I spoke with a founder recently who had just successfully raised funds from an established Venture Capital fund, and excitement was high. It was a great moment for the company, they said, and they couldn’t wait to continue on the company’s growth journey. Next stop? Another funding round…
For the past 15 years, startup fundraising has been dominated by VC funds. And in many cases the investments haven’t been hard to come by – European VCs raised more in 2020 than in any previous year, according to Dealroom.
But solely relying on VC is not necessarily the most effective way for startups and founders to finance growth.
Understanding the pros and cons of VC investment
VC investment has its place. For startups looking to invest significant amounts in technology, innovation, and market expansion, equity is a vital piece of the puzzle. VCs are also seen as an essential first step by many founders because it opens an investor network and shows the outside world that a concept has the support of experienced, successful business minds.
But you cannot have it both ways with VC. Bringing on external investors dilutes founders’ control of their business through the relinquishing of shares and board seats. This brings a whole new set of commercial goals into the equation, which at some point might not align with your original values.
Further, getting this investment in the first place remains challenging for many, as access to VC funding still largely depends on warm introductions. It’s a process that takes months and can remove the momentum from commercial activity.
Embracing an array of financing options
Beyond VC, a range of financing opportunities is available to founders at different stages of growth. Remaining open-minded and considering the options is about doing what’s best for the business – and that’s what building your own company is all about.
This is where Revenue Based Finance (RBF) comes in. RBF gives companies short-term cash injections for a clearly defined purpose, like marketing costs or sales efforts with predicted cycles. RBF is not based on fixed interest payments and burdensome guarantees. Instead, revenue performance and real time data are the collateral for repayments, with a fixed fee to access funds and a percentage of revenue used to gradually repay the loan on a weekly basis.
When a startup has found its product-market fit and is generating repeatable, predictable revenues, RBF can be a more efficient way to increase revenues than VC. The benefits to founders are numerous:
- You can fund growth without diluting equity or giving up a board seat;
- Funding is approved quickly – potentially in under two weeks depending on the investment approach;
- Analysis of credit worthiness is predominantly data-led, meaning human bias is reduced;
- The loan repayment is flexible, via a fixed percentage of company revenue; and,
- Founders retain full control and oversight of company performance.
Scale while staying in control
RBF has only recently become available to startups. Banks offer loans with different repayment mechanisms, but they often don’t have the flexibility in their underwriting process and are often wary of working with founders.
I strongly believe RBF presents a real opportunity to startups with a certain profile and can be the perfect complement to your existing funding – equity-based or not. For founders looking to scale while keeping their hands on the steering wheel, RBF should be one of the first ports of call.