Investors and Capital-Hungry Companies Adapt to Covid-19 Crisis

Revenue-based funding proving more flexible over other forms of capital raising.

As experts postulate on the future of supply chains, the healthcare system, the retail landscape, and the workplace in a post-COVID world, the industry that funds these economic engines is already adapting. Investing is being transformed in both predictable and surprising ways by the new economic reality abruptly created by Covid-19.

Some companies face urgent investment needs as revenue dries up during the Covid-19 shutdown. Other businesses are overwhelmed with the demand for products and services undergoing sharp spikes in usage during the crisis and seek partners to help them meet that demand.

Meanwhile, venture capital and other popular sources of funding are either drying up or being severely strained, forcing some companies to seek out new, innovative capital sources that they feel are more adapted to this difficult and uncertain economic climate.

“Fasten your seatbelts, it’s going to be a bumpy ride,” said the National Venture Capital Association in a report that warned “investment in the startup ecosystem is expected to drop significantly. A significant amount of the capital deployed in 2019 came from nontraditional startup investors … who are likely to rebalance investment away from these high-risk and illiquid companies.”

In this historic economic moment, some companies have found revenue-based financing to deliver the flexibility, access to capital, and founder-friendly funding model made for these turbulent times. While revenue-based financing does not have the profile of venture capital or angel investing, it may be an investing model uniquely suited to these volatile economic times. Instead of surrendering ownership in their company or agreeing to inflexible term sheets or onerous repayment terms, revenue-based financing recipients agree to repay investments in small increments based on future revenue.

“Because revenue-based funding models are non-dilutive, companies do not need to worry about short-term valuation reductions like they would when raising equity,” said John Borchers, managing partner of leading revenue-based financing firm Decathlon Capital Partners. “Revenue-based funding approaches are also built around supporting reasonable growth rates and healthy operating cultures as opposed to some equity investment models that demand hyper-growth and a large burn rate in pursuit of a ‘growth at all costs’ mentality that is misaligned with the current economic landscape.”

Borchers says the demand for revenue-based financing deals has been strong in the midst of the economic chaos. And other firms employing revenue-based funding models agree.

“We are seeing more companies looking for revenue-based financing investment, which may be because we hear that many equity investors and angel investors have slowed their investment decisions or fully stopped making investments in the near term. We haven’t slowed our investment pace, and we don’t anticipate that we will,” said Novel Growth Partners Managing Partner Keith Harrington.

Decathlon Capital Partners has closed or is currently closing funding deals with six new companies and has term sheets out to four other companies that may accept Decathlon funding within weeks. All of this funding activity occurred during the Coronavirus crisis.

At least two of Decathlon’s recently funded companies — Circle Medical and The Closing Exchange — have business models well suited to meet the new demands Covid-19 has placed on the economy.

Circle Medical is a leading provider of primary care through telemedicine. The company was already seeing rapid growth before the Coronavirus and expects the crisis to accelerate that growth.

The Closing Exchange is a digital signing service platform used in a wide variety of financial and contract transactions, including mortgage, title, loan, and vacation rental agreements.

Both Circle Medical and The Closing Exchange are examples of companies that were already positioned to meet the rapid digital transformations of the economy but now find that transformation accelerating exponentially during the Coronavirus crisis. Digital contracts, telemedicine, and other remote or digital solutions have, overnight, become the only way to conduct business.

Borchers said that shelf-stable food and beverage, in-home gaming, and entertainment, Software-as-a-Service companies focused on supporting remote work environments and e-commerce businesses are all performing well.

But even for the companies that are being hit hard by this economic crisis, the benefits of revenue-based financing are even clearer now. Revenue-based funding deals are structured in a way where companies never have a fixed payment due without the liquidity to cover that obligation.

“In this sense, the volatility in today’s market showcases the exact flexibility that makes revenue-based financing such a powerful solution for companies,” said Borchers.

Revenue-based financing’s advantages are even starker when contrasted with the current state of venture-funded or loan-levered companies.

“In the current environment many banks are leaning on technical default issues to call loans and companies are suffering from their fixed payment requirements and bankers who are rushing to try to manage their risk down,” said Borchers. “Meanwhile, many venture-backed companies are still running very material monthly burn rates in pursuit of unrealistic topline growth. In the current environment, companies at both ends of this spectrum are having to deal with cash flow and liquidity issues at the same time that they are having to work through all the other operational issues associated with the COVID-19-induced downturn.”

As the nation’s largest revenue-based financing investor, Decathlon Capital expects the current economic turbulence to bring more attention to revenue-based financing’s intrinsic benefits for medium-sized growth companies. The flexibility to repay investments based on the future financial performance of the company allows companies to take on funding deals that don’t hamstring future growth or set looming repayment deadlines that force unsustainable growth.

“Because Revenue-Based Funding models are non-dilutive, companies do not need to worry about short-term valuation reductions like they would when raising equity,” said Borchers, “Revenue-Based Funding approaches are also built around supporting reasonable growth rates and healthy operating cultures as opposed to some equity investment models that demand hyper-growth and a large burn rate in pursuit of a ‘growth at all costs’ mentality that is misaligned with the current economic landscape.”

“In the post-COVID-19 market environment we think that RBF will become a much larger part of the growth-funding landscape for the simple reason that is a better tool for funding growth-oriented companies,” said Borchers.

Melissa Withers, the founding partner of RevUp Capital, another active revenue-based financing lender, said the Covid-19 crisis has changed the investing landscape.

“I think this event signals the end of ‘equity-only’ thinking,” said Withers.

Whereas many venture capital firms swing for the fences with high-growth companies, revenue-based financing applies to much broader swathes of the American economy.

“We’re not dependent on exits to win. So everything doesn’t have to be a home run. It just has to be good,” said Withers.

The Coronavirus pandemic has completely altered the economy as we know it. Some of those changes may be short-lived, and others are likely to be long-lasting shifts in how we work, manufacture, seek healthcare, travel, and recreate. Those shifts in the economy are already kicking off widespread changes in the investing landscape as investors and capital-seeking companies find new ways to tailor investments for the Covid-19 crisis and the post-COVID-19 world.

“If history is a guide, the upcoming window will be challenging for growth companies who are seeking capital but it is also likely to forge the next generation of great companies who will thrive in a post-COVID-19 world,” said Borchers.