Convertible Notes and Startup Funding
February 12, 2025
There are several cognitive biases that affect our ability to think clearly about financial investments. One such bias is called the hindsight bias. Over the years, the effect of hindsight bias on the value of investor portfolios has been significant. This is the reason that we will have a closer look at what this bias […]
The past decade has seen a rapid increase in the number of start-ups. There are more companies which start up every year now as compared to a decade earlier! As a result, there are numerous new kinds of players which have come into existence in the start-up universe. One such type of company is called […]
Whenever investors pool their resources together in order to create a fund that then invests in other assets, the concept of fiduciary duty comes into play. The average investor considers fiduciary duty to be a complex legal subject and hence tries to avoid delving into the details. However, the subject is not very complex. Also, […]
Liquidity management has become an important buzzword in the pension fund industry. This is because of the fact that recessions, slowdowns, and the recent market crash caused by Covid-19 have left the pension funds exposed. Many studies have been conducted into the matter and the results from these studies are simply astonishing. Pensions funds are […]
Stakeholders all over the world are concerned about the irreversible damage being caused to the ecosystem of the earth. There is a common belief amongst people that the natural habitat on planet Earth has been irreversibly damaged. It is true that climate change affects all of us. It is also true that very soon the […]
The manner in which startup companies obtain their financing can have a very large impact on the future of their business. In the previous articles, we have already discussed how bootstrapping as well as investments by professional investors work. Both of these approaches have their own advantages and disadvantages. Up until recently, it was assumed that these are the only two alternatives for a startup firm to raise money. However, with the passage of time, we have realized that this is not necessarily the case.
It is possible for startup firms to obtain financing using a third method which is called revenue-based financing. In this article, we will have a closer look at what revenue-based financing is as well as how it affects investors as well as the founders.
Revenue-based financing is a method in which an entrepreneur can approach professional investors in order to raise funds but they can do so without giving up a portion of their equity. In traditional investments, investors obtain an equity stake when they invest in a company.
In revenue-based financing, investors are not provided with equity stakes. Instead, investors are entitled to receive a part of the revenue of the firm for a specified period of time. Hence, an investor can invest $10 million in a firm in return for 5% of the revenues of the firm. Additionally, the startup company may have to return a multiple of the original investment at the end of the period. For example, the company may have to pay 1.25× of the original investment in order to compensate the investor for undertaking the risk.
The concept of revenue-based financing is quite recent. However, it has been growing at a very rapid pace. This is because of certain advantages which are associated with revenue-based financing.
Professional investors have come up with different versions of revenue-based financing. Shared earnings agreement and point of sale capital are some versions that have become quite popular. There has been a considerable rise in the number of companies and investors using revenue-based financing and this is expected to continue in the near future.
Even though revenue-based financing has been growing by leaps and bounds because of the above-mentioned, there are several disadvantages of this model. Some of these have been discussed below:
The bottom line is that revenue-based financing is a relatively recent mechanism that is being used in order to raise funds. However, the effects of this arrangement are not fully known and hence its advantages and disadvantages cannot be fully known for sure.
Your email address will not be published. Required fields are marked *