January 16, 2021
Innovation Technology

Four Fundraising Myths For Tech Companies And How Revenue-Based Funding Can Work

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Co-founder & COO at Braavo Capital, the worldwide leader in revenue-based funding for mobile apps and games. More at getbraavo.com.

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In an industry that glamorizes unicorns, billion-dollar valuations and growth at any cost, is there room for profitable tech companies with strong unit economics? While classic VC traditionally looks for businesses with the potential for a massive payoff, other investors and alternative financing platforms are seeing opportunities for a different segment in tech. This article breaks down four assumptions about how fundraising in tech works and offers a more holistic picture of the current reality.

Myth 1: It’s all about who you know and where you’re from.

Reality: Your business performance matters just as much.

While location, personality and connections will always be significant in any industry, they can shroud something even more important: performance.

Historically, performance KPIs were difficult to analyze and measure, let alone predict. Today, entire industries are being built on accessible distribution platforms like the app stores and standardized analytics that funding partners can access to analyze business performance data in real-time.

Many investors worldwide are noticing — and they’re investing their capital with a keen understanding of unit economics and a company’s potential for future earnings.

Myth 2: You can only raise funding if you’re building the next unicorn.

Reality: Fintechs and investors are looking for innovative and profitable businesses outside of the classic VC-startup circuit.

VCs are hunting for unicorns. If they don’t believe you’re attacking a multibillion-dollar market opportunity or have the wherewithal to capitalize on it, they’re not interested. At any given time, however, there are only about 500 unicorns out there. That means many innovative and profitable businesses are being overlooked — or are unqualified — for VC funding.

The good news is that family offices, private investors, revenue-based financing platforms and other fintechs have stepped in to meet the needs of this overlooked (yet massive) segment. For these investors, a tech company with a monthly revenue of $50,000 that can confidently be increased to $1 million with enough funding is a very interesting opportunity to invest. These investors aren’t necessarily looking to build unicorns but to generate appropriate risk-weighted returns.

Myth 3: Raising funding means selling equity — and losing control over your business.

Reality: Alternate financing platforms can allow founders to receive funding while retaining optionality.

Traditional small businesses (non-tech) might borrow money from a bank to get started — to buy equipment or inventory, for example. However, this type of financing simply isn’t available for tech companies with limited assets, young founders or growth trajectories that rapidly outpace a bank’s capacity for lending. As a result, raising equity (e.g., selling a portion of your business in exchange for capital) was the only option.

Today, tech companies built on standardized platforms like the app stores or e-commerce marketplaces can generate revenue quickly and typically drive growth through paid digital marketing. Real performance data and revenue can replace traditional collateral, allowing investors and fintechs to quickly and accurately understand risk and forecast future earnings.

Myth 4: Fundraising is expensive and time-consuming.

Reality: With more favorable terms for founders, revenue-based funding can help tech companies raise funds faster and more efficiently.

An entrepreneur’s most valuable resource is time. Traditional VC rounds can take hundreds of meetings and months of due diligence, which can take the focus away from company-building. Revenue-based funding platforms can provide automated data analysis, which can shorten the fundraising process down to a few days. And instead of giving away a percentage of the company, the cost is typically a fixed percentage of the financing amount (i.e., cents on the dollar) with no transaction costs and little to no due diligence.

How founders can get started with alternative, revenue-based funding.

Alternative financing could be a great solution for companies where speed and flexibility are critical for achieving meaningful growth profitably and sustainably. If you’re considering revenue-based funding, we recommend keeping the following questions and qualifications in mind as you do your research:

• Convenience. Look for a provider that makes the onboarding and account funding experience quick and easy. This solution should help save you time — not increase the amount of attention you spend on funding.

• Trustworthiness. What’s their reputation for reliability? What is their track record for success? The cheapest provider may not necessarily provide the best-in-class or the most secure solution.

• Support. Do they help you consider the best ways to deploy your capital? What’s their level of support when you need to make changes on your account?

• Terms. Look carefully at the platform’s term lengths, fees and caps on capital. Ideally, the company can move as nimbly as you and can scale its capital with you as you grow.

Founders no longer have to be tied to traditional VC in order to build a company and grow. Today’s funding landscape includes a variety of investors and financing platforms with domain expertise, data savviness and alternative approaches from which entrepreneurs can choose based on their own unique goals and ambitions.