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    The future of revenue-based financing

    The future of revenue-based financing

    The future of revenue-based financing
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    By CNBCTV18.com Contributor  IST (Published)


    The revenue-based financing revolution is underway and the time has come for India to embrace it. Founders and entrepreneurs around the world are embracing this non-dilutive capital model and investors too are convinced.

    The revenue-based financing revolution is underway and the time has come for India to embrace it. Founders and entrepreneurs around the world are embracing this non-dilutive capital model and investors too are convinced. In the first 6 months of this year alone, investors have poured over US$500 million into revenue-based financing companies around the world. While it’s still early days for fintech powered revenue-based financing in India, the timing couldn’t be better.
    In India, while it is still early days for revenue-based financing, the timing couldn’t be better. The country is now home to over 800 new-age brands that have taken the direct-to-consumer approach and established themselves as robust eCommerce businesses. The last 18 – 24 months has seen an explosion in the number of eCommerce businesses as scores of young, exciting D2C brands and millions of small and medium sized businesses (SMEs) across the length and breadth of the country have gone online.
    Previously, business-owners were using the most expensive form of capital (equity) to fuel something repeatable – revenue growth.
    But this is quickly changing as entrepreneurs around the world and in India are embracing the revenue-based financing revolution. By using revenue as a measure of success and as an instrument, fintechs are quickly reshaping the landscape of venture finance.
    So what exactly is RBF? Simply put RBF is an exciting funding option that is friction-free, significantly less time-consuming, un-biased, and data-driven. RBF is structured as a founder-friendly alt-VC option that enables founders to raise capital without diluting equity, giving up board seats, or control in their company. A company simply commits a small percentage of its future revenues for fast, transparent, and easy access to financing.
    It is a very efficient way of raising capital since it allows founders to grow their business without having to go through the incredibly stressful and time-intensive process of raising capital. Unlike other funding options RBF doesn’t require any collateral – a pre-condition for bank funding – and also ensures no equity dilution – a must when dealing with venture capital or private equity.
    It wouldn’t be wrong to say that RBF combines the best of both worlds.
    Founders get growth capital and yet retain the complete control of your company. For entrepreneurs chasing dreams and bigger valuations, this is incredibly important to understand. With equity or risk capital, you have a much longer-term horizon and you are constantly diluting ownership and control of your company the more you are successful.
    Globally, RBF has exploded in different forms with players investing in offline or traditional companies while ground-breaking tech startups are using a data-driven, all digital approach to drive investment into eCommerce, SaaS, and gaming companies. RBF torchbearers Lighter Capital, Decathlon Captital Partners, Bigfoot Capital, Clearco (formerly known as Clearbanc), Pipe, Capchase, and Uncapped are all growing the global market for revenue-based financing. Clearco claims to have invested over US$2 billion into more than 4,500 businesses in becoming the world’s largest eCommerce investor.
    Why is the potential for RBF huge in India? India has one of the biggest start-up ecosystems in the world – third to be precise – and this does not even take into account the millions of SMEs that are on the cusp of initiating their digital journey. The D2C sector in India alone is on track to be a US$ 100 bn market by 2025, according to Avendus Capital.
    Early-stage start-ups or these SMEs are best suited for RBF due to a combination of factors.
    Firstly, RBF platforms are ready to lend as low as ₹10 lakh and up to ₹2 crore with a fee of 4-8% depending on certain parameters. Secondly, the quick disbursement helps these ventures get funds when they need it. Thirdly, is the transparency of knowing exactly how much of your revenue is required to service your debt in a specific number of months. Lastly, some platforms are using a data-driven approach that provides funding not based on who you know, but based on the fundamentals of the business and performance.
    A typical round of funding through VC/PE players could take months and that could make or break a venture that is looking for quick access to growth capital. A few months wait for funding could be fine for more mature businesses but it could be fatal for the smaller ones.
    While the access to capital is quick there is no let down in the due diligence as such. RBF fintech platforms technology-driven processes and innovative data-driven underwriting models to evaluate businesses and their performance.
    That also explains the negligible NPAs in RBF.
    However, the biggest growth opportunity for RBF comes from the burgeoning D2C segment in India that has registered a massive growth during the pandemic. A recent report by Inc42 indicated that while these D2C brands recorded an 88 percent growth in consumer demand in 2020 compared to the previous year, only 25 percent of the $2bn in funding in the last 8 years was by D2C startups in growth stage.
    The pandemic has been a blessing in disguise for the D2C segment and many are looking at expanding their businesses. The more that these businesses opt for RBF to fuel growth the healthier the ecosystem will be, and those business owners will still retain complete control of their ventures.
    The future of RBF in India is exciting and has huge potential. As a founder-friendly alternative that is revenue-first, RBF can be just the added catalyst India’s start-up ecosystem needs to bounce back from COVID.
    The author, Bhavik Vasa, is Founder and CEO at GetVantage. The views expressed are personal
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