Revenue-Based Financing: A new way of D2c funding

Direct-to-consumer (D2C) businesses have exploded in recent years, offering consumers a new way to purchase products and services directly from the source. With the rise of e-commerce platforms and social media, D2C companies have been able to reach a wider audience and grow at a faster pace than ever before. However, like any startup, D2C companies require D2c funding to get off the ground and scale their businesses. In the past, D2C startups often relied on venture capital (VC) firms to provide d2c venture capital, but a new option has emerged in recent years: revenue-based financing.

Revenue-based financing (RBF) is a form of alternative financing that allows startups to receive capital in exchange for a percentage of their future revenue. Unlike traditional debt financing, RBF doesn't require a fixed payment schedule or collateral, making it an attractive option for startups with limited assets. Instead, investors receive a percentage of the company's revenue until a predetermined repayment amount has been reached. This model aligns the incentives of investors and founders, as investors are motivated to help the company grow and increase revenue. Digital capital platforms like Klub are leading the market with 400+ brands in their portfolio, the majority of which are in the D2C segment across categories.

For D2C startups, RBF can be an attractive option for D2c funding in India. Firstly, D2C businesses often have a more predictable revenue stream than other startups, as they can track sales and customer engagement more easily. This makes it easier to estimate future revenue and determine a fair repayment amount for investors. Secondly, many D2C startups have relatively low overhead costs, as they can operate entirely online and don't require physical storefronts. This means that they can generate revenue quickly and efficiently, making them good candidates for RBF.

D2C startups in India have also started to explore RBF for start up funding. While VC funding has been the primary source of funding for startups in India, RBF is gaining popularity as an alternative financing option. This is partly due to the challenges that D2C startups face in raising funds from traditional sources. In India, there is still a lack of understanding and support for D2C startups, and many investors are hesitant to invest in companies without a proven track record. RBF allows D2C startups to access funding without giving up equity or control, making it a more attractive option for founders.

One company that has successfully used RBF for funding is Furlenco, a Bangalore-based furniture rental company. In 2017, Furlenco raised $6 million in an RBF round led by United States-based Lightbox Ventures. The company used the funding to expand its operations and increase its customer base. In a statement, Lightbox Ventures' partner, Sandeep Murthy, said, "We were looking for a financing structure that would provide Furlenco with the necessary capital to grow, without the pressure of an equity dilution. RBF was the perfect solution for Furlenco at this stage of its business."

While RBF can be an attractive option for D2C startups, it's not without its challenges. One of the main concerns for startups is the percentage of revenue that they will need to give up in exchange for funding. If a startup has a high revenue margin, the cost of RBF may be too high to justify. Additionally, startups that are in the early stages of development and have yet to generate significant revenue may struggle to find investors willing to offer RBF.

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Created on Mar 13th 2023 12:39. Viewed 107 times.

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