Who are the major revenue-based investing VCs?

This guest post was written by David Teten, Venture Partner, HOF Capital. You can follow him at teten.com and @dteten. This is part of an ongoing series on Revenue-Based Investing VC that will hit on:

So you’re interested in raising capital from a Revenue-Based Investor VC. Which VCs are comfortable using this approach?

A new wave of Revenue-Based Investors (“RBI”) are emerging. This structure offers some of the benefits of traditional equity VC, without some of the negatives of equity VC.

I’ve been a traditional equity VC for 8 years, and I’m now researching new business models in venture capital.

(For more background, see the accompanying article “Revenue-based investing: A new option for founders who care about control” published on Extra Crunch.

RBI normally requires founders to pay back their investors with a fixed percentage of revenue until they have finished providing the investor with a fixed return on capital, which they agree upon in advance.

I’ve listed below all of the major RBI venture capitalists I’ve identified. In addition, I’ve noted a few multi-product lending firms, e.g., Kapitus and United Capital Source, which provide RBI as one of many structural options to companies seeking capital.

The guide to major RBI VCs

Alternative Capital: “You qualify if you have $5k+ MRR. We have a special program if you are pre-seed and need product development. Since 2017 we’ve managed $3 million in revenue-based financing, which helps cash-strapped technology companies grow. In 2019 we partnered with several revenue-based lending providers, effectively creating a marketplace.”

Bigfoot Capital: According to Brian Parks, “Bigfoot provides RBI, term loans, and lines of credit to SaaS businesses with $500k+ ARR. Our wheelhouse is bootstrapped (or lightly capitalized) SMB SaaS. We make fast, data-driven credit decisions for these types of businesses and show Founders how the math/ROI works. We’re currently evaluating about 20 companies a month and issuing term sheets to 25% of them; those that fit our investment criteria. We’re also regularly following-on for existing portfolio companies.”

Investment Criteria:

• B2B SaaS or tech-enabled services with proven, recurring contracts
• ARR of $500K+
• At least 12 months of customer history, generally 20+ enterprise customers or 200+ SMB customers
• Rational burn profile, up to 50% of revenue at close, scaling down
• Capital need of up to $1.5M over next 12 months

Benefits:

• Non-dilutive, flexible credit offerings that fit SMB or enterprise SaaS
• Facility sizes of 2-5x MRR
• Repaid 12-36 months with ability to prepay at reduced cost
• For RBI, return caps of 1.2x-1.8x and cash share rates of 3-10%
• Multiple draws available once history established
• Ability to scale payments to provide initial cash flow relief
• No board seats or personal guarantees
• Success fee on M&A can be traded for lower payments

Corl: “No need to wait 3-9 months for approval. Find out in 10 minutes. Corl can fund up to 10x your monthly revenue to a maximum of $1,000,000. Payments are equal to 2-10% of your monthly revenue, and stop when the business buys out the contract at 1-2x the investment amount.”

• Investment amount of up to 10x monthly revenue, to a maximum of $1,000,000.
• Payment is 2-10% of monthly revenue, until a Contract Buyout.
• The Contract Buyout Rate is 1-2x the Investment Amount, depending on the risk of the business.
• To be eligible, a business must have at least $10,000 in monthly revenue, at least 30% gross margins, and post-revenue for at least 6 months.

According to Derek Manuge, Corl CEO, “Funds are closed significantly quicker than the industry average at under 24 hours. The majority of businesses that apply for funding with Corl are E-commerce, SaaS, and other digital businesses.”

Manuge continues, “Corl connects to a business’ bank accounts, accounting software, payment processors, and other digital services to collect 10,000+ historical data points that are analyzed in real-time. We collect more data on an individual business than, to our knowledge, any other RBI investor, through our application process, data partners, and various public sources online. We have reviewed the application process of other RBI lenders and have not found one that has more API connections that ours. We have developed a proprietary machine learning algorithm that assesses the risk and return profile of the business and determines whether to invest in the business. Funding decisions can take as little as 10 minutes depending on the amount of data provided by a business.”

