Funds are to startups what chlorophyll is to plants, it is one of the growth requirements for startups.
Traditional equity financing was one of the prevalent ways of accessing these funds. Here, investors invest money in exchange for ownership stakes, otherwise called equity in the startup.
There are lots of activities that go on before this investment is made and though the processes differ according to investor type, the fundamentals are basically the same.
There is the startup valuation which takes into cognizance the market share, industry, competitive landscape, development stage, financial performance as well as market potential.
While this looks as a safe source of funding for startups, not all investors are fair, nor are all startup founders willing to give out their startup equity. This is where revenue-based financing comes to play.
Revenue-based financing (RBF) is alternative funding where investors fund a startup in exchange for a certain percentage of the startup’s revenue over a stated period.
Of course, this revenue percentage is not given immediately but in the future, as agreed by both parties and the
investor continues to get the percentage until the predetermined amount is paid.
This works because, at the end of the day, the investors want to grow their money and the founder needs money to grow the startup.
RBF meets both goals, and provides the investor with a more flexible and reduced investment risk alternative.
However, startups should carefully consider the terms and conditions, to ensure that it serves the startup in the long run before opting for this type of funding.
Just like traditional equity financing, to secure RBF, there are certain processes involved. Applying for RBF is the first official step.
In the application, the startup’s business information, potentials, financial performance and revenue projections are stated.
Then the potential investor conducts due diligence on the startup to ensure that the information provided is accurate and that investing in the startup is a good business venture. Once this is checked, a term sheet is issued to the founder.
The term sheet is the document detailing the investor’s terms and conditions, revenue percentage, repayment time frame and other necessary information. When accepted by both parties, becomes binding and the startup is funded.
Repayment starts as stipulated and for most, the investor is paid monthly from the revenue, once the predetermined amount is completed, the agreement is terminated.
RBF offers various benefits in addition to retaining full ownership of the startup, an important benefit is the repayment flexibility.
Should there be any deviations in the projections as regards revenue, the repayment can be adjusted accordingly
RBF also offers faster and increased accessibility to capital for startups and this is good for not just the startup but improves the overall startup ecosystem.
With increased access to funds, the number of startups failing due to lack of funding will reduce. Finally, with Revenue-based financing (RBF) is alternative funding where investors fund a startup in exchange for a certain percentage of the startup’s revenue over a stated period. there is improved diversity, inclusion and sustainability in the startup ecosystem.
Underrepresented founders, or founders with unpopular views, can access funds as well. All of which results in a more robust and democratized ecosystem.
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