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Revenue-based financing: A new playbook for startup fundraising

A few years ago, founders only had two options when starting a company — bootstrap yourself or turn to VC money, and they would use that money primarily to pursue growth. Later on, venture debt started to gain prominence. While non-dilutive, its problems are similar to that of VC equity: It takes time to secure, involves warrants, isn’t very flexible and not every startup can get it.

But in recent years, more options have become available to founders. Most startups can now avail non-dilutive capital, and purpose-specific financing has entered the fray.

While venture capital remains the most popular avenue for startups, founders should take advantage of all the financing options available to them. Using an optimal combination of capital sources means using cost-effective, short-term funding for imminent goals, and more expensive long-term money for activities with uncertain returns on the horizon.

What is revenue-based financing?

Let’s define it as capital provided based on future revenue.

While venture capital remains the most popular avenue for startups, founders should take advantage of all the financing options available to them.

So what is unique about revenue-based financing? Firstly, it is quick to raise. Compared with the months-long process usually involved with other forms of equity or debt financing, revenue-based financing can be set up in days or even hours. It is also flexible, meaning you don’t have to withdraw all the capital up front and choose to take it in chunks and deploy it over time.

Revenue-based financing also scales as your credit availability increases. Usually, there’s only one simple fee with fixed monthly repayments.

How should startups evolve their financing playbook?

To optimize fundraising using different sources of capital, startups should think about aligning short- and long-term activities with short- and long-term sources of funds. Revenue-based financing is shorter term in nature, and a typical term ranges between 12 and 24 months. Venture capital and venture debt are longer-term capital sources, with a typical term of two to four years.

A startup’s short-term activities may include marketing, sales, implementation and associated costs. If a startup knows its economics, CAC and LTV, it can predict how much revenue it will generate if it invests a certain amount in growth. Because the return on these activities may be higher than the cost of revenue-based financing, startups should use revenue-based financing to fund initiatives that will bear fruit soon.

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