In the past 12 months, 500+ companies have applied for funding with Corl. The following information is based on companies funded by us and/or our capital partners:

• The average most recent monthly revenue is $331,229
• The average most recent annual revenue is $1,226,589
• The average most recent annual profit is $237,479
• The average gross profit margin is 55%.
• The average monthly operating expenses is $70,335
• The average cash balance is $191,164
• The mode purpose for funding is (in order of frequency) Sales, Marketing, Market Expansion, Product Development, and Hiring Employees.
• 30% have been operated by females, 70% have been operated by males.
• 40% have been operated by “visible minorities”, 60% have been operated by “non-visible minorities”.

Decathlon Capital: According to John Borchers, Co-founder, Decathlon is the largest revenue-based financing investor in the US. His description: “We announced a new $500 million fund in Q1 of 2019, in our 10th year. Unlike many RBI investors, a full 50% of our investment activity is in non-tech businesses. Like other RBI firms, Decathlon does not require warrants, governance involvement, or the types of financial covenants that are often associated with other venture debt type solutions. Decathlon typically targets monthly payment percentages in the 1% to 4% range, with total targeted multiples of 1.5x to 3.0x.”

Earnest Capital: Earnest is not technically RBI. Tyler Tringas, General Partner, observes, “Almost all of these new [RBI] forms of financing really only work for more mature companies (say $25-50k MRR and up) and there are still very few new options at the stage where we are investing.” From their website: “We invest via a Shared Earnings Agreement, a new investment model developed transparently with the community, and designed to align us with founders who want to run a profitable business and never be forced to raise follow-on financing or sell their business.” Key elements:

• “We agree on a Return Cap which is a multiple of the initial investment (typically 3-5x)
• “We don’t have any equity or control over the business…”
• “As your business grows we calculate what we call “Founder Earnings” and Earnest is paid a percentage. Essentially we get paid when you and your co-founder get paid.”
• “Founder Earnings = Net Income + any amount of founders’ salaries over a certain threshold. If you want to eat ramen, pay yourselves a small salary, and reinvest every dollar into growth, we don’t get a penny and that’s okay. We get earnings when you do.”
• “Unlike traditional equity, our share of earnings is not perpetual. Once we hit the Return Cap, payments to Earnest end.”
• “In most cases, we’ll agree on a long-term residual stake for Earnest if you ever sell the company or raise more financing. We want to be on your team for the long-term, but don’t want to provide any pressure to “exit.”
• “If you decide you want to raise VC or other forms of financing, or you get an amazing offer to sell the company, that’s totally fine. The SEA includes provisions for our investment to convert to equity alongside the new investors or acquirers.”

Feenix Venture Partners: Feenix Venture Partners has a unique investment model that couples investment capital with payment processing services. Each of Feenix’s portfolio companies receives an investment in debt or equity and utilizes a subsidiary of Feenix as its credit card payment processor (“Feenix Payment Systems”). The combination of investment capital and credit card processing (CCP) fees creates a “win-win” partnership for investors and portfolio companies. The credit card processing data provides the investor with real-time sales transparency and the CCP fee margin provides the investor high current income, with equity-like upside and significant recovery for downside protection. Additionally, portfolio companies are able to access competitive and often non-dilutive financing by monetizing an unavoidable expense that is being paid to its current processors, thus yielding a mutual benefit for both parties.

Feenix focuses on companies in the consumer space across a number of industry verticals including: multi-unit Food & Beverage operators, hospitality, managed workspace (office or food halls), location-based entertainment venues, and various direct to consumer online companies. Their average check size is between $1-3 million, with multi-year term and competitive interest rates for debt. Additionally, Feenix typically needs fewer financial covenants and can provide quicker turnaround for due diligence with the benefit of transparency they receive by tracking credit card sales activity. 10% of Feenix’s portfolio companies have received VC equity prior to their financing.

Founders First Capital Partners: “Founders First Capital Partners, LLC is building a comprehensive ecosystem to empower underrepresented founders to become leading premium wage job creators within their communities. We provide revenue-based funding and business acceleration support to service-based small businesses located outside of major capital markets such as Silicon Valley and New York City.”

“We focus our support on businesses led by women, ethnic minorities, LGBTQ, and military veterans, especially teams and businesses located in low to moderate income areas. Our proprietary business accelerator programs, learning platform, and growth methodologies transition these underserved service-based businesses into companies with $5 million to $50 million in recurring revenue. They are tech-enabled companies that provide high-yield investments for fund limited partners (LPs) that perform like bonds but generate returns on par with equity investments. Founders First Capital Partners defines these high performing organizations as Zebra Companies .”

