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How Revenue-Based Financing Works and What RBF Providers Care About

Revenue-based financing is quickly becoming a popular way for startups to raise funds without sacrificing equity. This is how it works.

This is a guest post by Brian Parks, Managing Partner at Bigfoot Capital.

New investment structures are gaining traction in the early-stage SaaS financing market. 

You may have heard of Revenue-based financing (RBF), venture debt or hybrid structures blending a revenue or profit share concept with an equity ownership stake. 

Or, maybe you haven’t and are still thinking your only options are to bootstrap or pursue angel and/or venture capital.

Bigfoot Capital invests in initial-scale SaaS companies using both RBF and venture debt investment structures. We do not pursue hybrid structures with a significant equity component attached.

In this post, you will learn:

  • What revenue-based financing (“RBF”) is
  • 2 Primary RBF structures
  • What RBF investors care about
  • How Bigfoot evaluates initial-scale SaaS companies
  • How the RBF structure functions, what it costs and the value it can generate for your company. 

We’ve provided our RBF structuring model that we use internally when structuring investments, so you can dive in and understand all of the underlying details (link at the bottom of this post).

A high-level look at Revenue-based financing (RBF)

What is RBF?

Revenue-based financing is an alternative growth investment structure with different mechanics, provisions, and return profiles than either equity capital or traditional lending products. It is first and foremost a debt instrument, that is paid back by sharing in a company’s revenue.

Who is it for?

RBF is for growing companies that either do not have the current revenue growth rates or scale or Founder desire to attract venture capital and/or lack the assets and meaningful profitability/cash flow to procure traditional debt products (bank financing) at the time of investment.

Simplified RBF

Here’s an example of how an RBF loan facility can work:

  • We invest $300k with a 36-month payback term.
  • We require $450k (1.5x of investment) to be paid back over that term.
  • You pay us back based on a % of your monthly cash receipts.

Our return is IRR-driven (Internal rate of return) based on the timing and volume of the cash receipts we share in over the term of the investment. (Note that the IRR ≠ interest rate. Here’s a primer on IRR. And here’s one on the time value of money.)

Higher revenue growth = Higher IRR for us. We’re capturing cash and recouping our investment more rapidly.

Lower revenue growth = Lower IRR for us. We’re waiting longer for our cash share which defers our recoup.

Once the 1.5x return on investment is returned, you have no further payment obligation and you have retained your equity ownership while growing.

2 Main approaches to RBF

Pure debt instrument

This is what Bigfoot provides. The expectation is that the RBF facility (i.e. the loan) will be paid back and a return cap will be achieved over time (24-36 months) based on monthly payments delivered as a % of your cash revenue.

This is a simple structure that doesn’t impact your cap table, i.e. you keep full ownership of your business. 

This is generally senior capital, meaning it has first priority of payment in a capital stack that may include equity.

Hybrid debt/equity investment

There are some groups employing this model, which functions somewhat similarly to a traditional convertible note. 

The key and important difference between this structure and a traditional convertible note or SAFE is that if you do not raise a subsequent “qualified financing” of, say, at least $1M in equity within a certain timeframe, this investment will not convert to equity and will need to be repaid at a significant multiple of the investment back to the investor. You can think of this structure as redeemable equity whereby you’ve sold equity and you can redeem by purchasing it back at a premium.

The time frame is generally longer than that of a pure RBF. Say, 5-7 years vs. 2-5 years. Accordingly, the return cap requirement will be higher 3-4x. I understand this can be a bit hard to follow as there’s more complexity to understand and model here. Matt Wensing of SimSaaS has done a wonderful job of comparing these types of structures in deep detail.

What RBF Investors Care About

If you’re interested in raising capital through an RBF facility, it is important to understand what investors who offer this kind of financing are looking for when they evaluate potential deals:

  • Existing revenue traction: as RBF investors are getting their return based on receiving a % of your revenue, it’s paramount that you have substantial revenue to share.
  • Revenue growth: In order for an RBF to perform well, revenue needs to be growing at a rate of at least 20% YoY, a far cry from the TTDDD growth rates VCs are looking to capture.
  • Revenue quality: At least for us, this is very important and where we dig hard. Not all revenue is created equal, so we’re evaluating its quality primarily by applying standard SaaS revenue metrics to your revenue and cohort metrics to the underlying customers delivering it. Here’s a post we’ve written on Determining the Quality of SaaS Revenue (comes with a cohort analysis tool).
  • Fundamental quality of operations: Of course, beyond revenue, RBF investors need to believe in the viability of the company and its ability to share revenue without compromising the business. This comes down to how you actually operate and grow the business.

How Bigfoot Evaluates Initial-Scale SaaS

Bigfoot focuses on initial-scale SaaS. By that we mean: SaaS businesses with $1M-$10M ARR that have raised <$5M in equity capital. We’re very metrics focused as you’ll see below. Additionally, we have our own views on products and markets that may differ from those of VCs.

If you’re considering exploring the RBF route, it is useful to know how investors think and evaluate opportunities.

