Revenue Based Financing: A Promising Venture Capital Model
Legal advisors are confronted with legal problems requiring structured solutions which has led them to become innovators of the capital finance world. The increasing availability of structured investment vehicles coupled with the liquidity shortage across all major economies, has led the way for a capital raising model labelled, amongst its other names, known as ‘revenue-based financing’
In this article we will describe RBS to the reader, and share our views on its use in venture capital (which means ‘seed’ or start-up or first phase financing), and expansion and early growth finance.
What is Revenue based financing?
It is first and foremost a debt instrument – because the investor does not gain an ownership stake – where repayment liability and the payment terms are linked to the revenues generated by the company. Investors continue to receive such pay-outs until they obtain a predetermined amount.
Here’s an example of how basic RBF terms:
- you invest USD 200,000 with a 35 month payback term.
- You require $400k (2x of investment) to be paid back over this term – its not cheap you can easily end up paying back twice as much as you take.
- Company pays you back through a % of its monthly cash receipts – whatever those maybe.
If your revenue increases, you’d be paid off sooner. If it decreases, it would take longer.
Who is it for?
Because this model relies on the business generating revenue, investors will want to see you generating that, preferably with strong gross margins. Companies that may not be revenue-positive for an extended period of time are generally not a great fit for revenue-based financing.
Not all businesses are established to be sold, merged, or go public. Venture capital financing model typically assumes that you intend to sell your company within a determinable time period.
investors receive a percentage share of the ongoing monthly gross revenue of the businesses they invest in. Unlike traditional angel and VC capital, this form of financing prevents equity dilution for founders and simultaneously provides regular returns to investors from fast-growing startups. Investors continue to receive such pay-outs until they obtain a predetermined amount.
“new-age entrepreneurs and asset-light businesses access to debt capital with flexibility.”