Wazzup with Startups ep-3

Updated: 4 days ago

REVENUE BASED FUNDING & its effect on startup ecosystem


Hi, guys, good morning. And I'm Dr. Bhatia from Saurabhbhatia.com. And today's short video is going to be about revenue based funding. RBF is a topic that has been requested by so many founders from me. So essentially, what is RBF? And how is it going to be utilized in the area of fundings? Let's talk about it.

And I'm going to keep it pretty short. So one important thing about RBF and which is revenue based funding is that it is for the companies, that are already making some revenue, or at least are on immediate path to it. So a lot of companies get funding on seed based idea pre seed, so all those companies are not eligible for revenue based funding, who will be eligible is if you have revenues, currently. Typically what happens is that an investor comes and takes some part of the equity from you. And in return of it, he invests money in your company.

Now, this, of course, has been labeled as a high risk investment. And as an investment, for a common investor in India, it's not very common. So we do not have as many investors in this kind of sector. Everybody has been thinking how to overcome this sort of shortage of investors because of the high risk involved in equity based funding. So revenue based funding comes with the help in the sense that you will have some revenue, and you will be able to project it to the investors and investors will come and invest.

And then after a few months, or after a certain specific period, they(investors) will start getting (part of) revenue, and you will have to share the revenue with them. And this kind of mitigates the risk of the investor who has invested. So this will also have a lot of other play around which we'll have to see how it works. Typically in equity based funding, you have a certain valuation of the company and based on that valuation, the equity is given to investors. Now, when you are already planning to share the revenue with the investor, over and above, whatever equity stake, they are able to get, we'll have to check out the valuations of the company. So they will be calculated on a different basis. Moreover, it is not very clear as yet that what will be the exact terms of equity versus how much revenue will they get. So this is, this can be also considered as a kind of debt plus equity kind of mix, where a person is thinking in terms that okay, I'm getting some of my money back, even if the company is not doing well in long term or I'm not getting an exit. So all my money is not getting lost, (the investor thought process), but all my money's not getting locked waiting for an exit. So think of it like very similar, if you're buying a property which you want to give out on rental. So you think okay, well, let's say I have bought a shop for 20 lakhs. And then I start thinking that, Okay, I'm going to get a rental of it, which is worth like three lakh rupees per year. And so that way, like in five to six years, at least for me, my initial capital that I had for them is back. So, it is very similar to this in concept. So an investor tends to be more forthcoming, if he thinks that he's going to get a share in the revenue and his money at risk keeps on reducing. So in equity based funding the investor is locked into the period, till he cannot arrange an exit for himself. And as we all know, all the companies don't succeed and all the investors are not able to get an exit. So, revenue based funding will bring in this kind of mindset where more and more investors will start coming into this market of startup funding, based on the fact that some risks have been mitigated and these risks being mitigated, they will be able to shell out some money. Now another thing is like for equity based funding, the government and the RBI stipulate that you should have at least two crores of networth, if you want to start investing in these startup companies. Now, we do not know or at least I do not know, as of now, the rule about the RBF funding, and will it be lowered, maybe equity based funding will be hiked.

And if that happens, then it's quite possible that a lot more people from the middle class who currently invest only in mutual funds, fixed deposits, property and gold, and there is no other option for them, they may actually also start coming in here. So it will depend on if there are any strictures being placed on them as we go along. But overall, I think this is good news for the startup community, because I think the number of investors will increase and possibly even the OTC exchanges will start with activity after that. So that is the basic overall idea of revenue based funding and how is it going to affect the investor mindset and startup community? Now, what I would like to encourage you is to ask questions about this from below, and I'll be happy to answer. So cheers. Good morning. It's a Happy Sunday for everyone. Have a nice weekend. Bye.

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(c) www.SaurabhBhatia.com 2021

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