Revenue-based investing (RBI), also known as revenue-based financing, is one of the more prominent new investment models and financing instruments appearing in the startup fundraising ecosystem.
It allows businesses to raise capital from investors by giving them a percentage of the company’s ongoing gross revenues in return for the money they invest.
Through RBI, investors receive a consistent share of the company’s income until a predetermined amount is reached. This portion of revenue is paid at a pre-established percentage until a certain amount is reached. This is usually a multiple of the original investment, ranging anywhere from three to five times.
RBI is often considered a hybrid of debt- and equity-based financing as although a company that raises capital through RBI will have to make regular payments to investors (similar to that of debt-financing), these are based on the business’s income and are directly proportional to how well the company is performing. No interest is paid on the outstanding balance and there are no fixed payments.
Likewise, RBI differs from equity-based financing as investors are not given ownership of the business. At the time of investment, terms for converting to equity can, however, be agreed upon, e.g. the investment can convert into equity upon an event such as a future fundraising round.
In order to raise through a RBI, a company must typically be generating revenue and have a repeatable sales record that demonstrates a strong revenue stream and thus clear ability to return the capital provided by investors. Profitability, though not required, is usually considered an important criteria.
This means that certain startups are typically more suited to RBI. This is because their business models are better suited to recurring revenue generation, particularly in the early stages, and investors are able to securitise this revenue and lend capital against that theoretical security. Common suited verticals include B2B SaaS, consumer software, e-commerce/D2C & food and beverage companies.
Advantages of RBI include
- It is non-dilutive, allowing founders (and other investors if applicable) to retain control and full ownership of the company.
- It allows small to mid-sized startups who cannot obtain traditional forms of capital to raise funding.
- No collateral is required unlike more traditional business loans.
- Flexibility. Repayments are a variable rather than fixed cost as they are proportional to the company’s revenue. This is particularly advantageous for companies with unpredictable revenue.
- Simplicity & speed. RBI usually has specific and straightforward requirements and does not require the time and effort demanded of more traditional fundraising attempts. Once an application is submitted, it can take as little as 7 days to receive funds.
- As investors will receive a faster rate of return the better the company performs, they are incentivised to spread the word and support the company they’ve invested in.
Disadvantages of RBI include
- Raising capital through RBI means a startup is agreeing to give up a certain percentage of their future revenue every month. This is something companies need to keep in mind, particularly if they are looking to get out of operating at a deficit.
- Though approval requirements are less strict than standard funding streams, to qualify for RBI, startups need to have a pre-established revenue stream, something many early stage startups do not. Because of this, RBI tends to be the reserve of particular startups or startups that have bootstrapped themselves or raised funding previously.
- The amounts available through RBI are traditionally much smaller than those offered by VCs.
- There is less regulation than in more traditional fundraising channels. This leads to a greater risk of predatory offers and higher rates of scams. Extensive research should therefore be done when deciding on a RBI company.
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