PayPal-backed money lender Tala raises $110M to enter India

Tala, a Santa Monica, California-headquartered startup that creates a credit profile to provide uncollateralized loans to millions of people in emerging markets, has raised $110 million in a new financing round to enter India’s burgeoning fintech space.

The Series D financing for the five year-old startup was led by RPS Ventures, with GGV Capital and previous investors IVP, Revolution Growth, Lowercase Capital, Data Collective VC, ThomVest Ventures, and PayPal also participating in the round.

The new round, which takes the startup’s total fundraising to $215 million, valued it above $500 million, a person familiar with the matter told TechCrunch. Tala has also raised an additional $100 million in debt, including a $50 million facility led by Colchis in last one year.

Tala looks at a customer’s data on texts and calls, merchant transactions, overall app usage, and other behavioral data through its Android app to build their credit profile. Based on these pieces of information, it provides instant loans in the range of $10 to $500 to customers.

The loans are approved within minutes and disbursed via mobile payment platforms. The startup has lent over $1 billion to more than 4 million customers to date — up from issuing $300 million in loan to 1.3 million customers last year, Shivani Siroya, founder and CEO of Tala, told TechCrunch in an interview.

The startup, which employs more than 550 people, will use the new capital to enter India, Siroya, who built Tala after interviewing thousands of small and micro-businesses, said. In the run up to launch in India, Tala began a 12-month pilot program in the country last year to conduct user research and understand the market. It has also set up a technology hub in Bangalore, she said.

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Shivani Siroya (Tala CEO) at TechCrunch Disrupt NY 2017

“The opportunity is very massive in India, so we spent some time customizing our service for the local market,” she said.

According to World Bank, more than 2 billion people globally have limited access to financial services and working capital. For these people, many of whom live in India, securing a small size loan is extremely challenging as they don’t have a credit score.

In recent years, several major digital payment platforms in India including Paytm and MobiKwik have started to offer small loans to users. Traditional banks are still lagging to serve this segment, industry executives say.

Tala goes a step further and takes liability for any unpaid returns, Siroya said. More than 90% of Tala customers pay back their loan in 20 to 30 days and are recurring customers, she added.

The startup also forwards the positive credit history and rankings to the local credit bureaus to help people secure bigger and long-term loans in the future, she added.

Tala, which charges a one-time fee that is as low as 5% for each loan, relies on referrals, and some marketing through radio and television to acquire new customers. “But a lot of these users come because they heard about us from their friends,” Siryoa said.

As part of the new financing round, Kabir Misra, Founding General Partner of RPS Ventures, has joined Tata’s board of directors, the startup said.

Tata will also use a portion of its new fund to expand its footprint and team in its existing markets — East Africa, Mexico, and the Philippines — and also build new solutions.

Siroya said the startup has identified some more markets where it plans to enter next. She did not disclose the names, but said she is eyeing more countries in South Asia and Latin America.

Fresh out of Y Combinator, Tandem lands millions from Andreessen Horowitz

Tandem, one of the most sought after companies to graduate from Y Combinator’s summer batch, will emerge from the accelerator program with a supersized seed round and an uncharacteristically high valuation.

The months-old business, which is developing communication software for remote teams after pivoting from crypto, is raising a $7.5 million seed financing at a valuation north of $30 million, sources tell TechCrunch. Airbnb investor Andreessen Horowitz is leading the round.

Tandem and a16z declined to comment for this story. The round has yet to close, which means the deal size is subject to change. Y Combinator startups raise capital using SAFE agreements, or simple agreements for future equity, which allow investors to buy shares in a future priced round at a previously agreed-upon valuation.

We’re told several top venture capital firms were vying for a stake in Tandem. One firm even gifted the founders a tandem bike, sources tell TechCrunch, resorting to amusing measures to sway the Tandem team. But it was a16z — which has an established interest in the growing future of work sector, evidenced by its recent investment in the popular email app Superhuman — that ultimately won the coveted lead investor spot.

