A new playbook for startup fundraising • TechCrunch
It has been a few years ago, founders only had two options when starting a company — bootstrap yourself or turn to VC money, and they would use that money primarily to pursue growth. Venture debt gained prominence later on. While non-dilutive, its problems are similar to that of VC equity: It takes time to secure, involves warrants, isn’t very flexible and not every startup can get it.
In recent years, founders have had more options. Non-dilutive capital is now available to most startups, while purpose-specific financing has also entered the market.
Venture capital remains the most popular option for startups. But founders should explore all funding options. A combination of capital sources is the best way to ensure that you have both cost-effective and reliable short-term funding. Long-term money can be used for projects with uncertain returns.
What is revenue-based finance?
Let’s define it as capital provided based on future revenue.
Venture capital is still the preferred avenue for startups. But founders should explore all funding options.
What is so special about revenue-based funding? First, it’s easy to raise. It is much quicker than the lengthy process of debt or equity financing. Revenue-based financing can be established in days, if not hours. It is also flexible, meaning you don’t have to withdraw all the capital up front and choose to take it in chunks and deploy it over time.
As your credit score increases, revenue-based financing scales. Usually, there’s only one simple fee with fixed monthly repayments.
What should startups do to improve their financing strategies?
Startups should consider aligning short-term and long-term activities with different sources of capital to maximize fundraising. The typical term for revenue-based financing is between 12 and 24 month. Venture capital and debt are long-term capital sources that typically last between 2 to 4 years.
A startup’s short-term activities may include marketing, sales, implementation and associated costs. It is possible to predict the amount of revenue a startup will generate by knowing its economics, CAC or LTV. Startups should consider revenue-based financing in order to finance initiatives that are likely to bear fruit quickly, as the potential return on these activities could be greater than the cost for revenue-based funding.