Disrupting Venture Capital: A Case Study in Non-Dilutive Capital

The year is 1602; The Dutch East India Company has a monopoly over the spice trade, battling pirates and aspiring merchants of the high seas to maintain its grip over its lucrative shipping lines. The world’s largest company needs capital to grow its fleet and protect its expanding business empire, so it comes up with an idea; offer investors the opportunity to participate in its success by issuing equity shares in the venture.

The world has changed a lot in the 400 years since the first equity offering – we’re no longer defending wooden ships with swords and cannons – but the story remains the same; companies need capital to fund growth, and investors are always looking for ways to participate in that growth. For founders however, the arrangement comes with an obvious drawback —the steady relinquishment of equity. A massive problem not solved in 400 plus years.


The Problem

Founders lose on average 80% – and ultimately control – of their company through equity financing over various rounds. At the same time, equity investors have no motivation to change this model – a future liquidity event is the only way to earn a return investing in companies Pre-IPO. Revtap aims to solve these problems – the “equity dilemma” – for both companies and investors. A viable alternative to equity that allows companies to raise similar amounts of financing without dilution, while giving our investors an immediate return on their capital.

Is There Really No Alternative?

In recent years, non-dilutive capital in the forms of venture debt and revenue based financing (RBF) have attempted to disrupt the space offering an alternative to equity rounds. While both options have found their place in the market and attempt to give founders a solution to the equity dilemma, they have their drawbacks.

Venture debt typically comes with the prerequisite of already having venture backing of at least $5m, and of course the stipulation of warrants tied to the arrangement; so it often ends up converting, at least partially, to equity. Meanwhile RBF, a relatively new entrant to the space, companies can raise smaller amounts of capital (typically 2-3x MRR) for short periods of time; often repaid in 3-5 months (or at best within a year of raising capital). The aforementioned drawbacks are dwarfed by the fact that with RBF companies are sacrificing as much as 20% of their top line revenues to repay the debt.

Revtap: A Non-Dilutive Venture Fund

Enter Revtap, a hybrid between these forms of non-dilutive capital, empowering founders of revenue-generating companies to raise capital through a unique loan facility aiming to upend the 400 year-old equity dilemma. Unlike conventional loans or venture debt, Revtap’s approach does not require liquid collateral, warrants, or a “Venture-Backed™” pedigree. And in contrast to RBF, Revtap facilities are long term, provide larger amounts of capital, with far more manageable revenue sharing.

Here’s the twist: unlike traditional venture capital or its existing non-dilutive counterparts, Revtap provides capital in exchange for 1-2% share of top-line revenues, rather than equity. Effectively owning a small slice of a company’s income, Revtap becomes inherently invested in the success of the businesses it supports. As a company’s revenues grow, so does the return Revtap receives, aligning the interests of both parties.

When Do Companies Repay The Debt? Well, possibly never.

Revenue sharing does not repay principal; it is in lieu of interest. A company can continue to thrive without the burden of repaying the financing, while Revtap continually benefits from revenue sharing. Think about it like an interest only loan; a bank is more than happy to continue to receive interest without the principal ever being repaid. Unlike traditional loans, through Revtap companies can borrow far greater amounts of capital with the only collateral requirement being recurring revenues.

At a future juncture, should the company decide to conclude the arrangement, they can do so by repaying the principal financing with a “growth premium” – essentially the valuation at the date they chose to end revenue sharing. The premium is tied to the company’s revenue growth – the sum of the principal and their revenue growth percentage for the term of the loan. Eg. if a company raises $1m in capital, grows by 10%, they end the revenue sharing arrangement through a repayment of $1.1m. Revtap is therefore deeply vested in the company’s growth. Venture firms rarely give companies they invest in the luxury of “buying back” the equity at a future date; Revtap gives founders even further flexibility with this buy back arrangement.

