3/1/2023
11/4/2024
Combine RBF and VC to support your company's growth
When it comes to considering the growth cycles of small businesses, and in particular of startups, two alternative means of financing are traditionally opposed: the VC (venture capital ), and RBF (revenue based financing).
This opposition finds its relevance in the benefits and disadvantages of the VCs s and the RBF.
Nevertheless, these two financing methods can be complementary and optimize the growth of your of your startup. We present here respectively the advantages and disadvantages of VCss, then the RBFbefore showing you how to combine them to get the most out of growth of your company.
Venture Capital
Definition of Venture Capital
Venture capital or VC, refers to the injection of capital into a company, via specialized investors. It takes the form of an equity investment by investors in companies.
These are risky investments, as they are uncertain about future returns, made by investors who specialize in companies with high potential.
According to this definition, venture capitalists will raise funds to financeinvestments for companies with high potential, but lacking sufficient cash flow to finance these investments.
This early involvement of VCs in the life of companies generally establishes privileged 7 to 10 year partnerships between the investee company and the venture capital fund. VC firms typically charge 2% per year for all funds raised.
The advantages of VC fundraising
VCs allocate significant funding resources, particularly for young companies that have not yet proven themselves in terms of margin. The use of VCs is therefore appropriate in theseed phase.
Importantly, the capital provided by venture capital firms is not debt per se. The funds raised by a VC firm are secured by equity investments in the investee company.
A VC fundraiser is unique in that it not only raises needed funds, but also provides institutional support and even mentoring .
According to a 2015 study analyzing the impacts of VCs on U.S. companies between 1974 and 2015, nearly 63% of companies in the stock market would be backed by a VC-type fund.
VCs therefore bring credibility to a company within the economic ecosystem. They provide triple support: economic and financial; institutional; and in terms of credibility.
The disadvantages of VC-type fundraising
To compensate for the risk-taking of the VCs, a significant amount of collateral will have to be provided in the form of shares in the company seeking capital.
Thus, the impact of the VCs in the medium term is a governance impact, insofar as this mentoring relationship may turn into a tutorship... It is therefore a matter of anticipating the future cost to the company of such a loss in terms of governance.
This impact on governance makes the capital provided by VCs dilutive, as it leads to a loss of control of the company. Bringing in a VC is therefore taking the risk of compromising on the strategies to adopt for your company.
In addition, attracting a VC and meeting their potential requirements represents an opportunity cost in terms of time.
RBF or Revenue Based Financing
Definition
RBF is an alternative form of financing, where companies pay - in exchange for growth capital - a percentage of their future monthly profits.
Thus, an RBF financing is perfectly tailored to the company's income. The amount of repayment fluctuates according to the company's profits.
The benefits of RBF
RBF financing is particularly advantageous for digital companies. RBF is perfectly suited for expansion, growth or upgrading phases.
RBF is not dilutive, i.e. the governance of the company is not called into question by a new influx of capital. It is a method of financing that allows the company to emancipate itself from the possible intrusions of the VC firms regarding the company's strategy.
FBR costs less than VC or business angel funding, the expected returns are lower .
RBF allows you to align yourself with your growth in an optimal way, since it is dependent on your earnings. In addition, RBF investors do not expect collateral as security.
RBF funding is much faster to obtain. With Karmen, for example, funds are available within 48 hours.
The disadvantages of FBR
Unlike VCs, RBFs do not raise as much money. RBFs typically raise 3 to 5 times the estimated annual revenues.
RBF financing involves a monthly repayment. This monthly payment is a potential short-term strain on the company's cash flow. This monthly payment also makes repayment slower.
How to combine RBF and VC?
Thus, RBF and VC are opposed in three main ways:
- The RBF is less dilutive, and the VC is reciprocally more dilutive
The RBF is not intrusive in the governance of the company, whereas the VC leads to equity investments in the company.
- VC funding provides additional visibility within a business ecosystem, as well as a potential long-term partnership.
- A VC financing allows for a more important, but slower fundraising than the RBF.
This opposition between VC and RBF is structured in two aspects:
1) Quantity and speed of fundraising
2) Capital dilution or not
So how can you benefit from the respective advantages of VCs and RBFs without suffering their disadvantages? To do so, you must rely on the complementarity of VCs and RBFs to optimize the growth of your company.
Before answering these questions, here is a classic model of the fundraising phases of a startup, compared to a revised model. The revised model precedes Series A with RBF financing, to solidify the company's profitability.
In the priming phase
The association's aim is to extend the startup runway and enhance the company's credibility for venture capitalists.
This model shows an example of the joint use of RBF and VCs. An RBF fundraising will extend the runway of the company between the first rounds. At such a growth phase, the entry of VCs into the company would be too early and would dilute the capital.
Conversely, RBF financing would allow to consolidate the company's profitability, and thus to reach the KPIs required by the VCs in case of a larger fundraising.
An RBF can also be used during an aggressive and opportunistic growth phase, in case of a sudden market opening for example, if the amount of funds does not require the intervention of a VC firm but only of an RBF for example.
In growth phase
The objective of the association is to complement the funds allocated by a venture capital firm.
Financing via RBF allows to complement the contribution of a venture capital fund without diluting the company's capital excessively. The combination of VC and RBF allows the RBF to provide additional financing.
Raising funds through a venture capital firm can, for example, stabilize a company' s profits , which will then qualify for RBF financing.
In this way, the respective advantages and disadvantages of Revenue Based Financing and Venture Capital (VC) can complement each other. Combining the two can be a winning strategy in both the seed and growth phases.
