Revenue-Based Financing Models

Yesterday's post sparked questions and comments about how investors actually get their money back, especially through dividends. Let's get specific. Dividends are PROFIT DISTRIBUTIONS to shareholders. The company MUST BE PROFITABLE to pay them. Most startups aren't. Here are some terms tossed around. I want to clarify what they mean: • Cash dividends – Profit gets paid out in cash. Rare in startups. Cash is too precious in the early stages to give away. • Stock dividends – You get more shares, not more money. It dilutes everyone. • Preferred dividends – Some preferred stock comes with dividend rights, but they're often never paid unless there's a liquidity event (IPO or acquisition). • Dividend recaps – The company takes on debt to pay shareholders. Mostly a private equity move, not early-stage. There are other models people confuse with dividends: • Royalties – A percentage of revenue (or per-unit sold) paid to an investor or IP owner. Mr. Wonderful loves this structure on Shark Tank, especially with CPG deals. In theory, it ties repayment to growth. However, I've yet to see it used in a real-world startup deal (but wouldn't be opposed to it). • Revenue-based financing – This is more like debt. You pay investors a fixed percentage of top-line revenue until a certain return cap is reached. It's non-dilutive and works for startups with recurring revenue and predictable cash flow, like SaaS models. • Income share agreements – You commit a percentage of your personal income to repay capital over time. This is mostly used for individuals, not companies. • Cost-plus markups – Not an investment return strategy. It's how vendors charge: "cost to produce" + a margin. For example, manufacturing something for $5 and charging $7. Founders sometimes confuse this with investor profit-sharing but they are very different things. • Profit sharing – A way to reward employees, not investors. When the company is profitable, a percentage of those profits are distributed to the team. It's usually based on salary or tenure, not equity owned. If you're raising investor capital, remember: These return mechanisms ONLY work if the company is profitable or cash-flowing. And that's NOT most startups. Don't dangle the word "dividends" if what you mean is "maybe one day, if everything goes perfectly." Make sure your return story aligns with your business model. Or don't raise investor capital at all.

Securing investment from big-name VCs feels like the holy grail, doesn't it? But there's a funding option you might be overlooking. I know, investment is not just about the money. → It's a vote of confidence in your vision, your team, your future. But what if those VC doors keep slamming shut? ↳ Revenue-based financing. Have you heard of it? It's not new, but it's gaining traction fast. Here's why: → No equity dilution. Keep control of your company. → Repayments flex with your revenue. Bad month? Lower payment. → Less pressure for exponential growth. Steady progress is celebrated. → Shorter fundraising process. Get back to building your business faster. Sounds too good to be true? Well, it's not all roses. So how does it work? 1. Investors provide capital upfront to a business. 2. The business agrees to pay back a percentage of its monthly or weekly revenue until a predetermined amount is repaid. 3. Typically, the total repayment amount is a multiple of the original investment, usually ranging from 1.35x to 3x. The typical requirements include: → Minimum revenue thresholds (e.g., $100,000 in monthly recurring revenue). → Predictable revenue streams. → Strong gross margins. For whom is best suited? → Businesses with recurring revenue models (e.g., SaaS companies) → Companies with strong gross margins. → Startups or small businesses that may not qualify for traditional bank loans. How does it look compared to other financing methods? → Unlike equity financing, RBF does not dilute ownership. → Unlike debt financing, RBF does not have fixed payments or require collateral. → Can be seen as a hybrid between debt and equity financing. Revenue-based financing offers a flexible alternative for businesses seeking growth capital without the constraints of traditional loans or the dilution of equity financing. But well, what about you? Do you think revenue-based financing could work for your organization? Let me know your thoughts in the comments below. ⬇️ — P.S. Unlock 20 years' worth of leadership lessons sent straight to your inbox. Every Wednesday, I share exclusive insights and actionable tips on my newsletter. (Link in my bio to sign up). Remember, leaders succeed together.

What does a company do when it doesn't fit the venture capital model, is generating revenue, but doesn't have the collateral necessary for a loan? The answer to this gap is another example of Demand-Driven Impact. As a reminder, Demand-Driven Impact shows up when incumbents can't (or won't) serve a community that doesn't fit the incumbent's model, when the community shares both a common problem and a common desire to pay for a solution...if a solution is tailored to its needs, circumstances, and ability to pay. And, the solution has to solve a problem in a way that creates measurable benefit for the community (call this "solving a problem worth solving"). If each of those elements are in place, then the conditions are right to "unlock" hidden demand. And unlocking hidden demand is how new markets are made. Today's example has fascinated me for years, because it fits a gap that disproportionately hits small businesses. But not just small businesses...small businesses that are otherwise ready to grow. What I'm talking about is Revenue-based Financing (RBF). RBF, done fairly, is a tool that provides capital to revenue-generating businesses. It doesn't take equity. It's not debt. It's a payback built off of a fixed percentage of revenue, at a fixed multiple, until that cap is hit. The business owner keeps their equity. They don't go into debt. And they get to grow. So what's the catch? The catch is that the firm issuing the RBF needs to be ready to help the business grow. It needs to support the leadership teams. It needs to understand and care about the businesses it's supporting. And the "rates" have to be structured so they don't stress the business' ability to repay. In other words, good RBF knows its value-add, can define it, supports businesses that want it, and build that ethos into the core of what they do. Years ago, when my friend Victor W. Hwang was at the Kauffman Foundation, he led a process to build RBF across America. You can find more in the report below. As you read, ask yourself this: If we thought outside the traditional venture box, would we find ways to unlock demand and deliver impact? I suspect your answer will be "yes!" https://lnkd.in/eXggvsBg #impinv