The benefits for companies are clear; the ability to raise without equity dilution retain control; a small percentage of revenues being used to facilitate the debt; and the flexibility to end the arrangement at anytime – a hybrid “best of all worlds” model that at the same time allow Revtap to participate in the success of burgeoning businesses. Let’s illustrate a practical example of how the model works.

Case Study: O²Cloud Unleashes Growth with Revtap’s Non-Dilutive Funding

Here’s a summary of a case study we’ll use to illustrate the power of Revtap’s model (you can read the full case study here). O²Cloud is a thriving startup in the healthcare SaaS space, offering a CRM & Inventory Management software tailored for the Medical Oxygen industry. Some quick facts:

  • O²Cloud was founded 5 years ago and now generates $5m in Annual Recurring Revenue (ARR), and while EBITDA is positive most of its cash flows are being reinvested into salaries and marketing
  • The company is seeking $1m in growth capital to expand its sales team and custom development to expand into new markets in the healthcare space

As O²Cloud charts its future path, the company is faced with a crucial decision on how to secure the necessary capital. Traditional debt is not a viable option for O²Cloud – banks are offering a credit line but only a fraction of the capital they require.

Venture debt also presents hurdles for O²Cloud as most offerings require prior venture backing of at least $5m – they want big pockets already vested in the business in case things don’t go as planned. But they also introduce warrants, diminishing the non-dilutive nature of the funding.

RBF is willing to finance ~2x MRR which would provide them close to the capital they need, but require the capital be repaid with a 20% revenue share, resulting in repayment in mere months. Non-dilutive, but impractical and short term.

The founders are now looking to the traditional equity route. With a modest 5x ARR valuation placing O²Cloud at $25 million and a large TAM presenting growth opportunities, the company is an attractive prospect for numerous investors. However, the founders face a daunting tradeoff – investors are only interested in a 20% slice of the business – a $5 million investment. Not only does this option involve a substantial equity dilution at this early stage, but it also presents a capital infusion that exceeds O²Cloud’s immediate needs. The company just doesn’t need that much capital today, a problem that is surprisingly common – companies raising capital they don’t need just to get the attention of VCs and make an investment worthwhile for them to consider.

The Nuts and Bolts – Modeling Out Non-Dilutive Capital From Revtap

On the face of it, Non-Dilutive Venture Capital is an attractive proposition. But how does Revtap compare to the cost of equity? In order to illustrate this we’ll have to make a few assumptions:

  • We’ll assume a 5x ARR valuation placing O²Cloud at $25 million as fair value for the business (a fair valuation assumption at this stage based on growth, churn, TAM, and other factors; a separate post on valuations here)
  • O²Cloud wishes to raise $1m leveraging their revenues. We’ll assume an equity investor is willing to take 5% of the business for $1m and use this as our comparison to financing through Revtap
  • We’ll model out 2 growth scenarios; median and high growth (see our rationale behind SaaS growth metrics here):
    • Median Growth Scenario: projected growth of 35% in the first two years after financing; 25% the following two years; followed by 20% and 15% for the next 2 two year timeframe
    • High Growth Scenario: projected growth of 70% in the first two years; 50% the following two; followed by 30% and 20% for the next 2 two year timeframe
  • We’ll assume that in 2 years, the company will raise a standard equity based Series A and end revenue sharing. In fact for sake of simplicity we’ll assume 24 months between each future round (Series A through C), a fairly accurate median length of time between rounds (yes, we also discuss this as well – see our post here on capital raise timing).
  • Coming up with a valuation multiple is of course highly subjective. For our purposes, we’ve used a variety of sources from around the Venture & PE world to come up with a range of multiples based on industry, growth, and comparables in the market. Its safe to assume O²Cloud will attract higher multiples in future rounds that correlate to their growth.

With these assumptions, we can easily visualize the retained value – the retained ownership using Revtap instead of equity, expressed in a simple dollar figure – assuming O²Cloud choose to repay the capital 24 months later and end revenue sharing. Essentially, the following are estimations of the value of Revtap funding – that is the value of the equity the company saved using Revtap at a future date:


Illustrated in the above graphs is the “Value of Revtap Capital” 24 months after their Revtap capital raise – the value of the 5% equity they would have lost had they instead raised through a standard equity round. “Revtap Cost” accounts for both revenue share payments, as well as a final repayment of capital to end the revenue share agreement. And finally, the difference between these gives us retained value.

