In a recent report we wrote that dilution is a Founder’s worst nightmare. Early-stage Founders are normally forced to reach a compromise between retaining ownership of their company and raising capital for growth.
There are several solutions to avoid giving up equity when raising funds, such as the Start-Up Loan Scheme, or other forms of debt funding such as those you’ll find on our partner Swoop’s fundraising platform.
There is a third option that tries to fill the gap between equity fundraising and traditional loans: revenue-based financing. Revenue-based financing does exactly what it says on the tin: it allows you to raise finance and to pay it back as a percentage of your future revenues.
However, most revenue-based financing companies are essentially lenders: they charge an interest over the amount borrowed and they require either company assets as a security or personal guarantees.
Nonetheless, a new category of revenue-based financiers that aim to provide fast funding with no equity or guarantees involved, harnessing the power of data to assess a company’s performance and determine whether or not they are eligible for the loan. The loan, however, does not involve compounding interest but, in most cases, just a flat fee.
The following are the four most prominent players leading this market segment.
One of the first innovative companies that tried disrupting the standard paradigm of equity fundraising is Clearbanc. Founded in 2015 by Canadian Dragon’s Den star Michele Romanow and serial investor David D’Souza, the San Francisco-based company’s aim is “democratizing capital” by using data science to provide quick and flexible funding.
Clearbanc uses algorithms to analyse applicants’ financial data and determine their eligibility for funding. As their algorithms are based on constant revenue streams and rely on online sales platforms, Clearbanc only provides funding to e-commerce and consumer SaaS businesses.
One of the basic requirements, as stated on the company’s website, is an average monthly revenue of $10,000 over a 6+ months period.
Through Clearbanc, companies can raise between $10,000 and $10m. The funds are provided within as little as 3 business days through a “Clearbanc Marketing Card”: a Mastercard that companies can use to pay for digital ads and other eligible marketing spend.
The company operates a flexible policy, negotiating fees and repayment terms on a case-to-case basis. However, their fees range from 6% to 12.5% of the capital raised, depending on how that is spent. The advance – plus fees – has no set repayment date, but is repaid as a pre-negotiated percentage of revenue.
The most recent service on this list, launched just over a month ago at the end of 2019, London-based Uncapped is a very promising venture that just raised £10m to offer dilution-free capital to both start-ups and lifestyle businesses.
With a similar business model to Clearbanc, Uncapped analyses sales data from applicants to determine the amount of funding they’re eligible for. The company provides between £10,000 and £1m, targeting online businesses from SaaS to marketplaces, apps and subscription models.
There are two key differences between Uncapped and Clearbanc: the first is that Uncapped provides growth capital with no restriction on how that will be used, whereas Clearbanc only allows applicants to spend it on marketing; the second is that Uncapped has a fixed 6% fee on the capital borrowed, which is typically repaid in the shorter term.
Powered by VC firm Velocity Ventures, DRVE is a self-described hybrid between a traditional investor and an online advertising agency. DRVE offers up to $50,000 per day, or up to $1m per month in online advertising spend that is allocated to tailored campaigns aimed at growing revenues. They then take in a portion of the monthly revenue to repay their ad spend and fees.
While less flexible than the previous two options, DRVE – with offices in Malta, London and Singapore – would suit companies selling online that see a high ROI on online advertising spend.
Operating a similar business model to DRVE, Hong Kong based Galton Voysey targets exclusively e-commerce businesses. They offer to finance 80% of their partners’ inventory. Products are then advertised by Galton Voysey through their social media marketing channels and expertise, and contribution margin from sales is split 50/50.
It seems like a very convenient deal, but obviously it requires financial conditions for Galton Voysey to manage to profit from it. More specifically, contribution margin must be at least 60% higher than the cost of inventory.