Tandem provides a virtual office for remote teams, complete with video-chatting and messaging capabilities, as well as integrations with top enterprise tools including Notion, GitHub and Trello. The service launched one month ago and has signed contracts with Airbnb, Dropbox and others. The company claims to be growing 50% week-over-week.

“Every company is a remote company,” Tandem chief executive officer Rajiv Ayyangar said during his pitch to investors on day two of Y Combinator Demo Days this week. “You have salespeople in the field, [companies with] multiple offices, people working from home. Tandem isn’t just building the future of remote work, it’s building the future of work.”

Ayyangar was previously a data scientist at Yahoo before joining Yakit, a startup seeking to simplify ecommerce delivery, as the director of product. Co-founders Bernat Fortet Unanue and Tim Su are also Yahoo alums.

We’re told Tandem’s fundraise was nearly complete before it pitched to investors Tuesday afternoon. Startups that participate in YC are often flooded with offers from VCs throughout the three-month program. Firms are hungry for the batch’s Airbnb, Dropbox or Stripe — graduates of the program — and will pay premiums on startup equity for their chance to invest in a future ‘unicorn.’

As a result, the median seed deal for U.S. startups in 2018 was roughly $2 million — a record high — with typical pre-money valuations hovering north of $10 million. Tandem’s seed financing represents both a trend of swelling seed deals and valuations, as well as a tendency for VCs to dole out more cash to fresh-from-YC companies amid heightened competition amongst their peers.

The previous YC batch, which wrapped up in March, included ZeroDown, Overview.AI and Catch, a trio of companies that pocketed venture capital ahead of demo day. ZeroDown, a financing solution for real estate purchases in the Bay Area, raised upwards of $10 million at a $75 million valuation before demo day, sources told TechCrunch at the time (months after demo day, Zero Down announced a whopping $30 million financing). ZeroDown was an outlier, of course, as the company’s founders had previously co-founded the billion-dollar HR software company Zenefits.

As for the summer batch, we’re told Actiondesk, Taskade and Tandem are amongst the startups to garner the most hype from investors. Some even forwent the demo day pitch altogether. BraveCare, which is creating urgent care clinics intended just for kids, raised $4.1 million ahead of demo day, we’re told. The company opted not to pitch to additional investors this week.

You can read about all the company’s that pitched during demo day one here and demo day two here.

Why are revenue-based VCs investing in so many women and underrepresented founders?

This guest post was written by David Teten, Venture Partner, HOF Capital. You can follow him at teten.com and @dteten. This is part of an ongoing series on revenue-based investing VC that will hit on:

A new wave of revenue-based investors are emerging who are using creative investing structures with some of the upside of traditional VC, but some of the downside protection of debt.

I’ve been a traditional equity VC for 8 years, and I’m researching new business models in venture capital. As I’ve learned about this model, I’ve been impressed by how these venture capitalists are accomplishing a major social impact goal… without even trying to.

Many are reporting that they’re seeing a more diverse pool of applicants than traditional equity VCs — even though virtually none have a particular focus on women or underrepresented founders. In addition, their portfolios look far more diverse than VC industry norms.

For context, revenue-based investing (“RBI”) is a new form of VC financing, distinct from the preferred equity structure most VCs use. RBI normally requires founders to pay back their investors with a fixed percentage of revenue until they have finished providing the investor with a fixed return on capital, which they agree upon in advance. For more background, see “Revenue-based investing: A new option for founders who care about control“.

