Revenue-Based Financing: A Guide for Private Equity & Startups

Revenue-based investing (RBI), also referred to as revenue-based financing or revenue-share investing,¹ represents a logical progression within the private equity and early-stage venture investment landscape. However, because RBI is a relatively recent approach, comprehensive publicly accessible data remains limited.

To overcome this deficiency in market information, we have created a unique data collection encompassing 32 RBI investment firms, 57 individual funds, and 134 companies that have successfully obtained revenue-based investing.

Through detailed analysis of this data, we have determined the total number of firms and capital involved in the RBI industry, the particular sectors and business types most frequently utilizing RBI, and the common characteristics of companies accessing this type of funding.

The key findings are presented below; a complete report providing an in-depth analysis of the current revenue-based investing market is available for download here.

As background, the fundamental financial structures employed by venture capitalists have seen limited evolution since their inception in 1957. The core model remains largely unchanged, with improvements primarily focused on more efficient capital markets and standardized practices for deal structuring, company valuation, and related areas.

In recent times, we’ve observed the emergence of several innovative investment models and financing methods, including shared earnings agreements and point-of-sale financing. Revenue-based investing (RBI) has become one of the most prominent and widely adopted new models for investors.

However, the novelty of the model results in a scarcity of public data, a lack of fully established industry standards, and, similar to traditional equity investments, limited visibility into the true cost of capital paid by companies receiving revenue-based investment.

Fortunately, there have been efforts to increase transparency within the RBI market. For instance, Bigfoot Capital publicly released its RBI model, detailing it in a blog post and sharing both its financial model and a sample, anonymized term sheet. However, a comprehensive, quantitative, industry-wide analysis has not been undertaken until now.

Typically, a company seeking RBI must be currently generating revenue, though achieving profitability is not always a prerequisite. However, profitability, or a clear path toward it, is frequently a key consideration for investors. Emily Campbell of The Campbell Firm PLLC, a legal practice representing entrepreneurs and venture-backed companies, stated, “For startups with revenue, RBI can be a viable option, as it can minimize dilution—particularly for founders—even if the startup isn’t yet profitable.”

She further explained, “Combining strategic equity or convertible debt with other financing options can be a sound strategy for a startup.” Demonstrating profitability reduces the risk of default and confirms the company’s capacity to repay the investment.

Regarding the most suitable applications for RBI, B2B software-as-a-service (SaaS) companies are particularly well-suited, as their revenue streams can be effectively used as collateral for lending. In addition to SaaS businesses, RBI is gaining traction within the impact investing community, offering a solution to the limited traditional M&A or IPO exit options often faced by impact-driven companies and is sometimes presented as a non-extractive investment approach.

Beyond B2B SaaS and impact investing, a growing number of other sectors are embracing the model, including e-commerce/D2C, consumer software, food and beverage, and others. It’s important to note, however, that regardless of the specific business model, companies seeking RBI generally need to demonstrate consistent sales and a proven track record of strong revenue generation, indicating a clear ability to return capital to investors.

The U.S. RBI Landscape

Our research has pinpointed 32 companies headquartered in the U.S. that are currently engaged in revenue-based investing, managing a total of 57 separate funds with approximately $4.31 billion in available capital. Our investigation into these companies, their funds, and the businesses they support has revealed the following:

1. Both the number of companies involved and the total capital dedicated to RBI are growing, and we anticipate this expansion will continue.
2. Business-to-business (B2B) software companies represent the largest segment receiving RBI funding.
3. A significant level of investment activity is occurring in sectors not traditionally linked to revenue-based investing, including the food and beverage industry, consumer goods, fashion, and healthcare.

To be included in our analysis (and therefore considered actively involved in revenue-based investment), firms had to meet these criteria:

1. They must invest in businesses utilizing a financial instrument where returns are generated from the initial investment plus a predetermined fee, repaid through a consistent percentage of gross revenue.
2. Investor payments must be distributed on a monthly or longer schedule.
3. The expected timeframe for full repayment must exceed 12 months.

We are confident in the accuracy of the firm count, as it represents only actively investing, U.S.-based revenue-based investment companies. However, the number of funds may be a conservative estimate. While each firm is associated with at least one fund, we only included additional funds when verified through public statements from the firms, SEC Form D filings, or other sources detailed in the methodology section of the complete report.

To date, a total of $2.1 billion in RBI capital has been distributed to companies by all firms across all years. It’s important to note that this figure includes several larger entities in our dataset – Kapitus, Clearbanc, Braavo, and United Capital Source. Excluding these firms, the remaining 28 companies, operating 51 funds, have deployed $592.8 million.

