Grow Faster by Thinking Smaller: New Funding Tools for Founders

In the fast-paced startup ecosystem, startups historically leaned towards venture capital or venture debt to fuel their growth ambitions. This capital is the fuel that brings their ideas to the world. In Q3 2023, global venture funding reached $73 billion, showing a slight increase QoQ, yet a 15% decrease from the $86 billion invested in Q3 2022​. The need for growth capital has always existed and always will, no matter the market conditions.

Traditionally founders looking for the capital to fuel their business have been told to raise the money they need for at least the next 18-24 months. This is because it’s the most efficient way for founders to plan their financial needs, right? Well, not exactly.

This is because raising funds takes 3-6 months (if successful), and on average a founder will spend 25-40 hours a week during that time raising. They have to plan ahead so that in between raises they can actually direct attention to their business!

New tools have evolved recently that allow founders to forego these and other drawbacks and meet their capital needs in a different way. Before detailing those it makes sense to first explore other the current frictions of traditional funding routes for startups.

The Inherent Problems with Traditional Funding

Traditionally, startup funding avenues like venture capital and venture debt have been the go-to solutions to secure the much-needed capital for growth.

However, these long-term funding strategies come with challenges that could derail a startup's journey towards success.

1. Unpredictability of Startup Growth

The journey of a startup is filled with uncertainties – such as economic shifts, the emergence of new competitors, and changing customer behavior which can significantly derail your growth plans.

The risk further increases when you attempt to sketch a financial roadmap for the next 18-24 months in such a turbulent market, especially in 2023 and going into 2024.

In response to this uncertainty, many founders plan for multiple scenarios - including a strong and a weak growth scenario. Still, this can lead conservative founders to cap their growth to the top end of what they budgeted - and risk-inclined founders to find themselves in a cash crunch.

2. The High Cost of Miscalculation

Another factor to consider is that the margin for error in estimating your funding needs is very slim.

If a miscalculation results in raising too little funding, it can land your startup in financial hot water, stalling growth or, in the worst-case scenario, leading to an outright failure.

If you raise too much, it can lead to unexpected costs in the future and poor exit potential.

This is easiest to demonstrate with venture debt. As of 2023, venture debt annual interest rate hovers around the low to mid teens. If Startup Y takes $5 million in debt with a six year repayment period, they begin to accrue interest from day one.

If they don't use the funds immediately — because a planned product launch gets delayed or a key hire falls through, they continue to bear the interest cost with no upside. Two years later they might still have $3 million in cash lying unused, accruing high interest. This debt also comes with many other costs and considerations.

3. Costs of Fundraising: Time and Control

An average venture capital funding round — Seed, Series A, or even Series B takes anywhere from 3 to 6 months from the start of discussions to the money being wired. This is if fundraising is successful.

Founders, especially those new to the process, often underestimate the sheer effort required.

• On average, a startup founder will spend 25-40 hours a week on the fundraising process, with about 8-10 hours dedicated solely to investor meetings.
• Opportunity cost: Every hour a founder spends courting investors is not spent on product development, strategy, or customer acquisition.

Venture capital doesn't come cheap. In terms of equity, seed-stage startups, on average, give up anywhere from 10% to 25% of their company. By Series A, this can range from 15% to 30%. You may give up more equity than you need to.

On top of that, many venture debt agreements come with warrants, which give the lender the right to purchase shares at a predetermined price.

New Tools

So does that mean Venture Capital and Debt are bad for founders and startups? No, not at all. While these instruments have some drawbacks they are still great answers to funding companies, and most founders will continue to employ one or both of these tools to support their growth. However, by also incorporating new tools founders can minimize the costs and drawbacks.

Introducing Revenue-Based Financing (RBF)

Revenue-based financing is a relatively new concept, with annual funding projected to reach $42 B by 2027. It’s a unique alternative, bridging the gap between venture capital and traditional debt, offering startups the capital they need.

How does it work?

RBF providers invest capital into a business on the basis of the company’s recurring annual revenue. Rather than an interest rate or an equity stake, RBF providers generally provide a transparent fixed cost for the funding.

