Why startups may want to forgo traditional VC and opt for revenue-based financing
Hitting the traditional venture capital trail isn’t for everyone. For many startups, revenue-based financing (RBF) may be a more preferable way to go.
To learn more about this alternative form of funding, I spoke with Jae Choi, the CEO of New York-based EduCloud Inc.
Choi, 49, says that with traditional VC, he gave away more shares of his previous company than he should have. That’s the drawback, he told me.
The RBF route — via Decathlon Capital — proved to be the better alternative for EduCloud. Here’s why:
What is revenue-based financing?
Revenue-based financing allows a company to repay a growth-funding package from a fixed percentage of future revenues so a company’s payments are flexible and tied to their future growth. At a macro level, equity financing is vastly different from revenue-based financing.
Yes, one of the main attractions to equity financing is that you’re not necessarily required to pay that money back in a certain matter of time. That money is being invested into selling your shares of the company. That certainly had its appeal. The drawback of equity financing is that you’re giving away a part of the company and you have to be really careful about that.
If you agree to a valuation that is lower than what you want or where you think the company is, then you end up basically giving the company away. Not all revenue-based financing companies are equal. You have to make sure you know who you’re partnering with.
Why Decathlon Capital?
Decathlon Capital came out and we sat down and talked for hours. They tried to understand our business model and that went a long way in terms of building that relationship. Obviously in order to make any vision happen you need capital. One of the main reasons we sought capital from Decathlon Capital was to acquire a business that was owned by someone else.
What was the capital used for?
The funding we received was used to make that purchase, but also to grow the business in general. That’s the reason why we have two websites rather than one (Mathcloud.net and HomeSchoolBuyersCo-op.org). Homeschool buyers co-op was the business we acquired a little more than a year ago.
There is no loss of governance, which is important to the extent that I don’t want to give away my vision. As a founder and a manager, you want to see your vision through. Once you start letting others tell you what to do, you may lose the way or find there’s too much bureaucracy that could impair your vision.
Has it been tempting to pursue other avenues of finance?
I already had one exit from my previous venture, where I relied heavily on equity funding from the get go. When I exited, it was with a healthy return, but I wish I had been more conservative in handing out the shares of the company because I felt like I gave away more than I should have.
I did not want to make the same mistake, so I wanted to maintain my equity, as much and as long as I could. That was one of my principles I wanted to hold onto. As of now, I still haven’t given away any of my equity. That’s obviously in part to the funding we got from Decathlon Capital.
At some point, I do foresee the possibility of raising equity capital, but only if the valuation makes sense. That’s one of the reasons I went with Decathlon Capital, they are willing to grow with us if we do go the venture route.
Why should entrepreneurs give RBF a chance?
I’ve seen way too many entrepreneurs and founders who give away control of their board, get fired, or end up not being able to implement their vision. That’s when everybody loses. Certainly, that’s one of the pitfalls of any entrepreneur. With Decathlon Capital and revenue-based financing, we didn’t have to worry about that.
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