I contacted every RBI venture capital investor I could identify, and learned:

  • John Borchers, Co-founder and Managing Partner of Decathlon Capital, reports that “37% of our portfolio companies would be considered ‘impact’ qualified companies. This includes companies that would meet most institutional definitions for impact investing (women, minority, and veteran owned/run businesses, including LMI (“Low to Moderate Income”) and CRA (“Community Reinvestment Act”) qualified companies. While we do lots of work in these areas due to the attractive opportunity set, we are not an impact investor, and impact qualification is not a criterion that we use in evaluating or funding companies. On an organic basis, 13% of our portfolio companies are women-owned or run businesses, while 19% of the companies we work with are minority-owned or run. When you look at the composition of the entire founding or executive teams, the number of companies with either a woman or minority in management jumps even higher and is north of 50%.”
  • Indie.VC reports, “…50% of the teams we’ve funded are led by female founders and nearly 20% are led by black founders.”
  • Lighter Capital reports that they’ve funded companies in 30 states, including well established startup hubs and less mature ecosystems.
  • According to Derek Manuge, CEO of Corl, in the past 12 months, 500+ companies have applied to Corl for funding. Of the ones who received capital, “30% were led by women, and 40% were led by executives of non-Caucasian or of mixed ethnic origin.”
  • Feenix Partners reports that “35% of our portfolio companies have either a female or minority (non-Caucasian) CEO or Owner.”
  • Michelle Romanow, co-founder and CEO of Clearbanc, says that “We have funded eight times more women than the venture capital industry average – probably because we’re not doing meetings, which is an amazing accomplishment, and that’s not because we do different sourcing or anything else. It was just because we looked at data.” (Note that Clearbanc has a somewhat different business model than the RBI VCs I list here.)
  • Founders First Capital is the only RBI VC I’ve identified with a specific focus on underrepresented founders. Kim Folsom, Co-Founder, reports that as of August 2019, Founders First’s portfolio was 80% women and 55% women of color; 70% people of color; 20% military veterans; and 71% located in low/moderate income areas. 85% of their companies have under $1m in annual revenues. I can also announce exclusively that according to Kim Folsom, “Founders First Capital Partner (F1stcp) has just secured a $100M credit facility commitment from a major institutional impact investor. This positions F1stcp to be the largest revenue-based investor platform addressing the funding gap for service-based, small businesses led by underserved and underrepresented founders.”

By contrast, according to PitchBook Data, since the beginning of 2016, companies with women founders have received only 4.4% of venture capital deals. Those companies have garnered only about 2% of all capital invested. This is despite the fact that the data says that in fact you’re better off investing in women.

Paul Graham href="http://www.paulgraham.com/bias.html"> observes, “many suspect that venture capital firms are biased against female founders. This would be easy to detect: among their portfolio companies, do startups with female founders outperform those without?

A couple months ago, one VC firm (almost certainly unintentionally) published a study showing bias of this type. First Round Capital found that among its portfolio companies, startups with female founders outperformed those without by 63%.”

Image via Getty Images / runeer

Why are RBI investors investing disproportionately in women & underrepresented founders, and vice versa: why do these founders approach RBI investors? 

I’d argue it’s not that RBI is so unbiased and attractive; it’s that traditional equity VC is biased structurally against some women and underrepresented founders.

The Boston Consulting Group and MassChallenge, a US-based global network of accelerators, partnered to study why “women-owned startups are a better bet”. Through their analysis and interviews, BCG identified three primary reasons why female founders are less likely to receive VC funds.

The study used multivariate regression analysis to control for education levels and pitch quality to conclude that gender was a statistically significant factor. I argue that these 3 reasons are much less applicable for RBI investors than for conventional VCs.

