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Modern Finance for Modern day Start-ups – Elets BFSI – Elets

Anurakt Jain, CEO and Co-founder, Klub

Start-ups, fundings, Equities, and other similar terms have become part of everyday conversations, thanks to Shark Tank. We saw 198 businesses pitching their ideas to “the sharks” in order to get funding. These 198 businesses were selected from 62,000 applicants from all over India. The sharks committed about ₹42 crores to 67 startups in return of some sizable equity all in about 10 weeks.

However, the actual process of securing funds is not that simple. It is a long winding process that includes a number of meetings, iterations, rejections / heartbreaks and investment of time and effort. Even after not being able to get the funds or desired amount is a real possibility. In modern times start-ups need funds frequently and quickly. Traditional ways of procuring funds cannot provide a stable solution for entrepreneurs which creates the need for founder-friendly funding alternatives.

Innovative start-ups are opening new segments and the funding business supporting them are also evolving swiftly. Revenue Based Financing (RBF) is such a model. It is based on the idea that all businesses do not go along with traditional ways of funding. There needs to be an arrangement where the owners do not have part with equity. RBF tries to bridge that gap by providing growth capital customised to a company’s revenues.

Why RBF?

Today’s market is a fast paced market where start-ups need fast access to funds, which traditional funding systems cannot provide. The process of raising funds through banks & financial institutions requires either a personal guarantee or fixed liability that is payable irrespective of business performance. Since repayments under the RBF model are directly linked to the revenues, the financier is more like a partner equally invested in the growth of the start-up.

RBF is a simple process which does not involve any pledge of collateral and hence is an ideal source of capital for smaller digital start-ups that do not have any physical assets. The RBF process is:

● Founder-friendly with no equity dilution

● Fast as companies get funded within days & sometimes hours

● Fair with RBF providers only look at the company’s financials removing biases associated with

who pitches or how they pitch

● Flexible as brands commit to repayments as a percentage of future revenue and not fixed

EMIs

● Frequent with companies unlocking repeat funding with growing revenue

What if Founders could trade a share of their revenues instead of equity?

The boom in D2C and SaaS sectors and RBF are almost made of each other. In fact, few of the 198 businesses that were featured on the show, have already raised finds via RBF

Also Read: Why early-stage startups and SMBs need Group Health Insurance

The boom in the D2C and SaaS sectors has created a huge opportunity for RBF providers. Out of the 198 businesses like Wakao Foods, TagZ Foods, Deciwood that pitched on the show, few of them have already raised RBF rounds with capital platforms.

Brands like JhaJi store opted for the RBF model when they could not secure funding from Shark Tank and later believed it was a better model for small businesses. Uma & Kalpana Jha, Co-Founders, JhaJi Store, aptly sum up the case for RBF, when they say, “We’ve worked hard to build a profitable business at JhaJi Store that can generate cash every month. The funding from RBF literally gives us the fuel to add to the fire that’s cooking ever more batches of pickles and chutneys. RBF helps first time entrepreneurs like us to fund our own growth without having to give up any equity.”

RBF acted like a lifeline to many of the start-ups during the pandemic and continues to be so. Going forward, the cookie cutter approach for funding will not work, innovative businesses will need tailored funding options. It would be great to see sharks offering RBF options as well to the participants.

Views expressed in this article are the personal opinion of Anurakt Jain, CEO and Co-founder, Klub.

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