Asian Financial Crisis of 1997
The Asian financial crisis was another major currency crisis that happened during the 1990’s. The crisis assumed epic proportions. This is because it started in only one country i.e. Thailand whose currency faced an attack from speculators. However, in a very short span of time the crisis had gripped the entire South East Asian region. […]
Fraud Prevention Using Positive Pay
As we have already seen in previous articles, corporations all over the world have started automating their payments. Unfortunately, a high degree of automation has also given rise to a high degree of financial fraud. This has created an opportunity for a commercial bank to provide a service to their corporate customers. This is where […]
How Money Market Impacts Other Markets?
In the previous articles, we have learned that the money market is a very important market in our financial system. However, it is also important to note that the money market can have an impact on almost all other financial markets. Central banks all over the world try to control the monetary policy of their […]
Who Uses Accounting Data ?
Financial reporting is used by a wide variety of users for a wide variety of purposes. For this reason it has been difficult to set a common framework of accounting. The many stakeholders often have contrasting needs from accounting information. Let’s look at the stakeholders and their need for accounting data: Capital Markets: Accounting information […]
The Panaya Acquisition
If mere numbers are considered, Panaya is a small blip on the radar of the global Information technology behemoth Infosys. The deal is valued at only $316 million dollars which is not even 1% of the valuation of Infosys. However, this Panaya acquisition has shaken the company to its core. It has created a rift […]
The manner in which startup companies obtain their financing can have a very large impact on the future of their business. In the previous articles, we have already discussed how bootstrapping as well as investments by professional investors work. Both of these approaches have their own advantages and disadvantages. Up until recently, it was assumed that these are the only two alternatives for a startup firm to raise money. However, with the passage of time, we have realized that this is not necessarily the case.
It is possible for startup firms to obtain financing using a third method which is called revenue-based financing. In this article, we will have a closer look at what revenue-based financing is as well as how it affects investors as well as the founders.
Revenue-based financing is a method in which an entrepreneur can approach professional investors in order to raise funds but they can do so without giving up a portion of their equity. In traditional investments, investors obtain an equity stake when they invest in a company.
In revenue-based financing, investors are not provided with equity stakes. Instead, investors are entitled to receive a part of the revenue of the firm for a specified period of time. Hence, an investor can invest $10 million in a firm in return for 5% of the revenues of the firm. Additionally, the startup company may have to return a multiple of the original investment at the end of the period. For example, the company may have to pay 1.25× of the original investment in order to compensate the investor for undertaking the risk.
The concept of revenue-based financing is quite recent. However, it has been growing at a very rapid pace. This is because of certain advantages which are associated with revenue-based financing.
Professional investors have come up with different versions of revenue-based financing. Shared earnings agreement and point of sale capital are some versions that have become quite popular. There has been a considerable rise in the number of companies and investors using revenue-based financing and this is expected to continue in the near future.
Even though revenue-based financing has been growing by leaps and bounds because of the above-mentioned, there are several disadvantages of this model. Some of these have been discussed below:
The bottom line is that revenue-based financing is a relatively recent mechanism that is being used in order to raise funds. However, the effects of this arrangement are not fully known and hence its advantages and disadvantages cannot be fully known for sure.
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