Alternative funding model : Revenue Based Financing
As Angel Investors we want to help entrepreneurs succeed.
Investment ecosystems tend to have certain blind spots, and in India, we think the VC-led pursuit of high growth businesses means there are several sound profitable businesses which are being ignored by investors. We are looking for these gazelles, not unicorns!
Companies need capital in order to grow, and large corporations have the choice of either using internal accruals, equity or debt to fund further growth. However, startups don't have the same luxury of choice, even when they become profitable. Banks aren't keen to lend to them; venture debt is still hard to come by because the pool is still very small; and VCs are not interested in their models because they are not present in a high-growth domain.
For startups which want to grow organically, they find they are limited to deploying the revenues they generate, which hampers their expansion plans. A new option is RBF or Revenue Based Financing, and this is an area we are also actively exploring. We offer growth capital to profitable startups in exchange of a mix of revenue share, equity or warrants - the entrepreneur can decide how he wants to structure this, so that he can give us an IRR of 35%. This timely infusion of funds can help him to grow faster, so everyone benefits. We also believe that we offer smart money, and can help the founder to grow his business frugally, because of our focus on unit economics.
What are we looking for while evaluating for Revenue Based Financing (RBF):-
1. Company should have good gross margins, preferably 50% +
2. Company should be cash flow positive
3. RBF is growth capital, and is meant to be used mainly in:
• Sales and Marketing initiatives
• Expanding geographically
• Hiring additional team members
4. The business can be grown frugally
5. We have a soft corner for entrepreneurs from Tier 2, Tier 3 towns solving Indian problems
6. We prefer mature entrepreneurs who have domain expertise
Financial Objective :
1. Our financial goal is to make IRR of 35% from this instrument
2. We plan to give capital which is about 6-9 X of your monthly Revenue
3. We can receive our money back, through:
• Revenue share per month ~ 5-10% of Revenue (Variable Coupon)
• Fixed coupon/interest can be kept as low as 0.01%
4. Prepayment is allowed
5. Moratorium of max 6 months allowed
6. Instrument is closed once we receive our expected IRR
We want entrepreneurs who can craft a win-win agreement !