Impact investors may want to set their sites on smaller markets and more local contexts and not pursue the scale required for venture capital, but have plans to invest in more local transformative change. 

The Founders First Capital Partners targets service-based companies led by minority, veteran or women founders that do not fit the venture capital pattern, but do have the potential to create well paid jobs and generational wealth. 

 

Revenue-Focused Accelerators

Where most accelerators follow a Y Combinator model helping founders move through inflection points set by VCs, emerging accelerators are gearing for smaller markets, non-traditional geographies, and RBF as a primary funding source. 

Whereas a startup in a Bay Area accelerator might be encouraged to built an MVP pilot, first, and then optimize for growth over profit,  these emerging accelerators focus energy on getting to revenue – finding consulting income, paid pilots, and optimizing the growth plan towards achieving profitability. Accelerators like TinySeed and the above mentioned Founders First Capital Partners are examples of Revenue-Based Finance accelerators. 

Before You Consider Revenue-Based Finance

  • Do you have a revenue? You’ll need it!
  • Do you have operational rigor to predictably pay off the principle and interest?
  • Are you growing? You’ll want to grow, otherwise, it’s an expensive loan.

Exploring Revenue-Based Finance

  • Take a look at RBF companies with quick decision processes.
  • Compare the true cost of capital for equity fundraising and compare the difference to RBF.
  • Plan out your funding and capitalization strategy to figure out when RBF might be right for you.

Discover Alternative Capital

Revenue-Based Finance is one way to grow your company, and you can choose other capital types as an alternative or pair and combine  at different stages of your business. Consider these alternative capital sources or explore our Capital Library