Most entrepreneurs know about venture capital, but many are not familiar with other options as they seek to accelerate growth.
Venture capital can be a great option, especially when hyper-growth is in sight, but for entrepreneurs who are beyond the startup phase and ready to expand their sales and marketing efforts, other financing choices might be a better fit. Some alternatives allow business owners to retain more control, more ownership and/or set a more methodical growth course, versus more traditional capital options.
Depending upon the investor, these growth equity alternatives still can come with more than just money. Working with an experienced investment firm can provide a growing business with access to deep professional expertise, infrastructure and support in new geographies, and even a portfolio of other companies that could be potential customers or service providers. That access can be invaluable for helping an expansion-stage business navigate challenges and new opportunities, while making an investment into growth.
New tool for an established market
Software companies today need to spend far less money building their product and setting up the infrastructure to scale it than in the past. Most of the growth capital spent today is on go-to-market initiatives, and the larger the round, the larger the expected spend.
Growth capital alternatives allow companies to take a more deliberate approach to test, iterate and refine initiatives prior to acceleration. Once the right path forward is established, the company can choose the best way to fund that next stage of growth.
One of these alternative growth capital options is revenue-based financing (RBF), which offers growth-stage companies access to nondilutive capital that is right-sized for their needs. RBF is aligned to revenue performance and can provide funding ahead of, or entirely in lieu of, an equity round.
As the name implies, payments are tied to a percentage of company revenue, underscoring the flexibility of the structure and equity-like alignment with growth. The upshot for entrepreneurs is that RBF allows for a more deliberative approach to expansion before funding high-growth initiatives prior to the evidence that the efforts will pan out.
Funding the proof points
Revenue-based financing allows founders to effectively fund the proof point and generally extend runway to improve valuation. If they’re pursuing expansion, for instance, they can demonstrate their ability to sell into the new market. If an initiative falls flat, the company can reassess the strategy and fall back on what was previously working.
In some cases, companies will leverage revenue-based financing at multiple inflection points, or to obviate the need for dilutive investments altogether. For instance, one company may use an RBF facility to expand, yielding significant revenue growth and a higher valuation. A few years later, when it needs funding to add new markets, it once again uses an RBF, and the subsequent organic growth precluded the need for additional equity or further dilution. Simply put, the entrepreneurs in this case were able to scale quickly and efficiently, while retaining their upside potential with RBF.
If your company is at an inflection point and ready to thrive, carefully consider all your options, and be sure to choose the financing that aligns with your goals and strategy.
Jonathan Drillings is a partner at Riverside Acceleration Capital