Non-Dilutive – check.

Maintain control without board seats or warrants – check.

Cost savings over equity (in this case $1.2m – $1.9m over 24 months) – check.

But what if O²Cloud don’t end revenue sharing? Lets model this out further and consider the implications longer term – assuming a repayment of financing at either Series A, B, or C:




In each scenario, O²Cloud secures the required capital without sacrificing equity or control, and for Revtap the projected growth in revenues makes the investment attractive. This clearly illustrates that not only are founders able to retain control over their business, but there’s a significant cost savings as well.

Investment Criteria, and What About Risk?

Investing in a world where 35% of SaaS businesses post Series A ultimately fail (learn more about this stat here) means the weather is not calm and quiet. We navigate these rough waters with a strict investment criteria and a focus on what we call our “Investment Quality Assessment”.

It begins with our initial criteria that focuses on market and financial risk. We invest in vertical market software companies with a minimum $3m in ARR and at least a 3 year track record. We look for stickiness, growth, and moat; our investment assessment thoroughly evaluates the company’s industry, its competitive advantage and barriers to entry. We dive deep into its end user and seek out mission critical products deeply integrated into operations. All this is performed while conducting a financial evaluation to determine the financial risk of investing into the operation.

Our model is best aligned with SaaS focused on mission critical, integrated systems like CRM, ERP, HR, and Payments in industries like Cybersecurity, Envirotech, Fintech and Healthcare. We then look at thousands of data points even after analyzing financial statements. Its safe to say that one of our largest areas of focus is on the end customer. What we believe is more important than a marketing plan or future CAGR projections is attrition. While our methodology is proprietary and not made public, a few of the key data points we look at:

  • Software Licensing Revenues – it’s important to mention this a second time even though its a part of our initial criteria. A surprisingly large number of SaaS companies have a high portion of their revenues coming from professional services and consulting fees, which we don’t consider truly recurring or stable.
  • Vertical Markets – the key advantage of specializing in a vertical means software we invest in becomes an integral part of the end user’s business in the long run
  • Stickiness – Recurring revenues from vertical market software ultimately means we’re focused on customer stickiness (low churn). We dive deep into the customer (again probably our single largest focus during underwriting) to determine whether the product has a high or low switching cost, is it integrated or a point solution, is it mission critical or just another software solution that can be axed easily when looking for budget cuts
  • Competition – is the business 2x the next largest competitor in the space? Or is it just one of many tiny players all vying for attention in the same niche
  • And of course Industry – is the business model focused on a market that’s cyclical and depressed or non-cyclical and strong

These risk management considerations all focus on market, operational, technological and financial risk management; but we also protect our portfolio though diversification and risk transfer through syndication and portfolio insurance.

Closing Comments

The equity model has been around for over 400 years and its time for a change. Venture firms notoriously seek out that one “unicorn” to make up for the losses investing in duds. We like to think that we’re looking for camels – those who can hold on to what they have and survive even in periods of drought, yet also have the perseverance and stamina to make it to the oasis. Our model is deeply vested in the success of the businesses we fund; but we’re also offering our LPs an immediate return with future upside potential – both points are something no other venture fund offer.

Finally, Revtap isn’t designed to replace equity altogether, but compliment it. In fact we don’t view VCs as our competition, rather potential partners. We believe based on the overwhelming response thus far that our model will herald a new era for Venture Capital. Revtap has proprietary systems in place that can also be utilized by such firms; a “white label” back-end that can help facilitate revenue based financing of their own. Perhaps there’s a future where all VCs offer a hybrid Series A Revenue share model, utilizing our revenue share management software.

When that day comes, we will herald the new era, officially rid of pirates, cannons, and equity based venture financing.

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