Profits are crucial to the growth of every business entity. However, some of the biggest names are light on profits yet are valuable. The world of investing has evolved significantly over the years, with investors investing in businesses showcasing a sufficient margin of safety. Today, alternative funding methods such as revenue-based funding are beating traditional financing methods. Revenue funding, one of the most popular and prominent funding methods, does not simply rely on available historical financial data and thus invests in high-growth companies that might not have the track record in terms of profitability or revenue. But, the probabilities of picking those rare winners are set against the investor. Hence, the sensible investment strategy would be to determine whether the growth of a particular business is real or not, thereby separating the wheat from the chaff.
Which Companies can Leverage RBF?
RBF is a good financing option for startups that demonstrate moderate to hyper-growth. To qualify for RBF, companies need not be profitable. On the contrary, early-stage VCs seek to fund companies with a growth rate of 100% per year as they need significant equity to realize solid returns on their investment. So, only hyper-growth companies are likely to fit into their criterion.
On the other hand, RBF works for startups that stand at different levels of growth as no “equity exit” is required to receive a reasonable rate of return for an RBF investor. However, for an RBF investor, the key lies in accurately understanding the future growth rate of the startup and then accordingly structuring the funding to fit the desired return. While founders get the option to operate their businesses at a controlled growth rate, they can still secure growth capital and thus have more growth options.
Startups leveraging Revenue-based funds can thus use a more blended approach to raising funds for business growth. Founders can choose to avail RBF alone or blend it with VC or angel funding to retain ownership and control.
Do RBF Fit Businesses that Aren’t Profitable?
While startups with a seven-figure capital can avail of traditional venture debt, the same doesn’t hold for companies willing to secure revenue-based financing. Moreover, RBF investors have set different standards of underwriting w.r.t profitability.
However, they consider several factors such as a company’s runway and their capability to grow sufficient revenue to repay their loan and other operating expenses. Most companies that seek RBF are not profitable and are burning money to fulfill growth stretches.
Revenue-based financing is a unique financing model that has revolutionized the startup finance space by helping high potential companies with quick and easy growth capital while helping them maintain ownership and control. Since the unique finance model works well for slow, moderate, and hyper-growth companies, it wouldn’t be wrong to say that companies do not require being profitable to seek revenue-based loans. Vedfin – one of the reputed Revenue financing companies has helped several small businesses accelerate their business growth by securing revenue-based funds.