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The Smarter Startup

Revenue-Based Financing for Startups

Revenue-based financing can provide the working capital your startup needs between equity rounds without exchanging an ownership stake or giving up control.

In today’s challenging economy and fundraising environment, startups are on the lookout for ways to extend their cash runway. This can take several forms, including trimming expenses, boosting revenue, and evaluating different sources of financing for working capital.

It’s got me thinking back to my discussion with Novel Capital CEO Carlos Antequera last year on our Startup Success podcast. Novel Capital provides revenue-based financing to startups, particularly those with predictable revenue like B2B SaaS companies. Revenue-based financing is a compelling option right now and could provide working capital for your startup without some of the possible drawbacks of raising equity financing in today’s market.

How is Revenue-Based Financing Different from Equity?

Revenue-based financing is non-dilutive, so your startup doesn’t exchange any equity for the funds like you would in a traditional equity-based VC deal. Instead, you agree on a total return over a period of time and pay the lender back from your monthly revenue stream until the loan is paid off.

  • For example, a startup seeking $1MM may agree on a return of 1.3, or $1.3MM, over the next 24 months. Once the amount is paid off, that’s it. In the meantime, if the startup used the $1MM to hire its first dedicated salespeople, who went on to sell an additional $2MM in contracts for the business, the value is clear. The startup has increased its revenue and valuation without diluting the founder or any other existing shareholders.

Revenue-based financing can offer a way to accelerate growth or extend runway for startups that have already proven market fit and have some level of predictable recurring revenue.

Revenue-Based Financing + VC Funding

A common misconception about revenue-based financing is that it’s not compatible with other forms of financing, like equity-based VC funding. Carlos dispelled this notion during our discussion, pointing out that for companies on a venture track, revenue-based financing can provide an ideal way to extend runway and provide a bridge until the company receives a VC offer from the right partner at the right valuation. Revenue-based financing can add value for startups, their customers, and existing or future investors.

…revenue-based financing can provide an ideal way to extend your runway and provide a bridge until your company receives a VC offer from the right partner at the right valuation.

I encourage you to listen to my entire conversation with Carlos and learn more about revenue-based financing to determine if it might be a good fit for your startup’s current capital needs.