How we think about metrics as a SaaS RBF investor (3 buckets)

We do our best to utilize data to capture the metrics we care about most across three broad buckets and use these metrics to evaluate opportunities, structure our investments, and monitor our portfolio on an ongoing basis.

SaaS Metrics

Customer / revenue metrics

  1. MRR (scale and growth rates)
  2. Revenue quality: ARPU, LTV, Quick Ratio
  3. Cohort metrics: cohort sizes, cohort multiple — an indicator of growth 
  4. Retention / churn metrics

Below, you can see some of the customer/revenue metrics we capture.

If you connect with our app, we can produce this and our cohort report for you and short-circuit our RBF fit evaluation process (note: this is alpha software, so please forgive our unoptimized load times).

Of course, if you have a ChartMogul account tracking your metrics and cohorts, that will help accelerate our decisioning as well.

Revenue-based financing: essential metrics we look at

Sales & Marketing Metrics

  1. CAC recovery period
  2. LTV/CAC
  3. Funnel/pipeline metrics (conversions and sales cycles)
  4. ACVs/ARPU

Financial Metrics

We primarily focus on revenue through the SaaS customer and revenue metrics outlined above. For financial metrics, we’re really digging into your OPEX and how it’s serving the company and looking for answers to a multitude of questions (see below).

  1. Labor spend: how are you managing your labor and how efficient is it? Are you scalable?
  2. Sales & Marketing spend: headcount and discretionary. How effective are you at deploying S&M spend. Can we see that a dollar spent generates 2+ dollars? Can you turn off discretionary spend and still maintain (and even grow) the business. How is your sales cycle?
  3. Research & Development spend: how is your engineering organization structured? How much do you need to invest in it to get where you want to be? How much can be cut without compromising the product’s ability to deliver revenue? What level of investment do you anticipate to grow/evolve the product in order to maintain your competitive lead?
  4. General & Admin spend: How lean are you running this non-revenue-generating portion of the P&L. Are you spending fast and loose, or do you run a tight ship? 

Cash Metrics (all about cash)

  1. Cash balance before and after investment
  2. Net cash burn: historical and projected and the path to profitability
  3. Runway: cash low points
  4. Cash receipts / management: payment processes and cash capture

How we think about markets

We don’t need to see multi-billion TAMs to be excited about an investment opportunity. We believe great businesses can thrive in “small”, “boring” markets. We like niches and verticalized software which lend themselves to capital-efficient growth. This post outlines our thinking about markets.

How we think about products

We’re B2B focused and bucket products into functional categories of marketing, sales, and operations. 

For the enterprise, we like mission-critical applications that are painful to cut once implemented and justify their existence in a corporate budget. 

For SMB SaaS apps, we look for ease of use and delightful user experience with consistent engagement and value delivery. These types of apps are inherently going to stay on the credit card. 

We are not frontier tech investors and are primarily focused on the business problem being solved that we can understand and hear from customers why your solution solves it.

Here are a couple of posts we’ve written on proving value with your product and how to position your product.

How we think about teams

We like Founders and executive teams that have been working on the business for a decent period of time, say 3+ years. 

Given that we’re investing in lightly capitalized companies that have achieved meaningful revenue traction, the reality is that these companies have been around for a bit. So, we get a lot of comfort that the team that’s gotten the company to that level has been in place and working together for a while. Of course, the team is ever-evolving but the foundational leadership and knowledge remain in place to support new hires.

How we think about SaaS financing

We started Bigfoot with the belief that there are many, many, many SaaS companies in existence that we can support with a different form of capital than has traditionally been available. These companies may have been passed on or overlooked by traditional early-stage capital providers (angel/VC) and maybe for a good reason if they don’t fit that investment profile. 

We believe that by focusing on these companies and building our company, products, and service model around them, we can mutually succeed and achieve meaningful outcomes that don’t require billion-dollar exits. Maybe we help you get to a venture round. Maybe we help you get to an exit while retaining your ownership. Maybe you have a great company that cash flows. Any of those is a success we’re interested in playing a role in.

Bigfoot’s RBF Structuring Model

We’ve provided our model to educate Founders and drive transparency and alignment in this emerging capital market. We believe in helping Founders make their capital decisions with the appropriate data in hand. 

We do this by providing them with all of the details and tooling that go into how we make our investment decisions and by taking the time to build relationships that help us both get where we’re aiming to go. 

You grow. We grow. All good.

Check it out and create your own model here: RBF Model_Bigfoot Capital_Open-Source (note that the model is view only, so File → Make a copy, no email required).

Make sure to spend some time on the ‘Model Overview’ worksheet and reference it as you play with the model.

If you have any questions, email Brian at [email protected] or schedule a call with him.

Supporting Links

  1. Bigfoot Capital RBF Model
  2. Bigfoot Capital Cohort Analysis Model
  3. Bigfoot Capital Stripe Application
  4. IRR and Time Value of Money Explanations
  5. Hybrid Structures Analysis
  6. How We Think About SaaS Revenue Quality
  7. How We Think About Markets
  8. How We Think About Proving Product Value and Product Positioning