Revenue Based Finance

Venture Capital, Venture Debt or Revenue Based Finance, three ways of financing a startup

Webinar New financing tendencies

Raimundo Burguera By Raimundo Burguera

*Ignacio Fonts, Managing Director of Inveready Asset Management; Sergio Pérez Merino, Managing Director of Sabadell Venture Capital and Raimundo Burguera Co-founder & Co-CEO of RITMO, discussed the viability and flexibility offered by these new forms of finance.

Madrid, 30th April 2021.

Startups need finance but there is not always a single best option. Instead, different forms of finance can complement each other. In the case of a well-managed startup, a mixed approach is required to minimise its financial costs and avoid excessive risk. This was one of the conclusions reached by the round table held to discuss the subject of “New Financing Trends” which was organised by RITMO, the Spanish fintech that offers non-dilutive financing to digital companies.

Moderated by Samuel Gil, a partner at JME Ventures, those participating were Ignacio Fonts, Managing Director of Inveready Asset Management; Sergio Pérez Merino, Managing Director of Sabadell Venture Capital and Raimundo Burguera Co-founder & Co-CEO of RITMO. The discussion focused on the pros and cons of three forms of finance: Venture Capital, Venture Debt and Revenue Based Finance.

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“Venture Capital” o “Venture Debt”, what is the difference?

The main difference between Venture Capital and Venture Debt is that the former is a capital instrument, while the latter is debt.

Venture Capital is typically the form of finance that is most appropriate for large-scale and high-risk business operations. According to the round-table participants, “it finances what nobody wants to finance, such as those operations which will initially be loss-making.” Samuel Gil, a partner at JME Ventures, noted that Venture Capital “assumes the risk that no other source of finance wishes to assume in exchange for which, if things go well, maximum profitability is obtained.” Therefore, it is a type of finance that focuses mainly on the initial phases of a startup’s existence or on all those times when it wishes to take a big step forward, such as international expansion or an operation involving inorganic growth.

The second form of finance analysed was Venture Debt, a method that allows companies to extend the capital obtained during the first rounds of financing via debt. In addition, this type of finance, which is medium risk, “uses the project itself as security. As a result, it is very much in line with the needs of both entrepreneurs and investors, because it needs the project to do well so that the loan can be repaid,” said Sergio Pérez Merino, Managing Director of Sabadell Venture Capital.

Revenue Based Finance: the objective – to grow the company

The third form of finance that the participants analysed was ‘Revenue Based Finance’. The objective of this form of finance is to finance the growth of companies. Its main feature is that the amount of loan capital to be repaid is a percentage of the startup’s future sales until all capital and interest are paid off. This is a highly flexible arrangement, since a company can use this form of finance in the intermediate periods between funding rounds to accelerate its growth.

Similarly, this form of finance is also highly relevant in the new business context, where digitalisation and e-commerce are more important than ever. As Raimundo Burquera, Co-CEO of RITMO, put it, “many e-commerce businesses invest very heavily in digital marketing. It is not completely efficient, from the Venture Capital investor’s perspective, for the entrepreneur to dilute its stock in order to give the money to Google. Hence the need for this system which aims to avoid dilution.”

The main difference between the three types of finance is the degree of difficulty faced by companies in obtaining it. “For new companies, traditional finance provided by financial institutions involves a process that may take three months. With methods like Revenue Based Finance, a proposal can be obtained in just two days, not only to manage the loan, but for a whole credit line for all the funding that may be needed during a year,” points out Ignacio Fonts, managing director of Inveready Asset Management.

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