This $592.8 million figure is likely an underestimation because only 19 of the 32 firms had a publicly available “amount of allocated capital” figure; the remaining 13 firms currently have unknown values (represented as zeros) for their capital allocation. Consequently, if confirmed capital allocation data were available for all 32 firms, the total amount would undoubtedly be substantially higher than the current $592.8 million.

Growing Interest in Revenue-Based Investing

The number of companies specializing in Revenue-Based Investing (RBI) has grown annually starting in 2013. The year 2010 saw the establishment of five such firms, followed by four more in 2015. Furthermore, between 2014 and 2019, at least two new RBI firms were created each year.

The data demonstrates a significant increase in the formation of RBI companies since 2005, with a steady rate of new firms appearing over the subsequent fifteen years. Within the past decade, a total of 25 RBI firms have been launched.

Funds raised by RBI investment firms

A total of 35 separate funds have been established by the 32 companies included in our analysis since 2015. This indicates that only 16 funds originated before 2014, with the establishment year remaining unconfirmed for an additional six funds. Given the increasing number of companies operating in this sector, a corresponding rise in the number of distinct funds is to be expected. An interesting question for future research, though outside the scope of this report, concerns whether these newer firms are competing directly with established venture capital firms for investment capital, or if they are attracting funding from alternative sources.

Concerning how capital is being deployed, the available data suggests that a significant number of firms are still utilizing funds from their initial fundraisings. Ten companies launched their first fund after 2017, meaning it is probable that many, if not most, of these are currently making investments from that first fund, contingent on their specific fund terms. Consequently, it is reasonable to assume that the proportion of firms investing from their first fund is currently greater in 2020 than at any previous time.

Total amount of capital allocated to RBI funds

When considering only the investment perspective, the average fund size is calculated to be $56.2 million, whereas the median fund size stands at $20 million. Our data set includes 57 funds linked to the 32 companies analyzed, with 51 of those funds connected to companies that were not designated as outliers. The total amount of capital we could verify as being committed to these individual funds reaches $1.85 billion. This overall amount is relatively small, indicating that only $6 million of the $1.8 billion is overseen by the firms categorized as outliers – specifically, Kapitus, United Capital Source, Braavo, and Clearbanc. We were unable to determine the exact size of the distinct funds for each of these outlier firms, and as a result, this number likely provides a significant underestimation of the total assets they manage, as these firms collectively report allocating multiple billions of dollars to small businesses.

Of the 57 funds identified, the size of 33 funds was known, while the size of the remaining 24 funds remains unconfirmed. Focusing on the firms for which fund sizes are known, the average fund size is $56.2 million, and the median fund size is $20 million.

Dry powder

Our assessment indicates approximately $2.18 billion in dry powder currently available throughout the industry. Determining this amount proved complex, as complete total committed capital information was unavailable for 24 different funds. Consequently, accurately gauging the volume of capital that has been pledged but remains uninvested presents a significant challenge. Despite this, we diligently worked to estimate industry-wide dry powder, employing a simplified approach and making certain assumptions to ultimately reach a figure of $2.18 billion.²

Number of deals executed by revenue-based finance firms

Based on our data, each of the companies detailed in the following chart has completed fewer than 40 revenue-based investments (RBI). It’s important to note that these numbers are likely an underestimate, as our data doesn’t represent a complete overview of all their investment portfolios. Nevertheless, we have restricted reporting to only confirmed data and refrained from including information derived from estimations.

The data concerning most of the companies that received investment³ was obtained through direct research efforts. Our research encompassed 134 different companies, each of which has benefited from revenue-based financing.

Average revenue of RBI investees

The investees within this dataset demonstrate an average yearly revenue of $33.4 million, with a median yearly revenue standing at $5.4 million. We believe this difference arises because the dataset is weighted towards companies with higher revenues. This is likely due to larger financing rounds receiving more public attention compared to smaller deals, which often don’t generate press releases or investor announcements.

Most companies utilizing revenue-based financing generally earn under $20 million annually, as illustrated in the following chart. The chart’s data encompasses 89 companies (names withheld for privacy) for whom revenue figures were available at the time of this report. It does not include the 45 investees whose revenue remains unknown.

Industry analysis

The sector benefiting most from RBI (Revenue-Based Investment) loans was B2B software, with 42 companies out of a total of 134 recipients – representing 31.3% of all invested businesses. The “B2B software” designation encompassed companies focused on serving any kind of business client, from major corporations to small businesses, individual professionals, startup founders, retail operations, and other commercial entities.

The prominence of B2B software as the leading industry aligns with predictions and supports observations made by those monitoring the RBI landscape. Recent discussions have centered on the securitization of SaaS revenue and the possibility of developing a high-return fixed income instrument based on this approach. It is noteworthy to observe this initial component – the investee data – materializing, although the industry has not yet reached a stage where the suggested financial instruments could achieve widespread use.

