How Revenue-based financing is shifting the balance of power?
Anyone who has been in the fences of trying to raise a round for their startup, knows how much of a time-consuming and lonely process it can be.
Every successful funding round is marked by celebratory declarations in the media. You signal to the world that the idea that you have been working on has found validation and you now have the firepower to execute.
No one really mulls over how the founder had to give up a portion of the company to live another day – except the founder of course.
This capital is expensive.
It is even more expensive when the founder has done the hard work, taken on the risk, found product market fit, and just needs funding to fuel the growth – buy inventory, grow out a sales team etc.
There’s got to be a better way? In comes Klub with its Revenue-based financing model!
What is Revenue Based Financing?
A new financial instrument that is neither equity nor debt. It is quite simply a revenue-share agreement. A mechanism where a company receives funding in exchange for a % share in future revenues – which also includes a pre-agreed cap. As the startup grows, it can support higher funding amounts against higher revenues.
RBF offers a better financing structure than venture capital or equity to finance atleast a portion of the growth spend.
Unlike a typical loan, the amount repaid every month will fluctuate, based on the company’s performance, so the company rides the revenue fluctuation curve with the startup.
What are the advantages?
- Lower due diligence and Short turnaround time: Typically involves going ever the startup’s online systems, accounting software etc. and building a revenue prediction model around it
- Extends runway: RBF model is particularly helpful for entrepreneurs who are thinking about raising capital and want to accelerate their growth and numbers before they go into a capital raising process.
- No dilution or change in ownership needed: Provides ton of flexibility to entrepreneur – when they need capital, Klub can fund you and once the cap is met, the founder can part ways
- No valuation negotiations needed: No need for sensitive discussions and negotiation
- No giving up a seat at the board: RBF is designed for entrepreneurs who want to stay in control
- No startup exit is required for RBF investors to see their money back
What does the typical RBF customer look like?
Majority are D2C companies selling their products online, in various stages of growth. These companies have a functioning business model, are fast-growing and typically asset light, and need funding towards their sales and marketing efforts.
A key factor for a Revenue-Based financing company to fund the company would be the evidence of predictable recurring revenues. The companies should also ideally have a sufficiently high gross margin to support repayment based on revenues.
Revenue-based financing takes one step towards making the startup financing ecosystem more equitable and fairer for shifting entrepreneurs. It rewards entrepreneurs by accelerating their growth journey without penalizing them unnecessarily by taking equity.