“Each year, Founders First Capital Partners works with hundreds of entrepreneurs. Three tracks of pre-funding accelerator programs determine the appropriate level of funding and advisory support needed for each founder to achieve their desired expansion: 1) Fastpath for larger companies with $2 million to $5 million in annual revenue, 2) Founders Growth Bootcamp program for companies with $250,000 to $2 million in annual revenue, and 3) Elevate My Business Challenge for companies with $50,000 to $250,000 in annual revenue.”

“Founders First Capital Partners (FFCP) runs a 5-step process:

1. Attend the Appropriate Pre-Funding Accelerator Program. Programs are offered in both online, in-person, and hybrid format with cohorts of leadership teams for an average of 10 companies. Most programs culminate with a Pitch Day and Investor Networking Event where the companies present their newly defined and expanded growth playbook.
2. Apply for funding. After completion of the relevant pre-funding program, FFCP will review company funding applications and conduct due diligence.
3. Get Funding. FFCP-approved companies receive revenue-based loans of up to $1 million to support the implementation of a customized 5-year growth playbook for their businesses.
4. Growth support. FFCP uses its proprietary performance technology platform, structured growth program curriculum, and executive-level coaching operations to assist funded companies with the development, implementation, and iteration of their custom 5-year growth playbook.
5. Graduate. Companies repay loans with growth revenue generated over a 5-year term, capped at 2x the amount financed. Companies gain predictable revenue streams with significant and measurable increases in revenue and profits to graduate to either traditional debt or equity sources of growth capital.”

According to Kim Folson, Co-Founder, “Founders First Capital Partner (F1stcp) has just secured a $100M credit facility commitment from a major institutional impact investor. This positions F1stcp to be the largest revenue-based investor platform addressing the funding gap for service-based, small businesses led by underserved and underrepresented founders.”

GSD Capital: “ GSD Capital partners with early-stage SaaS founders to fund growth initiatives. We work with founding teams in the Mountain West (Arizona, Colorado, Idaho, Montana, Nevada, New Mexico, Utah and Wyoming) who have demonstrated an ability to get sh*t done… We empower founders with a 30-day fundraising process instead of multiple months running a gauntlet. ”

“To best explain the process of RBF funding, let’s use an example. Pied Piper Inc needs funding to accelerate customer acquisition for its SaaS solution. GSD Capital loans $250,000 to Pied Piper taking no ownership or control of the business. The funding agreement outlines the details of how the loan will be repaid, and sets a “cap”, or a point at which the loan has been repaid. On a 3-year term, the cap amounts typically range from 0.4-0.6x the loan amount. Each month Pied Piper reviews its cash receipts and sends the agreed upon percentage to GSD. If the company experiences a rough patch, GSD shares in the downside. Monthly payments stop once the cap is reached and the loan is repaid. In a situation where Pied Piper’s revenue growth exceeds expectations, prepayment discounts are built into the structure, lowering the cost of capital.”

“Requirements for funding consideration:

• Companies with a minimum of $50k in MRR
• We can fund to 4x MRR (Monthly Recurring Revenue)
• Companies seeking funding of $200k to $1mm
• Limited amount of existing debt and a clean cap table”

Indie.VC: Part of the investment firm O’Reilly AlphaTech Ventures. See Indie VC’s Version 3.0 . “On the surface, our v3 terms are a fairly vanilla version of a convertible note with a few key variables to be negotiated between the investor and the founder: investment amount, equity option, and repurchase start date and percentage.”

• Investment amount “is what it is”.
• Equity option is, ” a simple fixed percentage which converts into that % of shares at the time of a sale OR into that % shares prior to a qualified financing.”
• Repurchase start date and percentage is, “We chose 24 months from the time of our investment (but can be whatever date the founders and investors agree upon) and a % of gross revenue shared to repurchase the shares. With each revenue share payment, our equity option decreases and the founder’s equity increases. With v3, a team can repurchase up to 90% of the original equity option back at any point prior to a qualified financing through monthly revenue share payments, a lump or some combination of both until they reach a 3x cap. “

Kapitus: Offers RBI among many other options. “Because this [RBI] is not a loan, there is no APR or compounded interest associated with this product. Instead, borrowers agree to pay a fixed percentage in addition to the amount provided.”

