🏦 Revenue-Based Financing: Debt-as-a-Service, Picks and Shovels, Funding Options

💎 Why It Matters

Revenue-based financing joins a growing list of options to fund your business without giving up equity.

🔍 Problem

Companies struggle to raise capital fast without losing equity.

💡 Solution

Revenue-based financing helps you fund your business with no dilution, collateral or personal guarantees.

Lenders are paid back from a share of future revenue.

🏁 Players

Revenue-Based Financing Examples

Branching Minds - Scaled sales and support efforts without dilution.
Zoobean - Balanced cyclical cash flows.
Consensus - Funded a pivot to focus on enterprise.
Serious Tissues - Reached 150% return on ad spend funded by Clearco.
Connexient - Funded growth before selling to Everbridge.
Patron Technology - Funded growth before selling to Providence Equity.

Revenue-Based Financing Platforms

Clearco - Helps SaaS and eCommerce companies finance up to $20M.
Wayflyer - Provides funding up to $20M for eCommerce sites.
Podfund - Funds podcasts for 7%-15% of future revenue.
Lighter Capital - Offers up to $3M in revenue-based financing.
Shopify Capital - Funds up to $2M for Shopify users.
Klub - Focuses on consumer brands in India.
Pipe - Trade a share of recurring revenue with investors for upfront capital.
Founderpath - Funds B2B SaaS companies.
Bigfoot Capital - Funds B2B SaaS companies with at least $1.5M ARR.

🔮 Predictions

Disclosure of annual percentage rates will be universally required as revenue-based financing grows in popularity. Connecticut, Missouri, New Jersey, North Carolina, Utah, and Maryland have introduced bills.
- New York's law went into effect on January 1, 2022.
- California's regulations were under review as of December 2021.
- Virginia is the third state to pass a commercial financing law as of March 2022.
Marketplaces will use proprietary data to gauge risk and offer revenue-based financing to suppliers. "Debt-as-a-service" firms like Sivo aim to make this easier.
- Doordash launched Doordash Capital to finance merchants in partnership with Parafin.
- Mindbody is launching a service for their fitness partners with Parafin as well.
- Shopify Capital helps merchants fund payroll, inventory and marketing.
We'll see more bootstrap funds help companies aiming to balance growth and profitability.
- TinySeed is a startup accelerator for bootstrappers.
- Collab Capital supports black-owned innovative businesses.
- Calm Company Fund is an ecosystem of founders and funders of calm businesses.
Investors will shift models from direct lending to white labeling risk models to power other payments companies.
- Klarna partnered with Liberis to reach merchants.
- Wayflyer partnered with Mercury to reach eCommerce businesses.

☁️ Opportunities

Evaluate your financing options before committing to revenue-based financing:
- Annual Subscriptions - Speed cash flows and avoid repayment fees. Used by companies such as Testimonial, Plausible and Ahrefs.
- Factoring - Sell unpaid invoices (less a fee) to accelerate cash flows.
- Lines of Credit - Fees adjust based on your capital needs. SaaS Capital lends between $2 and $12M to SaaS companies.
- Bootstrap Funds - Partner with investors that understand and encourage sustainable growth.
- Venture Debt - An option if you've raised venture capital. Fund expenses, acquisitions and extend your runway between rounds. Offered by Mercury.
- Equity Crowdfunding - Give customers "skin in the game." This is more time-intensive and leads to dilution. Unlike revenue-based financing. See Roam, Winc and Mercury.
- Lifetime Deals - This becomes more viable once you have a grasp on lifetime value and "lifetime costs."
- and more...
Build picks and shovels. Help founders understand the true cost of capital.
- Fundstory bills itself as the OS for non-dilutive capital. Offering software tools to help founders access non-dilutive funding.
- Pollen.vc built a revenue-based financing calculator as a lead generation tool.
- Element Finance shared a revenue-based financing calculator.
- Founders First Capital's calculator compares traditional loans and revenue-based financing.
- Bigfoot Capital built a financial model to help entrepreneurs understand how they make revenue-based financing investment decisions.
Accelerate cash flow when funds are escrowed.
- Braavo lets app developers smooth out cash flow when the app store takes 60-90 days to release funds.
- Payability helps Amazon sellers get advances on earnings held by Amazon.

🏔️ Risks

Margin Volatility - Your profit margins may justify your cost of capital. At first. If margins fall, your revenue share percentage may not be as flexible. Paul Graham's observation of venture debt transfers to revenue-based financing.
High Cost of Capital - Revenue-based financing fees tend to be higher than other options.
Limited Funding - VCs invest millions in pre-revenue companies. Your access to revenue-based financing is limited by your revenue.

🔑 Key Lessons

Revenue-based lenders prefer SaaS companies for revenue predictability and profit margins that support sharing a percentage of revenue.
Revenue-based lenders look to fund repeatable processes. "Recipes" such as paid marketing, payroll and operations. Rather than R&D. Equity financing is a better model when there's significant market risk.

🔥 Hot Takes

Revenue-based financing will raise customer acquisition costs for non-users. By increasing competition and the ability to spend on paid marketing.
NFT project teams will be able to access funds backed by NFT royalties. Alchemix is a very early sign of things to come.

😠 Haters

"This is expensive."

Yes and fast. Each financing option has tradeoffs. Cost of capital is a downside for revenue-based financing.

"Isn't this just factoring or merchant cash advances with a different name?"

Factoring provides working capital towards sales that have already occured (accounts receivable). Merchant cash advances, though related, typically have less company friendly terms, shorter payback periods and are based on debit and credit card sales. Revenue-based financing factors in future revenues.

*"You don't get the network and expertise that comes with VC funding." *

Some founders want funding without strings attached. The expertise and network aren't always what they're cracked up to be. VC funding (applied to the wrong type of business) pushes for unsustainable growth and kills profitable businesses.

"Why not just get a small business loan?"

Taking out a loan may take time and require lots of paperwork. As well as collateral and guarantees that can lead to bankruptcy if the business does not perform as planned.

🔗 Links

Revenue-Based Financing Calculator - Tool to compare revenue-based financing offers with credit card, term loan and accounts receivable financing.
Round 2 Analysis - Slidedeck on the pros and cons of revenue-based financing.
Revenue-based Financing in VC - See returns of traditional VC models versus revenue-based financing models.

📁 Related Reports

Micro-SaaS - Micro-SaaS companies focus on specific features and/or audiences.
B2B SaaS - SaaS companies serving other businesses.
The Creator Economy - Revenue-based financing is available to creators with paid podcasts and newsletters.
Bootstrap Funds - A model that balances growth and profitability.
Alternative Assets - Lenders are investing in alternative assets.

🙏 Thanks

Thanks to Kevin Galang, Natwar Maheshwari, Neeraj Hirani, Lu, Héctor Reyes, Chris Strobl, Vikram Aditya, Christophe, Dimitri De Boose, Marek Janetzke, Vic, Ryan Lamvik, Tyler GIllespie, Vishal Srivastava, Tyler King and Stewart Townsend. We had a great time jamming on this report.