Pledging revenues: start-ups’ new funding model

’The old world of fundraising was based on who you know. The new order of fundraising is data-driven and based on business fundamentals. It’s about founders helping other founders,” says entrepreneur and start-up mentor Bhavik Vasa. As the founder and CEO of fintech platform GetVantage, Vasa provides “non-dilutive’’ growth capital—one where founders are not required to give up equity—to emerging ventures in a ‘’friction-free manner and with a fast, transparent and secure approach.’’

In a market where venture capital is king and start-ups rely on their networks for investor introductions, ultimately diluting ownership in exchange for funds, revenue-based financing (RBF) is gathering momentum. It encourages enterprises to access funds by pledging a percent - age of their revenues, and without any collateral, personal guarantees or equity dilution. Growth capital accessed by SMEs, direct-to-consumer (D2C) brands through the RBF route could vary from $25,000 to $280,000 through a revenue-share agreement—up to 20% of monthly revenues. A one-time financing fee, 6-14%, is also charged on the principal amount.

“This [the percentage of revenue to be shared] is agreed between us and the investee company at the start. It is based on simple math that allows for almost no impact on cash flows and a short-term repayment period. You only pay us when you make revenues,’’ says Vasa, whose company has funded several D2C brands, including Rage Coffee, Eat Better, Flatheads, Autobricks and The Healthy Company. Launched in early 2019, GetVantage is the first major RBF firm in India. Others operating in the space include Klub, Velocity and N+1 Capital.

‘’For founders like me who want to build mainstream brands but not lose valuable equity, RBF is an interesting way of raising money,” says Bharat Sethi, Founder & CEO, Rage Coffee.

Why RBF?

The last two years have witnessed a stupendous rise in the number of SMEs, D2C brands and omnichannel ventures across sectors such as personal care, edutech, wellness, beverages, homecare and apparel. One of the major challenges these tech-savvy brands encounter is access to quick funds in a seamless manner. Many brands are asset-light and have no collateral to avail bank loans. Also, the fixed EMI structure of bank financing puts significant strain on these emerging businesses that carry fluctuating revenues. On the other hand, the VC approach is often centred on networking for high-profile investor introductions and ultimately selling control in exchange for funds. And since the quantum of funds required by young entrepreneurs is often ‘’just a few lakhs’’, it doesn’t appeal to conventional investors. “This puts funding models like RBF in a very strong position,” says Vasa.

‘’RBF is an alternative growth capital that several D2C brands and digital-first companies have been opting for off late,’’ adds Anuj Golecha, co-founder, start-up incubator Venture Catalysts and accelerator programme 9Unicorns.

Experts believe RBF is also gaining traction because technology today underpins more of a business’ revenues, sales, marketing and operations. “Combined with the growth in e-commerce, it means more businesses are selling online and more consumers are transacting online. So platforms like ours are able to analyse data points using technology to build a more robust credit profile of a business and provide entrepreneurs with better capital choices,’’ says Vasa.

According to Anurakt Jain, co-founder and CEO of Klub, consumer brands are seeing a high uptake post Covid, with consumption shifting online and a higher information symmetry leading to brand awareness. ‘’These brands witness fluctuating revenues due to seasonality and now due to Covid-triggered shocks. RBF is designed to absorb these complexities and deploy significant capital, especially in marketing and inventory,” he adds. Klub has raised funds for firms such as The Man Company, Wallmantra, Third Wave Coffee, TagZ Foods, Wellbeing Nutrition, Pipa Bella etc.

But Then...

‘Pay when you make revenues’ sounds lucrative, but what if a borrower is unable to adhere to the terms of the agreement? RBF companies claim they have solid data-driven mechanisms for due-diligence to analyse future borrowers on business fundamentals and performance, before making any offer.

Transparent online revenue is the primary parameter we look for in potential investees,” says Abhiroop Medhekar, founder, Velocity, which has invested in several D2C brands, including Greensoul, Bombay Trooper, Athlos, Imagimake and Water Science, among others.

“We need six months of revenue history with at least ₹5-10 lakh of monthly revenues. We prefer capital-efficient businesses with healthy gross margins. Since our diligence is entirely online and data-driven, entrepreneurs can securely connect their online data sources with our platform and get funded within a week,” says Medhekar.

According to Jain, Klub’s data-backed risk engine and diligence system has produced a scenario of zero defaults so far. “With over 35% of the capital deployed being already repaid, we are confident of selecting brands that show potential to scale through our framework. We leverage data-driven analytics, parameters, including high customer affinity, growth potential and risk-return simulations to identify and fund brands.”

Vasa says data and live monitoring is the new collateral, as technology and platform innovation allow for real-time monitoring of businesses, thereby ‘’curtailing risk and NPA percentages substantially compared to traditional lenders.’’ GetVantage measures key growth metrics, including monthly revenues and ad performance for a 12-month period before making any offer. “Our credit engine does an analysis on business performance to determine eligibility and provides brands with a tailor-made term sheet with a funding offer in a few days. In an equity or debt deal situation, a borrower would be weighing the pros and cons of parting with equity or showing debt on their books. In an RBF deal, this step is skipped,” he adds.

Another key benefit of RBF is that it is size agnostic. ‘’Any start-up with recurring revenues, a solid digital presence, recurring spends on marketing and inventory, and a brand that is consumer-facing can avail RBF,” says Jain, adding, although Klub has worked with ventures having annual turnovers in the range of ₹15 lakh to ₹500 crore, the “average annual turnover we have seen is typically around ₹5 crore.’’

The Road Ahead

The revenue-based financing opportunity in India is estimated around $5-8 billion, with a potential to reach $40-50 billion over the next few years, according to experts. The D2C space, a key driver for RBF, is predicted to be a $100 billion opportunity in India by 2025, according to Avendus Capital. But, compared to markets in North America, India is still taking baby steps. Leading global RBF players such as Clearco and Pipe, amongst others, have funded thousands of start-ups and are valued at over $2 billion. Clearco claims to have invested over $2 billion in over 4,500 businesses, and is the world’s largest e-commerce investor.

Golecha of 9Unicorns is optimistic. Firms like GetVantage and Klub have the potential to become category leaders, he says. Both companies have funded over 80 ventures each, and are poised to partner over 300-350 brands over the next few months.

Vasa says although India is the primary market, South East Asia holds significant promise as well. “The market for consumer brands in that region is likely to grow over $400 billion by 2023. We are looking to expand into this geography in the next 12 months.

So, going by the momentum, will RBF emerge as an alternative to VC and angel investors anytime soon? Velocity’s Medhekar believes RBF is much more widely applicable than venture capital. “VCs will fund only 0.5% of e-commerce businesses. What about the remaining ones? ... Over here, Velocity already has a portfolio much bigger than VC funds.”

Experts, however, see RBF as more of a ‘’complementary capital’’ that founders need to scale up, rather than an alternative to traditional funding. Rage Coffee, for example, has raised funds via both RBF and VC routes.

A one-size-fits-all model is not suitable as businesses grow, says Jain. “It is critical to avail multiple forms of financing and deploy it for the right use case in order to maximise returns,” he concludes.