sample Novel capital portfolio revenue-based financing

3 Successful Startups Powered By Revenue-Based Financing in 2021

We’re often asked if, and when, revenue-based financing makes the most sense for a SaaS company. Though there’s no one-size-fits-all answer to this question, there are some recurring patterns with businesses that choose revenue-based financing. Today we’re going to showcase those patterns in three of our partners, and dig into why each chose to leverage revenue-based financing for their tech businesses. 

Rentable added more capital to their round quickly, so key hires could be made 

When we connected with Rentable in 2019, they knew exactly what they were trying to achieve with more funding. With known customer acquisition costs, and an upward trending growth trajectory, Rentable’s founder, Alec Slocum, knew they needed capital to rev the company’s engines. And the approach they took to secure the needed capital was a combination — part venture capital, part revenue-based funding. 

The main motivation driving Rentable’s combination approach to fundraising was that each option offered key strengths. Venture capital is great for large sums of capital, while dilutive to founders, and slower to close. Revenue-based financing, with smaller check sizes ($100k-5m) and no capital dilution, is usually quicker and simpler. As in the case with Rentable, we completed due diligence, made our decision, and wired funds in less than 30 days. With money in the bank, Rentable could forge ahead, hiring mission-critical team members to support their growth, without needing to wait for the close of their venture round.

We see this time and time again. Revenue-based funding, especially with our usual 15-30 day turnaround, is significantly faster than an average venture capital raise. This is capital that plays well with venture capital! To learn more about how revenue-based financing and venture capital work together, you can dive deeper with our article here

Wisboo prioritized preserving founder equity positions

We’ve worked with Wisboo and their founder, Eze Carlsson, for 3+ years now. When we began working together, Wisboo tapped revenue-based funding for the right reason: Eze needed capital to expand his sales team, and wanted to preserve his equity stake in the company. 

“We’re big fans of revenue-based financing, and we’ve done 3 revenue-based financing deals. We think about it in simple terms,” says Eze. “We’re focused on growing our company 5x year-over-year, and a typical revenue-based financing deal will have around a maximum 1.5x return. If you do an equity deal in this scenario, then you would be giving away much more upside than a revenue-based financing deal requires.” 

Eze highlights one of the main ideas behind revenue-based funding. When growth costs are unknown and risks are large, venture capital often makes the most sense. Ownership in the company offsets that risk to investors by providing them with (theoretically) unlimited upside. However, when growth costs are known, equity is far more expensive to founders than revenue-based financing.

Reconciled used revenue-based financing to fund strategic acquisitions 

As a virtual bookkeeping service, Reconciled, run by Michael Ly, has found a high-quality growth strategy through acquiring small to mid-sized accounting firms throughout North America. By onboarding traditional bookkeeping practices, Reconciled taps into their customer base, digitizes their business, and immediately begins to see a return on each acquisition. 

Rather than using bank loans or selling equity in the company, Michael leveraged revenue-based financing for his slew of acquisitions. 

In this instance, the primary value of revenue-based funding is flexibility. Reconciled, like many software companies, is not an asset-heavy business, and bank loans would require personal guarantees. By using revenue-based financing, Michael didn’t have to worry about risking his personal assets in case of default. He also wasn’t required to hold cash reserves in his bank accounts, as is a common requirement with traditional bank loans or lines of credit. 

Revenue-based financing provides the capital, and flexibility, founders value

The founders of Rentable, Wisboo, and Reconciled leveraged revenue-based financing for slightly different reasons — and each were able to quickly accelerate their business’ growth as a result. 

For Rentable, founders sweetened an existing round of fundraising to more quickly move forward with onboarding key employees, while Wisboo benefitted from the lower cost of capital offered by revenue-based funding. And for Reconciled, the flexibility of revenue-based financing was a much more attractive approach to funding their acquisition-heavy business model than either bank loans or venture capital. In the end, all three businesses share a laser-focused goal of growth, and they found that revenue-based financing, and Novel Capital, supported those goals. 

As we mentioned in the beginning of this article, there is no one-size-fits-all solution for SaaS company funding. What makes revenue-based financing work so well for Rentable, Wisboo, and Reconciled is that each knew their costs, had recurring and increasing revenues, and had founders who were laser-focused on further accelerating revenue.

If your SaaS company is in a similar position — with >$500,000 in annual revenues, and YoY growth of ~30% — we would love to learn more about your business, and your growth goals. We also want to share more about Novel Capital’s approach to revenue-based funding and see if we might be able to help you scale more quickly. Reach out to us by filling out the Get Funded form on our homepage, and we’ll get something on the calendar.

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