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How Revenue-Based Financing and Venture Capital Work Together

Updated: 3 days ago

As non-dilutive funding solutions attract more interest from SaaS entrepreneurs, venture capital (VC) investors are seeing an increasing number of startups who have used them for their growth and working capital needs, many times combining revenue-based financing (RBF) with a term loan, or other types of debt financing.

How revenue-based financing and venture capital work together

These flexible SaaS financing solutions scale with a business’ growth, enabling tech entrepreneurs to focus on their startups without giving up equity, signing personal guarantees, or adding warrant coverage; it’s understandable why entrepreneurs are increasingly seeking more founder-friendly funding options to reach their next growth milestone.

VCs unfamiliar with revenue loans are often curious how they fit into the funding life cycles of tech startups that also raise equity.

What should VCs make of revenue-based financing? Is it a replacement for venture capital funding or something different?

Below, we'll explain why RBF complements venture capital and how combining funding can be advantageous for both founders and VCs.

First, it's helpful to better understand where revenue-based financing fits into today's mixed bag of funding strategies.

Hybrid SaaS Funding Strategies

SaaS startups can skirt VC entirely by bootstrapping, but that decision can limit growth and result in missed opportunities. Fortunately, SaaS entrepreneurs have far more growth capital options than they used to, which include alternative debt financing solutions like revenue-based financing, venture debt, and traditional equity funding.

More and more, founders are implementing hybrid funding strategies that leverage non-dilutive RBF to fuel early-stage growth and gain traction before raising VC.

Here's an illustration that shows where RBF can sit in the funding lifecycle:

Hybrid SaaS funding strategies with RBF

Consider a typical equity path:

  1. Bootstrapping and friends and family: Founders launch their ideas with little or no funding from outside their circles.

  2. Angel and seed funding: As companies seek to grow revenue with their viable product, they turn to investors willing to fund the stages of commercialization.

  3. Venture capital funding: Startups with proven products and customers turn to VCs for the resources needed to accelerate growth.

Often, revenue-based financing sits between angel/seed and venture capital funding rounds, or it might replace angel and seed funding entirely.

Who gets RBF?

Similar to a venture capitalist, our team at Lighter Capital tries to understand where SaaS startups are in their life cycles and where they can predictably go before we make an investment decision. There's a lot of data that informs our RBF decision-making. You'll find that our alumni have strong balance sheets and metrics by the time they outgrow us.

We don't need to see the path to explosive growth that VCs seek in early-stage investing, though, because we’re not looking for the exceptional returns associated with venture. We just want to see good returns from deals with our clients.

Some of the companies we fund may never seek venture capital funding. Their main goal is steady growth and stability and smaller non-dilutive capital injections get the job done.

Other companies we fund want to follow a path that leads to the outsized returns that VCs seek. These companies turn revenue-based financing into a solid foundation for the rapid growth that attracts interest from VCs. When they’re ready for venture capital funding, the companies have matured enough to reach inflection points in the market, and they’re ready to turn traction into market leadership.

Combining Revenue-Based Financing and VC for a Strategic Advantage

RBF offers big benefits both prior to raising a venture round and after a VC raise — for founders and investors alike. Let's look at both scenarios.

Using revenue-based financing to strengthen the business going into venture capital rounds

Benefits for Founders

  • Show provable results and traction

  • Attract better offers from investors

  • Drive up company valuation

  • Accelerate growth without diluting equity

Revenue-based financing not only helps founders grow the business but also grow as a business — in addition to increasing revenue, founders often emerge better stewards of their startups and their balance sheets. The beauty of RBF is that SaaS leaders can reduce the risk from fluctuating revenue streams as they invest in growth initiatives without worrying about monthly payments they might not be able to make.

With RBF, founders can scale growth to position the business for a venture raise that offers better terms and a higher company valuation than they would have received with organic growth alone. This, in turn, is likely to increase the founder's ownership value at exit.

Benefits for VCs

  • Startup has established product-market fit

  • Startup is scalable

  • Startup has a path to profitability

  • Startup is likely to have a cleaner cap table

Not all young businesses have what it takes to qualify for debt. Entrepreneurs who tap into revenue-based financing have a number of positive characteristics — many of which VCs like to see too, like an established customer base and increasing revenue. Just as importantly, these companies have developed products that have good margins, scalable cost structures, and recurring revenue. They simply need funding to invest in sales and marketing or other initiatives so they could grow faster.

Though startups aren’t typically profitable at initial funding, trustworthy RBF lenders look for a path to profitability. At Lighter Capital, we use analysis to predict when a company has the potential to become cash flow positive.

Lighter Capital’s fintech lending platform pulls in 6,500 data points to reduce the entrepreneur’s time to raise funds by 90%. We use proprietary algorithms to determine a credit rating and data science to predict a startup’s revenue growth, with 97% accuracy, on average.

How Valant Achieved a 500% Growth Rate Using RBF and VC Funding

Valant Medical Solutions is a SaaS company focused on bringing efficiencies to behavioral healthcare. They turned a combination of RBF and venture capital funding into a 500% growth rate.  Read Valant’s story to learn how a hybrid funding strategy helped them stimulate healthy growth at scale.


Want to join the hundreds of successful tech startups in Lighter Capital’s portfolio?

By using objective, data-driven practices, Lighter Capital provides non-dilutive funding to tech startups with greater diversity in their ideas, perspectives, and their leaders — we ensure that strong, creative entrepreneurs have access to the resources they need, when they need them. Apply for up to $4 million and take your SaaS startup further.


Using revenue-based financing post-VC funding to source lower-cost capital

Revenue-based financing has benefits post-VC funding, too. Often, a company that receives support from venture investors has a plan to seek more funding at key milestones.

As the company grows and its valuation climbs, exchanging equity for additional fuel makes sense for both founders and existing investors. Sometimes, a company needs funds earlier than planned to stay on track and make the business more attractive before the next venture round.

Traditionally, a board facing that scenario has a few options:

  • Seek funding early at a hoped-for valuation

  • Venture debt (which usually comes with stock warrants)

  • Consider a down round

Adding revenue-based financing to the funding mix can be an alternative to dilutive capital options when venture-backed startups need extra runway.

At Lighter Capital, we’re finding that boards that recommend exploring debt increasingly point to RBF as a possibility. Revenue-based financing makes sense at this stage for the same reasons it does earlier in the funding lifecycle: this funding model doesn’t dilute equity. Plus, the time between initiating the funding process and receiving funding is weeks, not the months as it is with venture funding options. Then, as the company's revenues grow, so does access to additional non-dilutive capital to extend runway.

Lighter Capital Venture Capital Relationships

Let’s chat about how we can help startups grow together

We bi-directionally refer companies through our VC network to give startups the right funding options at different stages. Entrpreneurs get a direct line to the support they need most and we, as investors, never have to end a conversation with, "No."


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