Revenue-based financing (RBF) is the leading alternative to equity financing for early stage startups, and in recent years has become the choice of thousands of startups each year in the U.S. market.
In RBF, instead of giving equity for funding, you give a percentage of your monthly revenue stream (rev-share) for a fixed time period (usually 3 years) with a cap on the total payback amount (i.e. your repayment will be completed before the end of the period once reaching the cap). Unlike equity transaction where your investors become your partners for a lifetime, in RBF the investment agreement (and rev-share) is limited by time and by a return cap.
Technology and innovation have made a huge progress in the last 40 years and new business methodologies have been developed to meet this new era of tech growth companies. However, investments models remained the same during those years and vary between standard equity investments and bank loans.
New development methodologies significantly cut the product development time & cost while digital distribution options enable super effective customer acquisition. This made it possible for startups to reach significant revenues relatively fast with a low initial investment. As a result, it opens the opportunity for new venture financing models that are based on the early startup revenues and not on its future potential (equity).
Lower upside & lower risk – VCs traditionally look at startups that have ultra-strong KPIs and a huge market potential (over $2B annually); At the same time there are many companies that have a healthy growing business which does not fit the VC entering criteria. These companies may grow by “only” 30%-100% annually and serve a market of over $500M. Providing growth capital that is based on the startup’s revenues to these companies represents an investment opportunity with a lower upside for investors (1.5X unlike 10X that an equity investor expects) but with a lower risk as the return is generated from the first month and takes up to 3 years.
Many digital ventures experience aggressive product-market fit cycles – for example, a venture which suddenly sees a hockey-stick growth may be able to generate millions of dollars in a few months window. In order to seize the opportunity these ventures need to pour capital immediately into the marketing activities. Traditional equity or bank loan funding usually take around 6 months and therefore not relevant for these opportunities. Thus, there is an opportunity to a KPI driven financing that can provide capital within weeks!!.
RBF is attractive to entrepreneurs as it takes an asset they possess (revenues) and leverages it as a currency they can use in order to achieve growth capital with low risk and in a relatively low cost. For example, a company that pays 5% of its monthly revenues as an RBF monthly royalty for a limited period, will limit its risk in a way that in weak months, when revenues are low, it will pay less and if it experiences growth and strong months it will repay faster and shorten the timeframe of the agreement. In this way it will reach breakeven without dilution and risk!
in RBF there is no personal guarantees or liens and no risky fixed monthly repayments
in RBF there is no dilution, no control caveats
RBF is a good funding option for many kinds of companies , from moderate growth to hyper-growth. Companies do not need to be profitable to qualify for RBF, in fact, most companies raising RBF are burning cash. Furthermore, RBF fits companies that have raised VC, plan to raise VC later, or never plan to raise VC money. Some startups will see RBF as a long-term strategy for financing future growth while others may see it as a timely solution to improve the numbers towards a future equity round.
Revenue-based financing (RBF) is the leading alternative to equity financing for early stage startups, and in recent years has become the choice of thousands of startups each year in the U.S. market.
In RBF, instead of giving equity for funding, you give a percentage of your monthly revenue stream (rev-share) for a fixed time period (usually 3 years) with a cap on the total payback amount (i.e. your repayment will be completed before the end of the period once reaching the cap). Unlike equity transaction where your investors become your partners for a lifetime, in RBF the investment agreement (and rev-share) is limited by time and by a return cap.
Technology and innovation have made a huge progress in the last 40 years and new business methodologies have been developed to meet this new era of tech growth companies. However, investments models remained the same during those years and vary between standard equity investments and bank loans.
New development methodologies significantly cut the product development time & cost while digital distribution options enable super effective customer acquisition. This made it possible for startups to reach significant revenues relatively fast with a low initial investment. As a result, it opens the opportunity for new venture financing models that are based on the early startup revenues and not on its future potential (equity).
Lower upside & lower risk - VCs traditionally look at startups that have ultra-strong KPIs and a huge market potential (over $2B annually); At the same time there are many companies that have a healthy growing business which does not fit the VC entering criteria. These companies may grow by “only” 30%-100% annually and serve a market of over $500M. Providing growth capital that is based on the startup’s revenues to these companies represents an investment opportunity with a lower upside for investors (1.5X unlike 10X that an equity investor expects) but with a lower risk as the return is generated from the first month and takes up to 3 years.
Many digital ventures experience aggressive product-market fit cycles - for example, a venture which suddenly sees a hockey-stick growth may be able to generate millions of dollars in a few months window. In order to seize the opportunity these ventures need to pour capital immediately into the marketing activities. Traditional equity or bank loan funding usually take around 6 months and therefore not relevant for these opportunities. Thus, there is an opportunity to a KPI driven financing that can provide capital within weeks!!.
RBF is attractive to entrepreneurs as it takes an asset they possess (revenues) and leverages it as a currency they can use in order to achieve growth capital with low risk and in a relatively low cost. For example, a company that pays 5% of its monthly revenues as an RBF monthly royalty for a limited period, will limit its risk in a way that In weak months, when revenues are low, it will pay less $and If it experiences growth and strong months it will repay faster and shorten the timeframe of the agreement. In this way it will reach breakeven without dilution and risk!
in RBF there is no personal guarantees and no risky fixed monthly repayments
in RBF there is no dilution, no control caveats
RBF is a good funding option for many kinds of companies , from moderate growth to hyper-growth. Companies do not need to be profitable to qualify for RBF, in fact, most companies raising RBF are burning cash. Furthermore, RBF fits companies that have raised VC, plan to raise VC later, or never plan to raise VC money. Some startups will see RBF as a long-term strategy for financing future growth while others may see it as a timely solution to improve the numbers towards a future equity round.