How Revenue-Based Financing (RBF) Flips the Startup Funding Paradigm

Revenue-Based Financing gives startups more options. Startups can avoid locking themselves into 18-24 months budgeting plans, and instead get quick capital in short intervals. Here is what founders using RBF can do.

1. Plan in shorter time frames

For qualifying companies RBF can be secured in a matter of days, with 30-60 minutes invested. You have a need for cash, you get that amount, and only pay fees on what you actually will utilize. Why pay for money to sit in your account?

2. Time your funding to your growth opportunities

When a new and unexpected opportunity presents itself you can get the capital in time to take advantage of it.

3. Time your venture raising better (Avoid a down round)

Some founders use RBF instead of venture funding. Other founders will pair RBF with venture capital or venture debt, in a way that gives them the best outcome. For example, a founder might want to delay their venture fundraise until they have met an important growth milestone, or to wait for an improvement in the macro climate.

For these startups, RBF can provide the bridge capital to make it to the optimal conditions for an institutional round.

4. Keep ownership and control of your business

RBF allows founders to preserve long-term value for founders and early-stage investors. RBF is 100% non-dilutive and has a transparent fixed fee. This helps founders avoid expensive long-term debt with no clear plan to use it today - and helps them avoid relinquishing an ownership stake in their company.

5. Keep your focus on running a company

Startup founders are the executive team, sales, marketing and everything else. This demands a huge investment of time and attention. Adding capital raises to the list of responsibilities that distract from the real work. RBF is much faster, with some companies securing funding in as little as a week.

6. It’s cheaper

A VC or debt financier is attempting to predict where your company will be in 5-10 years. It’s high risk, many of their bets will fail, and therefore those that win carry a high price. RBF providers predict over a small time horizon with very little risk. Since RBF providers don’t have to factor that risk into the equation, the cost of capital is much less. Smaller fees on smaller amounts means the cost of growth capital has never been more affordable.

Are Founders Switching to RBF?

The Revenue-Based Financing market is growing 60% every year. Founders across the US, Europe, and more recently Asia and Latin America have begun to use RBF. Many founders are using RBF to rethink and reshape their approach to funding. Here at Efficient Capital Labs, we’ve seen a few things driving this shift.

• The Digital Age: The digital revolution has shortened business life cycles. Startups now operate in a world where agility is not just an advantage but a necessity. This demands a more flexible approach to financing. Startups are also demanding financing that can work as fast as they can. For example, Efficient Capital Labs funding takes 3 days from application.
• Democratizing Access: RBF levels the playing field. Small startups with moderate growth often don’t have the same appeal to big VC firms to secure the capital they need to grow. With more and more startups being founded each year, the need for RBF grows.
• Founder-Friendly Financing: Modern founders are savvy. Options for financing are growing beyond traditional routes. Founders are looking for financing options that offer them the best terms without compromising their vision. RBF, with its non-dilutive nature, is naturally attractive to founders who are looking to retain ownership. RBF is a great fit for bootstrapped and early-stage founders too.

Spotlight on Our RBF Solution

In a world with many funding choices, Efficient Capital Labs can be a helpful option for companies, offering a fresh and simple way to get the financing you need.

We offer Revenue-Based Financing (RBF) up to $1.5 million - and can fund a company up to 65% of its annual recurring revenue (ARR). We focus on SaaS businesses and charge a fixed transparent fee. RBF is a fair and easy way to get the funds you need while keeping control of your business.

• A 15-30 Minute Application: With us, applying is a breeze. Just a few minutes, and you're on your way to getting financing without the long waits. You can apply online and use our easy integrations with platforms like Plaid and QuickBooks to create your application easily.
• Quick Decision: Our simple process means you'll go from applying to having funds in just three days. This means no missed chances and the ability to act fast for new companies.
• Funding Support: We lend out of our own $100 million debt facility. We offer up to $1.5 million in funding per financing disbursement to help you grow. Having our own debt facility means we have better flexibility in pricing, availability of funds and timing.

The startup world is changing - and so should your financing. See how you can leverage RBF to meet your goals at contact@ecaplabs.com.