Age of investees

Analyzing the establishment years of companies receiving Revenue-Based Investment (RBI), a noticeable trend emerges: a peak in the number of investee companies founded between 2011 and 2015. Following this period, the number of newly founded companies securing RBI deals decreased, with only one investee founded in 2020 still successfully completing an RBI agreement. We were able to determine the founding year for 127 of the 134 companies included in the analysis, resulting in a highly comprehensive dataset.

Considering the consistent decline in RBI deal volume since 2015, one might initially conclude that RBI is losing favor. However, this interpretation overlooks the time typically required for businesses to develop a sustainable business model and demonstrate sufficient progress before becoming eligible for significant RBI funding. Simultaneously, companies need to reach a level of maturity that aligns with the risk tolerance of RBI investors.

Consequently, the lower number of companies founded between 2016 and 2020 likely reflects this maturation process. Additionally, the administrative expenses and transaction complexities associated with securing, managing, and repaying an RBI loan may not be justifiable for companies in their initial one to three years of operation.

Within the dataset, the oldest company, a recognized name in the hospitality sector, was established in 1950, while the most recent founding date was 2020. The median founding year for companies in our data is 2012, and the average founding year is 2009.

• 85 RBI investees, representing 63.4% of the total, were founded between 2010 and 2020.
• 114 RBI investees, or 85.1% of all investees, were founded between 2000 and 2020.

This observation provides a valuable perspective when considered alongside our understanding of investee age. It demonstrates that while RBI investees generally require more than three years of operation, they are rarely older than 20 years.

Conclusion

This report aims to foster greater openness within the revenue-based investing (RBI) market, offering both investors and companies seeking funding valuable data and industry perspectives. Our findings suggest a thriving RBI sector characterized by increasing capital availability, more frequent deal activity, specialized investment firms, and, crucially, the development of standardized investment terms and industry practices. These advancements will enhance transparency and promote competitive pricing, ultimately proving advantageous for entrepreneurs.

Bootstrapp undertook this comprehensive analysis of revenue-based investing to encourage a move towards increased transparency and standardization throughout the industry. As we develop a platform designed to streamline fundraising for non-dilutive capital, it has become evident that a key challenge for founders is a lack of readily available information, which this analysis directly addresses.

Through this research, we have validated several widely held beliefs within the RBI community:

Firstly, both the number of firms participating in the RBI space and the total capital deployed are growing, and we anticipate this expansion will continue as the industry matures. While this report doesn’t specifically address it, awareness of RBI among entrepreneurs and small businesses remains limited. We foresee a corresponding increase in demand for this financing option as awareness grows.

Secondly, B2B software companies represent the most significant portion of RBI recipients, supporting the idea that their business models are particularly well-suited to this type of funding and reinforcing predictions that the industry will increasingly focus on securitizing recurring revenue streams. These companies are also relatively new, with over 63% of those receiving RBI having been founded within the last decade.

Thirdly, we observed considerable activity in industries not traditionally associated with revenue-based investing. Sectors like food and beverage, consumer products, fashion, and healthcare were surprisingly prevalent, suggesting that RBI may be a more adaptable financing tool than previously understood. We also note the growing presence of impact investing in this broader category, although our database did not include impact investment recipients.

In conclusion, the primary takeaway from this work is that the demand side – the companies seeking funding – will greatly benefit from increased transparency. We therefore recommend that founders, CFOs, and executives actively seek greater transparency from their RBI investors. Specifically, we advise companies to negotiate the removal of confidentiality clauses from investor term sheets and contractual agreements before finalizing them, as these clauses primarily benefit investors and hinder market efficiency.

¹ Although commonly referred to as “revenue-based financing,” the authors believe “revenue-based investing” is a more accurate and encompassing term. This is because RBI instruments frequently incorporate equity, warrants, and/or the potential for conversion to equity, making “investing” a more fitting descriptor.

² Further details regarding the methodology used to calculate this figure are available in the Methodology section of the complete report.

³ For clarity, we use the term “investees” to refer to all recipients of RBI. However, it’s important to acknowledge that these agreements can take various forms, including purely debt-based instruments, warrants, or other arrangements that may convert into equity for investors. In some cases, firms may structure the RBI instrument as an equity investment that entitles the investor to revenue-based dividends, rather than dividends based on share count. Typically, after a period of around five years, these payments transition from being characterized as dividends to redemption payments.

This analysis was authored by Thomas Rush and Daniel Birmingham, with sincere gratitude to all contributors, including David Teten, John Berger, Dan Birmingham, Brian Parks, Jonathan Bragdon, Zack Mueller, Brian Mikulencak, Samira Salman and Marco Cesar Solinas.