RBF: A Growing Way for HPC Firms to Raise Cash

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In this special feature, Thomas Thurston of Growth Science International looks at an innovative way for HPC vendors to access the capital they need to grow.

Raising money can be tough for HPC firms, especially lately. Capital scarcity not only impacts startups and mid-sized companies, but also the larger firms that depend on them as vendors, customers or ecosystem partners. Accessing capital can be extra challenging for HPC firms with peak revenue a few times a year, followed by long lulls in between (such as around government procurement cycles or large installations).

With this in mind HPC managers and CEOs should be aware of revenue-based finance as an option for short- or long-term capital needs.

What is revenue-based finance and why should HPC firms care?

Revenue-based finance (RBF) is a relatively new way for business to raise money that’s been gaining momentum over the past few years. Basically, a business gets a lump sum of cash. In exchange, the investor gets a percentage of the business’s gross revenue for a length of time, or until a maximum “cap” has been repaid. The HPC firm gets money and gives up a percentage of its revenue, up to a limit.

How much money can an HPC business raise this way and what do they give up?

There’s no inherent limit on how much money a business can raise this way – whatever it can talk an investor into. Yet most of the time businesses only raise up to 15-20% of their revenue. In other words, an HPC business with $5 million in sales could raise anywhere from $100K — $1M. Again that’s not a hard and fast rule; I’ve seen companies with zero revenue raise several million in RBF. Just keep in mind that’s been the exception rather than the rule, at least so far.

In exchange for this cash businesses typically give investors 1% — 6% of their monthly gross revenue for a period of time, or until the maximum repayment cap is reached. Caps typically range from 2X – 5X. For example, a business with $1 million in revenue could get $150K in exchange for giving 5% of its monthly revenue to an RBF investor until $450K is repaid over time (assuming a 3X cap).

Those caps seem high, isn’t that expensive money?

It depends. Right now there are a wide variety of deal terms being used for RBF agreements. If an RBF contract fixes both the (1) duration and (2) magnitude of repayment (how much must be repaid, and by when) in addition to requiring personal liability and collateral, it can definitely be expensive money. Structured that way it’s almost identical to standard mezzanine debt or a bank loan.

However if an RBF contract doesn’t fix either the repayment (1) duration,(2) magnitude, or both, it becomes much more attractive and can’t be compared with traditional debt. It starts to behave more like equity from a risk/reward perspective. This is especially the case if an RBF investor doesn’t require any personal liability or collateral – and most don’t.

With those kinds of terms, RBF can be a fantastic option for the right HPC firms; some of the best elements of debt and equity without all the downsides or risk. For example, imagine a deal where an HPC business gets $150K in exchange for 5% of gross sales until $450K is repaid. If the duration isn’t fixed, the HPC business can take as much (or as little) time to repay the $450K as its organic revenue growth permits. It could take one year, it could take ten. Moreover, no money is repaid in months where the business has zero revenue since payments are a flat percentage of sales.

Also, if the magnitude of repayment isn’t fixed there isn’t a “guaranteed” return. So if the business goes bust the entrepreneur doesn’t have to repay anything. Conversely, if the business is a huge success its repayment is limited to the cap. Both the HPC firm and the investor share the risks of failure, while both also stand to gain more upside if things go well.

In summary, RBF encompasses a wide range of potential deal structures. Some terms make it more like debt, in which case things like APR, personal liability and collateral come into play. Other terms make it more like equity, in which case things like APR, personal liability and collateral don’t matter — they aren’t part of the deal.
What are the downsides to RBF?

In addition to what we’ve already covered, RBF is only useful if your business has big enough gross margins to survive after paying 1% — 6% of revenue to an investor. For example, a 15% gross margin hardware business would probably go out of business if it had to pay 5% of sales to an investor. They’d starve their cash flow.

That’s why RBF has been particularly interesting for software and service businesses. They tend to have larger margins, or at least more flexible margins that allow them to pass the 1% – 6% royalty on to their customers. Royalties could even potentially be included in RFP bids and thus “pay for themselves” in a manner of speaking, all the while providing an HPC firm with additional capital for growth, cash flow management, downturns or whatever the need may be.

Another downside is that it can be hard to raise more than one round of RBF at a time, since two or three royalties stacked on top of each other is usually too much for a business to handle. This has to be taken into account when exploring RBF funding.

How did I first hear about RBF and what’s my involvement?

I’ve been researching RBF for a number of years now and first learned about it from Professor Clayton Christensen when I was working with him at Harvard. He’d asked me to look into it as a side note for an article we were contemplating. This led me to Arthur Fox, the modern pioneer of RBF who had deals in this way for almost 20 years in nearby Lexington, Massachusetts.

Since then I’ve advised a number of funds and businesses regarding RBF such as Revenue Loan in Seattle, which is backed by Voyager Capital, Summit Capital and Founders Co-Op. I’m also on the Board of the Revenue Capital Association, the trade association for RBF investing. My personal goal is to encourage the right kinds of RBF to create the most benefit for both investors and entrepreneurs. Done correctly, this could be game changing for business worldwide by providing an innovative way to raise cash.

How many investors are doing these kinds of deals?

In 2000 there were only a tiny handful of RBF funds, mostly in New England. RBF was also being used by larger boutique funds, but exclusively in healthcare and biotech. Today there are nearly 20 dedicated RBF funds nationwide and over 22X more dollars being invested this way in healthcare alone (around $3.3 billion in healthcare RBF investments in 2007 – 2008). Traditional venture capitalists have also started doing occasional RBF deals without creating separate, dedicated funds. For example, Intel Capital has been openly considering strategic RBF investments and may have some on the books by next year.

There are also a booming number of RBF deals being done by angel investors, friends, family and business themselves. They’ve been much faster to adopt RBF for a variety of reasons. For example, one business used RBF to buy out a partner who wanted to leave the company. Another entrepreneur used RBF instead of equity to raise money from grandparents on a fixed income who wanted payback to begin immediately. A third business with around $7M in revenue had six locations and used an RBF investment to open a seventh. The mix has been diverse, creative and encouraging.

What are 5 quick benefits of RBF?

  • RBF allows business to immediately leverage future revenue streams
  • Most RBF agreements don’t require personal liability on the part of the entrepreneur.
  • Where it makes sense, RBF allows businesses to raise capital without taking onerous bank covenants (debt) and without giving up precious ownership of their businesses (equity).
  • Flexible payments (go up and down month-to-month as a percentage of sales)
  • RBF aligns the entrepreneur and investor around growing sales (rather than creating conflicts of interest around personal liability or a quick exit).

Where can HPC businesses learn more about RBF?

While there isn’t much out there yet in the way of deep research and tools, rest assured there will be plenty more in the future. Meanwhile my website (www.growthsci.com) frequently blogs about RBF, I’m a guest blogger at RBF Central (www.revenuebasedfinance.com), and I recently published an academic article touching on RBF through MIT (http://miter.mit.edu/article/revenue-capital-disruptive-models-venture-funding-tools-developing-nations).

Also keep an eye out for the Revenue Capital Association and its upcoming website next year. So far it’s been a relatively discrete organization but in the future there will be a ton of helpful tools, research, resources and educational material for the HPC community to sink its teeth into.

About the Author: Thomas Thurston is President and Managing Director of Growth Science International.


  1. This looks very interesting but I wonder how many funds would be interested in small systems integrators or systems consultants? These types of companies never interest venture capitalists because they’ll never be blockbusters, but the can still grow to multi-million dollar businesses. This could be good for them.