Lighter Capital: “Since 2012, we’ve provided over $100 million in growth capital to over 250 companies.” Revenue-based financing which “helps tech entrepreneurs get to the next level without giving up equity, board seats, or personal guarantees… At Lighter Capital, we don’t take equity or ask you to make personal guarantees. And we don’t take a seat on your board or make you write a big check if you’re having a down month.”

• “Up to 1/3 of your annualized revenue run rate”
• “Up to $3M in growth capital for your tech startup”
• “Repaid over 3–5 years”
• “You pay between 2–8% of monthly revenue”
• “Repayment caps usually range from 1.35x to 2.0x”

Novel Growth Partners: ” We invest using Revenue-Based Investing (RBI), also known as Royalty-Based Investing… We provide up to $1 million in growth capital, and the company pays that capital back as a small percentage (between 4% and 8%) of its monthly revenue up to a predetermined return cap of 1.5-2.2x over up to 5 years. We can usually provide capital in an amount up to 30% of your ARR. Our approach allows us to invest without taking equity, without taking board seats, and without requiring personal guarantees. We also provide tailored, tactical sales and marketing assistance to help the companies in our portfolio accelerate their growth.” Keith Harrington, Co-Founder & Managing Director at Novel Growth Partners, observes that he sees two categories of RBI:

• Variable repayment debt: money gets paid back month over month, e.g., Novel Growth Partners
• Share buyback structure, e.g., Indie.vc. Investors using this model typically can ask for a higher multiple because they wait longer for cash to be paid back.

He said, “We chose the structure we did because we think it’s easier to understand, for both LPs and entrepreneurs.”

Podfund: Focused on podcast creators. “We agree to provide funding and services to you in exchange for a percentage of total gross revenue (including ads/sponsorship, listener support, and ancillary revenue such as touring, merchandise, or licensing) per quarter. PodREV terms are 7-15% of revenue for 3-5 years, depending on current traction, revenue, and projected growth. At any time you may also opt to pay down the revenue share obligation in full, as follows:

• 1.5x the initial funding in year 1
• 2x the initial funding in year 2
• 3x the initial funding in year 3
• 4x the initial funding in year 4 “

RevUp: “Companies receive $100K-250K in non-dilutive cash… [paid back in a] 36-month return period with revenue royalty ranging from 4-8%, no equity .”

Riverside Acceleration Capital: Closed Fund I for $50m in 2016. Fund II has raised over $100m as of mid-2019.

” Investment size : $1 – 5+ million, significant capacity for additional investment.
Return method: Small percentage of monthly revenue. Keeps capital lightweight and aligned to companies’ growth.
Capped return: 1.5 – 2x the investment amount. Company maximizes equity upside from growth.
Investment structure: 5-year horizon. Long-term nature maximizes flexibility of capital.”

Jim Toth writes, “One thing that makes us different is that we live inside of an $8Bn private equity firm. This means that we have a tremendous amount of resources that we can leverage for our companies, and our companies see us as being quite strategic. We also have the ability to continue investing behind our companies across all stages of growth.”

ScaleWorks: “We developed Scaleworks venture finance loans to fill a need we saw for our own B2B SaaS companies. No personal guarantees, board seats, or equity sweeteners. No prepayment penalties. Monthly repayments as a percentage of revenue.”

United Capital Source: Provides a wide structure of loans, including but not limited to RBI. The firm has provided more than $875 million in small business loans in its history, and is currently extending about $10m/month in RBI loans. Jared Weitz, Founder & CEO, said, “[Our] typical RBF client is $120K-$20M in annual revenue, with 4-200 employees. We only look at financials for deals over a certain size.

For smaller deals, we’ll look at bank statements and get a pretty good picture of revenues, expenses and cash flow. After all, since this is a revenue-based business loan, we want to make sure revenues and cash flow are consistent enough for repayment without hurting the business’s daily operations. When we do look at financials to approve those larger deals we are generally seeing a 5 to 30% EBITDA margin on these businesses.” United Capital Source was selected in the 2015 & 2017 Inc. 5000 Fastest Growing Companies List.

Note that none of the lawyers quoted or I are rendering legal advice in this article, and you should not rely on our counsel herein for your own decisions. I am not a lawyer. Thanks to the experts quoted for their thoughtful feedback. Thanks to Jonathan Birnbaum for help in researching this topic.