Revenue-Based Financing vs Angel Investors?
Every type of business has the requirement of funding at some or another point. But, the founders of SMEs and start-ups may require some additional investment into the business, a little more than established firms for seamless business operations.
Typically, the founders opt for conventional funding options like angel investors, bank loans, crowdfunding and other types of funding products to overcome the financial crunches, but recently, the introduction of revenue-based financing (RBF) has changed the dynamics. More and more founders are opting for revenue-based financing. In fact, in just a few months of RBF being launched in India, a handful of revenue-based funding platforms like Klub, GetVantage, Velocity, and Aavejak started emerging in the market, too.
We know that you must be wondering why people prefer a seemingly new funding model over conventional reliable ones.
Well, in this blog, we will take a look at some aspects of both revenue-based financing and angel investors to understand the shift in preference.
Angel investors
These are high net worth individuals who are ready to invest anywhere between Rs 5 to 10 lakhs in a business to obtain convertible debt instruments or equity. Typically, a group of four to five angel investors team up to fulfil the requirements.
1- Multiple stakeholders: Since there are multiple angel investors, it can prove beneficial and restrictive.
Beneficial when the stake is distributed evenly among various investors, enabling the founder to still have the final say over the business operations. The downside of having multiple investors is that keeping everyone aligned and informed about the progress. Disagreement even from one investor can result in operational delays and other challenges.
2- Accessibility and expertise: Even though having multiple investors means being mentored on various operational metrics, this can prove challenging, too. This is because most investors play a passive role, meaning they won’t guide you at various stages of business growth.
Revenue-based funding
RBF model proves a good fit for start-ups that are at a growing stage that have a need for sustainable revenues and those founders who want to retain control over the business without any external fund pressures.
1- Less expensive than equity: Whether it is angel investors or VC funds, raising equity capital can prove expensive because these investors will end up expecting almost 8 to 10 times the returns on their capital and that too within the span of 6 to 8 years.
But, when it comes to revenue-based funding, the return is averaged out in sync with your revenues, making it far more economical.
2- Maintain control and ownership: As there is no or very little equity dilution, you as a founder of your business have full control and ownership over your firm. And once you repay your RBF liabilities, you can independently decide the future course of action of your business.
3- Alignment towards growth: Revenue-based financing depends upon the revenue and real value your business is capable of producing. This means, all the investors are aligned equally towards the practical business goals. There are zero lofty valuation expectations or pressures on your business and its operations.
4- No personal guarantees required: When it comes to the conventional way of acquiring the loan, your personal collaterals are what help you in securing the loan. But with revenue-based financing, you do not have to worry about not having personal guarantees. Instead, the lenders make bets on your company to make the returns.
5- Ease of access on the capital: VC funds typically take a few months to transfer the decided funds, meaning relying on VC can significantly delay your plans.
The best thing about revenue-based financing is that it helps you to access the growth capital within just a few weeks of approving the term sheet.
6- Keep the business long term: With RBF investment, there is nothing as “exit” when compared with the VC funds. This means the founder is free from any pressures that prevent them from continuing to operate and grow the business.
7- No need to sell the business: When it comes to VC funds, the founder can be inhibited to sell the business until the investors don’t get the expected returns. With RBF, there are no such limitations. Once the RBF liabilities are repaid, the founder is free.
Final thoughts
Well, we are hopeful that the information on various aspects of these two funding models gave you a clear idea of why people prefer revenue-based funding the most.
However, when it comes to your business, you are a decision-maker. Work with experts and choose a reliable funding model that aligns with your business objectives seamlessly.
