The Internet is Discovering Revenue-based Financing
Today’s Business Insider has a brief article on revenue-based funding. Unfortunately the title is very misleading:
If You Think Your Weird Startup Deserves $500,000 – Read This Now!
This leads the reader to conclude that this firm invests in startups. The problem is that they don’t. If you read the article you eventually come to this paragraph which sets the firm’s criteria straight:
Also, the VC model really only works for the “home-runs” so this approach makes sense for great businesses that make money but aren’t swinging for the fences. “We think businesses that make $1-5m/ year in revenue are great businesses and our long term vision is to make it super fast and simple for those businesses to get capital.” They believe a company that’s doing $1 or $2 or $3 M in revenue, with potential to go to $10 M or $20M, is still an awesome opportunity and deserves access to capital.
Yep, your “startup” has to already have one to three million dollars in revenues to qualify for a loan. That’s no longer a startup. So what’s the option for startups when it comes to revenue-based funding? Well, as always you need to find some potential investors yourself and then offer to use a Revenue Royalty Certificate (RRC) to structure the deal.
5 Responses to Revenue-Based Finance: Seed Capital
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Hi Peter, Thanks for noticing us, and love your site mantra. I have to disagree that it’s misleading – we do invest in startups, but you need to acknowledge there are different stages of “starting up” – getting from pre-revenue to $100k in sales is a huge step, getting up to $1m in revenue is another big step, and from $1m to $2m is another, etc. So, for the companies that are starting out with no revenues, we’re definitely not the best fit, so angels or other sources make sense. For the startups that need growth funding to grow from $1m in sales to $5m in sales, it seems a Revenueloan is a great way to go and still consistent with startup stage of business. Thoughts?
Drew:
RBF’s are attractive for several reasons- including the fact they take a smaller amount of run-a-round time, fewer business structure changes, and less loss of control vs Angel funding.
So your RBF model calls for investing “up to 20%” of revenue in any particular company. Why not take a $100,000/yr company and invest $20,000. Then if they hit $500,000 invest another $75,000. Then when they hit $1M invest another $100,000.
All along the way you are still getting your revenue share back. But now you have the satisfaction of taking a true startup and giving them the funds they need to grow. And when you have funded at the $1M revenue target you have $195,000 invested, but already have some of that back. And I venture (pun 100% intended) to say that this is less risky than giving a $1M company $150,000. Because they have a track record of doing what they say they can do.
I don’t blame you (AT ALL) for not funding pre-revenue companies… but if a company can show a repeatable and scalable sales process then I’d look at them at much lower revenue numbers.
That’s my two cents worth.
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