LV Insights

Revenue Based Financing – Why now?

Shanti Mohan, Co-founder, LetsVenture

When we founded LetsVenture in 2013, we had a very simplistic vision, to ‘make the process of fundraising easy and transparent for founders and investors’. When we thought easy – we meant easy access, a good understanding of the process, and quick closure. The ecosystem was still very nascent and we did spend a lot of time educating founders on the smaller nuances of fundraising. However, by default fundraising meant equity fundraising – where founders dilute equity and bring in new shareholders when capital is raised to build the business.

In the last 6 years, we have closed 340 transactions. We have a team that understands the very small nuances of equity fundraising. It goes beyond the magic number of just ‘valuation’ to many terms that need to be represented and negotiated correctly to ensure that you don’t give up too much equity for too little capital, or too much control for capital. We open-sourced documents and represented our founders and investors with the intent of creating more parity in an ecosystem that always seemed lop-sided. However, as we built LetsVenture we also realized that equity investing is more favorable for businesses that can scale quickly – at the back of technology – so as to generate those non-linear returns that venture investing promises.

Did you know that a third of the businesses that raise equity capital, also go in for bridge rounds? This number is probably increasing to 50% now. So, what does bridge funding mean? Bridge rounds are typically done between 2 rounds, when the money raised in the last round may not be enough to get to the business metrics venture-attractive for the next round investor. These rounds are typically difficult to raise, as there is a signal of higher risk. They are usually done as a convertible, probably without a lead, with the promise that the next round will happen soon. Many times bridge rounds are also done when the company is unable to optimize cash flow management. The use cases we have seen at LetsVenture is the following:

  1. Although revenue is booked, it does not allow for monthly cash flow management
  2. Available revenue is not enough to scale for the next 6 months
  3. Revenue is available but the bridge round further dilutes founder equity
  4. There are no easy alternate funding options and founders don’t intend to raise debt by leveraging personal collaterals. Also, such fundraising is cumbersome


(Courtesy: N+1 Capital)

While Venture Debt is an option that has become quite popular, we see that there is still a gap in the market for a founder-friendly product. At the beginning of 2020, at LetsVenture, we set a goal of ‘becoming the one-stop platform for all fundraising needs for a founder’. With this goal, we started to look at expanding the definition of fundraising – and that is where Revenue Based Financing (RBF) came into focus.RBF 2

Revenue Based Growth Capital (RBGC) can be independent or co-exist with traditional capital (Courtesy: N+1 Capital)

Let me explain some nuances of Revenue Based Financing

Revenue Based Financing is a new form of capital that is gaining popularity in mature ecosystems like the US but is a pioneering asset class in India with investors beginning to test the waters only now. It is basically an alternative method of raising capital for entrepreneurs where investors receive a percentage share of the ongoing monthly gross revenue of the businesses they invest in. Unlike traditional angel and VC capital, this form of financing prevents equity dilution for founders and simultaneously provides regular returns to investors from fast-growing startups. Investors continue to receive such pay-outs until they obtain a predetermined amount.

Advantages of RBF over other sources of funding:

  1. Effective: RBF helps meet immediate cash-flow requirements. Startups can access funds through this option and facilitate capital growth
  2. Undiluted equity and lower risk: Start-ups are not required to pledge collateral or dilute equity to avail revenue-based financing. Founders can continue to retain their ownership and control over the startup’s managerial and financial decision making
  3. Flexible: ROI becomes a derivative of revenue, meaning when revenue is less, the repayment amount is also less
  4. Longer Repayment Term: The repayment term is usually relaxed and can be opted for a longer-term. Startups can pay off their debt without straining monthly revenue

About LetsVenture & N+1 Capital Partnership

Revenue-Based Growth Capital fund, N+1 Capital has received a go-ahead from the Securities and Exchanges Board of India (SEBI) to raise its first Cat-II AIF of $100 million in India ($75 million + $25 million green-shoe). N+1 Capital is the first revenue-based growth capital fund in India, and LetsVenture is a founding venture partner to N+1 Capital.

“Raising venture capital is not appropriate for every type of business – there are lots of startups and SMEs with strong and steady-state business models that get left out of the equity capital race. Our mission at N+1 Capital is to provide new-age entrepreneurs and asset-light businesses access to debt capital with flexibility. The vision of the fund is to provide over 100+ entrepreneurs an average of $1 million each to grow their businesses profitably and sustainably,” said Rahul Chowdhury, Managing Partner, N+1 Capital.

“The traditional world of investing is all about the people one knows, warm introductions, and recommendations. While human relationships are great and necessary, they can be vulnerable to bias. While there has been significant innovation on the fundraising side, the investment business model still works like it always did. N+1 is trying to bridge this gap. We have a data-driven risk assessment technology model that makes the product accessible for new-age entrepreneurs and minimizes human bias in decision making,” said Ashish Singla, Managing Partner, N+1 Capital.

The fund is sector agnostic and caters to startups and SMEs that are operational for over a year, have a minimum monthly revenue of  INR 50 lakh, and positive gross margins. N+1 and LetsVenture have already seen scores of businesses apply for funding and disbursements should commence shortly. 

At LetsVenture, we believe that Indian startups are ready to explore Revenue Based Financing. If you want to know more, register here
Click here to know why RBF is an emerging asset class for the smart investor

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