What is revenue-based financing?
Revenue-based financing is a way for companies to secure growth capital similar to an equity investment but without any dilution or loss of control. A company agrees to pay a small portion of future monthly revenues to an investor instead of selling an ownership stake in return for cash. In fact, revenue-based financing is typically used to replace, or even complement, an equity investment because it offers the patience, flexibility, and agility of equity but does not require a valuation exercise, governance involvement, dilution, or a future liquidity event. High-tech enterprises and other businesses we work with see great benefits from revenue-based financing that supports their growth while allowing them to maintain control of the business and keep the value they create.
How does revenue-based financing work?
Revenue-based financing is typically structured with a multi-year repayment term in which the company pays a fixed percentage (usually 1% to 3%) of the revenues generated each month to their investor. To retire a revenue-based financing investment, a company typically makes these monthly payments until a pre-defined return multiple, internal rate of return, or date is reached, at which point the repayment obligation terminates. Unlike some other approaches to growth financing, revenue-based financing solutions typically don’t have any other fees, warrants, or hidden costs involved. Because payments are tied directly to revenues, the investment is very transparent; companies get a clear and accurate picture of their total cost of capital up front.
What size companies does Decathlon work with?
Decathlon works with companies with revenues of between $4 million and $100 million.
What sectors and geographies
does Decathlon focus on?
Decathlon engages with companies across a very wide range of industries and in all North American geographies. Because of our broad investment experience, our focus is not sector-specific.
Do you require warrants or any type of equity participation?
No. Decathlon does not require any warrants or equity participation in a company. There are no valuation events, no convertibility features, and no equity dilution involved in Decathlon’s revenue-based funding solutions.
Do you require a board seat or any operational involvement?
No. Decathlon does not require any governance role, and we are not involved in the operations of the companies in which we invest. However, our team has decades of experience working with high-growth companies, so we are always willing to offer our insight or
How is revenue-based financing different than factoring or purchase order financing?
Revenue-based financing is different from factoring and purchase order financing in several important ways:
- Revenue-based financing is not tied to current contracted orders or invoices, so a company can secure growth capital based on its future potential rather than the limitations of its current receivables.
- A revenue-based agreement usually has a multi-year term, rather than a multi-month term, so a company can make long-term investments in the growth and development of its business without the constraints of shorter-term repayment windows.
- Unlike factoring or purchase order financing providers, revenue-based investors don’t typically get directly involved with a company’s management. You will not need to notify your customers, ask them to remit payments to a third-party, or do anything to alter your normal course of business with them when you work with Decathlon.
Why would a company want to consider revenue-based financing structure instead of an equity investment like venture capital?
Companies who use revenue-based financing, instead of equity, to finance their growth, can benefit from several valuable advantages:
- There is no dilution – shareholders, LLC members, or other stakeholders maintain their
ownershipposition in the company.
- There is no loss of control in the form of required board seats or preferred share voting rights.
- Because revenue-based financing isn’t tied to a future liquidity event to monetize an investment, a company’s management team can operate on time horizons optimized for the company, not third-party equity investors.
The revenue-based financing structure allows a company to access growth capital that has the patience and flexibility of equity, but without the downsides of a traditional equity investment approach.
Why would a company want to consider revenue-based financing instead of traditional debt?
Traditional debt or loan structures can play an important role in supporting a company’s working capital needs, but they are often misaligned with the longer-term time horizons required to grow a business over many years. In addition to requiring personal guarantees, traditional debt generally involves fixed payment requirements and rigid financial covenants that are often incompatible with the contours of most growth-focused companies’ trajectories. In contrast, revenue-based financing solutions offer greater flexibility, more patience and a repayment framework tied to revenues. Moreover, you’re generally not required to maintain strict financial ratios, adhere to pre-set financial parameters, or pay facility fees on undrawn capital. As a business, you have significantly more agility.
What kind of due diligence information does Decathlon require?
We require a fairly standard set of materials, including historical and pro forma financials, information about the company’s history and future growth plans, data on the company’s target market, product descriptions, and insight into a company’s management team.
What is the term of a typical transaction?
Decathlon’s growth funding packages are customized to meet each individual company’s needs, but a large majority of our portfolio companies have initial investment terms in the two- to five-year range.
Does Decathlon require personal guarantees from management or owners?
No. Decathlon does not require personal guarantees or stock pledge requirements, meaning business owners can maintain a distinction between their commercial interests in the company and their personal interests elsewhere.
Does Decathlon require assets to collateralize a transaction?
Each company’s situation and asset profile is different, so the manner in which we secure our capital is customized to every investment we make.
How long does it take to close a typical investment?
We understand that a company’s fundraising effort involves significant time and opportunity cost, so we try to make the process as efficient as possible. Once a decision is made to move forward with an investment, we typically close and fund within three to four weeks.
If you are looking for capital to accelerate your growth, we would love to talk.
DECATHLON INVESTMENT CRITERIA
Operating history of at least two years
Annual revenues between $4 million and $100 million
Annual growth rate of 10% or more
Attractive gross margins
Experienced management team
North America-based operations
Near-term visibility to cashflow-positive status