Venture Capital

The future of revenue-based financing in India: New age financing for ‘traditional’ startups


The startup ecosystem has got everyone’s attention in 2021 with the addition of 21 unicorns and a mega IPO by Zomato. But not enough attention is paid to the thousands of new cloud kitchens that have ‘started up’ due to platforms such as Zomato and Swiggy. While technology driven startups get most of the attention of the media and all the funds from venture capitalists, there is a silent revolution taking place leading to an explosion in ‘traditional’ startups which equally deserves our attention.

I call them ‘traditional’ since they’re focused on building businesses with proven business models and that don’t require excessive cash burn. I am referring to the lakhs of new businesses cropping up in verticals such as Direct 2 consumer (D2C), Software as a Service (SaaS) and Education. These are fast-growing businesses with solid fundamentals, founded by a new generation of entrepreneurs, but they would neither qualify for VC funding or a bank loan. D2C itself is expected to become a $100bn market indicating that there will be a large demand for funds that will need to be filled in by new age financiers.

Enter Revenue Based Financing (RBF), a model which enables startups to raise revenue by pledging a percentage of their future revenues. Traditional finance options for small businesses have been to get loan from a bank, NBFC or family and friends in exchange for a fixed interest rate and by pledging collateral or giving a personal guarantee. Few might also be able to raise funds in exchange of diluting their equity. These options aren’t well suited for such businesses since they don’t have enough stability in their cash flows to service debt and nor are they looking to scale in a manner that would enable equity investors to get an exit. Revenue based financing solves these issues since they give capital to the business in exchange for a royalty from their revenues and they don’t take any equity in the business. While investors conduct proper diligence on a company’s revenue-earning potential, this also means that if a firm does not earn any income, then investors don’t get any return.

The developed markets such as the US are leading the way on RBF. Over $2bn was financed in 2020 and leaders in this space such as ClearCo and Pipe have become unicorns. The time is ripe for growth in India since RBF is in the interest of all the stakeholders:

  • Small businesses and startups: The founders and companies are looking for flexible funding without providing equity dilution, collateral or personal guarantee. They are willing to share revenues to ensure that their brand and business scale quickly.
  • Alternate Financiers: Banks are hesitant to serve these customers since these businesses have a limited track record, they’re loss making and can’t provide collateral. But there are a plenty of Fintechs, NBFCs and High Net worth Investors who are keen to back brands that they trust. They typically prefer backing brands that have collections via payment gateways and swipe machines so that they can start receiving their revenue share daily, leading to attractive returns.
  • Regulators: The RBI is facilitating digital onboarding of businesses by simplifying the KYC requirements. The future can become brighter once platforms like OCEN are introduced by the authorities.

Many fintechs share my bullish sentiment on RBF and have started up in the last couple of years leading to ample liquidity for deserving businesses. To ensure that RBF achieves its potential in the long run, I hope this liquidity is responsibly allotted by the fintech startups and businesses are diligent in availing this source of finance. If deployed well, this new age financing tool will help thousands of businesses bloom.

The writer is Founder, Credit Fair.

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