Recurring Revenue Finance: the saving grace for start-up founders
Recurring revenue finance (RRF) is becoming the saving grace for founders of growing tech companies with recurring revenue models, like Software as a Service (SaaS). It’s providing speedy access to a much cheaper and non-dilutive source of capital, to currently under-served early-stage companies. The result? 10x less time wasted, reduced dilution and better capital efficiency for many more companies.
What is Recurring Revenue Finance and how does it work?
RRF allows growing businesses to exchange their future recurring revenues for cash today. As those future revenues come in, companies deliver them back to the RRF provider with a premium.
Traditionally, start-ups have used venture capital to build a new proposition and get it to market, raising more to add fuel to the fire once growing. Though, in exchange for capital, founders would sell a part of their business to these investors – typically ~20% in each of their first few rounds – thereby continuously reducing or ‘diluting’ their ownership of the company. After reaching a point of profitability and consistent growth, these companies often turn to debt to continue growing without selling more, or much more, of their business to equity investors.
However, many start-ups and scale-ups can’t access debt capital because of their growth-oriented strategy.
By choosing to reinvest their income into growth activities, they sacrifice profitability in the short term and are therefore seen as too risky for many debt providers. With that, they’re blocked from accessing a more affordable capital solution for many years.
With the introduction of RRF, which recognises the predictability of recurring revenue streams, non-dilutive capital is becoming available to growth-stage tech companies, like SaaS, much earlier.
What are the benefits of Recurring Revenue Finance?
Many VC and non VC-backed companies in advanced markets like the US and Europe are starting to fall in love with RRF for its many benefits. Primarily, because it’s quickly accessible, affordable, and non-dilutive.
Accessible – RRF lets the data do the pitching. By simply connecting with companies’ financial systems, founders are able to get offers with less than 30 minutes of their attention and within 48 hours of applying. And, instead of requiring extraordinary growth or profitability, it looks for consistent, healthy economics with moderate growth rates. As a result, founders can fundraise in portions on an as-needed basis, leading to a more accurate and efficient allocation of capital and maximisation of runway.
Affordable – Companies using RRF sell their future recurring revenues at a discount. This discount is priced based on the economics and risk profile of the start-up (applicant), and considers how long they elect to repay the funds. Typically, discounts on a 12-month repayment term might range around only 10-15%. What’s more, founders aren’t required to put down director guarantees or tangible security like their homes. This is all made possible because of the conviction RRF providers have in the predictability of their customers’ recurring revenues.
Non-dilutive – the best providers won’t take any equity, whether through warrants, options or otherwise. Traditionally, it’s often been the case that, by time they’re preparing for IPO, the founding team’s initial shareholding of 100% has withered down to only 15%. RRF changes that by empowering existing shareholders – including founders, employees and existing investors like VCs – with an alternative, allowing founders to maximise their ownership in the businesses they’re working so hard to build.
So, what are founders using Recurring Revenue Finance for?
Founders are using RRF to fund various growth initiatives, extend their runway and diversify their fundraising stack.
Users of RRF have built a machine that turns one dollar into more, so it’s a no brainer for them to ramp up the input. Increasing marketing spend, building out their salesforce, expanding into a new market, and even acquisitions, are activities founders are funding with RRF, taking their growth to the next level. With the resulting new customers and increased revenue, more RRF capital becomes accessible and the flywheel continues.
Another common use of RRF, particularly in an economic environment like today’s, is to extend runway. With next to no effort, founders access batches of RRF to pay salaries and other working capital expenses. As we know, raising equity capital takes a huge amount founders’ time and the cost is based on the company’s valuation. It’s no surprise then that founders are using RRF to give themselves back months of focus and masses of future value by accessing a source of capital that’s available within days, and deferring the need to raise equity capital until their company’s valuation improves, or eliminating the need altogether.
Founders are also starting to include RRF aspart of their equity rounds. In a Series A or B, where dilution is often ~20%, they’re starting to make up about a quarter of it with RRF. In doing so, rounds are closed faster, a reliance on additional investors is minimised, and dilution is reduced down to ~15%. And, at the same time, founders continue to tap into the value of equity investors’ advice and networks.
How to get Recurring Revenue Finance
Kashcade is bringing RRF to Australia, and it’s now serving founders of revenue-stage businesses with recurring revenue streams.
Applying is quick and easy. It takes only a brief video call, followed by getting your bank and accounting systems connected in under 10 minutes. From there, you’ll get a decision and offer back within 48 hours, which allows you to access capital from the next business day. It’s that easy.
If you’re a founder and interested in exploring Kashcade’s RRF solution, check out our website or contact the Kashcade team to find out more.
Disclosure
This article is for informational purposes only, is general in nature and does not consider your specific situation. It is not, and should not be relied upon for, financial, tax, legal or investment advice.