  1. Less need for a belief in breakthrough technology. From the study: “More than men, women founders and their presentations are subject to challenges and pushback. For example, more women report being asked during their presentations to establish that they understand basic technical knowledge. And often, investors simply presume that the women founders don’t have that knowledge.” However, companies with a focus on early profitability are less likely to require an investor to believe in complex, hard-to-predict new technology which is hard to diligence. Instead, the company can pitch itself based on a credible financial projection.
  2. Realistic projections. “Male founders are more likely to make bold projections and assumptions in their pitches,” BCG observes, while, “Women, by contrast, are generally more conservative in their projections and may simply be asking for less than men.” However, to raise RBI a woman founder does not need to promise a valuation of $1 billion within 5 years. Rent the Runway co-founder and CEO Jennifer Hyman said in a recent interview with CNBC’s Julia Boorstin, “I haven’t been given the permission or privilege to lose a billion every quarter… I’ve had to bring my company towards profitability…”
  3. Concentration in consumer/branded products startups. BCG reports that, “Many male investors have little familiarity with the products and services that women-founded businesses market to other women”—especially in categories such as childcare or beauty. However, RBI investors report that they see a lot of proposals for ecommerce and consumer packaged goods geared to mothers. Meghan Cross Breeden, Cofounder of Amplifyher Ventures, observes, “Personal customer attachment shouldn’t be a factor in investing; the early investors in Snapchat and Facebook weren’t the Gen Z target demo. Rather, I would imagine that one explanation of women garnering rev-share modes of financing is the prevalence of women-led companies in the consumer/branded goods field, which systemically is more tangible and revenue driven. Therefore, there’s more revenue to share – as opposed to the typical venture business, which requires capital upfront before a J curve of growth.”

Traditional equity VCs are looking for high-risk, high-reward, “swing for the fences” models. The founders of such companies inherently are taking financial risk, reputational risk, and career risk.

Paul Graham, co-founder of Y Combinator, said, “few successful founders grew up desperately poor.” Ricky Yean, a serial founder, agrees: “building and sustaining a company that is “designed to grow fast” is especially hard if you grew up desperately poor”.

Most of the founders of the paradigmatic VC home runs were privileged: male, cisgender, well-educated, from affluent families, etc. Think Bill Gates and Mark Zuckerberg .

That privilege makes it easier for them to take very high risk. The average person, worried about students loans and long term employability, quite rationally is less likely to take the huge risk of founding a company. It’s far safer to just get a job.

Investors who back diverse teams can win much higher returns than the industry norm. Both RBI investors and the founders they back will hopefully benefit from this pattern.

For further reading

Note that none of the lawyers quoted or I are rendering legal advice in this article, and you should not rely on our counsel herein for your own decisions. I am not a lawyer. Thanks to the experts quoted for their thoughtful feedback.

Should your new VC fund use revenue-based investing?

You’re working on launching a new VC fund; congratulations! I’ve been a traditional equity VC for 8 years, and I’m now researching revenue-vased investing and other new approaches to VC. The question I’m asking myself: should a new VC fund use revenue-based investing, traditional equity VC, or possibly both (likely from two separate pools of capital)?

Revenue-based investing (“RBI”) is a new form of VC financing, distinct from the preferred equity structure most VCs use. RBI normally requires founders to pay back their investors with a fixed percentage of revenue until they have finished providing the investor with a fixed return on capital, which they agree upon in advance.

This guest post was written by David Teten, Venture Partner, HOF Capital. You can follow him at teten.com and @dteten. This is part of an ongoing series on Revenue-based investing VC that will hit on:

From the investors’ point of view, the advantages of the RBI models are manifold. In fact, the Kauffman Foundation has launched an initiative specifically to support VCs focused on this model. The major advantages to investors are:

  • Shorter duration, i.e., faster time to liquidity. Typically RBI VCs get their capital back within 3 to 5 years.

Who are the major revenue-based investing VCs?

This guest post was written by David Teten, Venture Partner, HOF Capital. You can follow him at teten.com and @dteten. This is part of an ongoing series on Revenue-Based Investing VC that will hit on:

So you’re interested in raising capital from a Revenue-Based Investor VC. Which VCs are comfortable using this approach?

A new wave of Revenue-Based Investors (“RBI”) are emerging. This structure offers some of the benefits of traditional equity VC, without some of the negatives of equity VC.

I’ve been a traditional equity VC for 8 years, and I’m now researching new business models in venture capital.

(For more background, see the accompanying article “Revenue-based investing: A new option for founders who care about control” published on Extra Crunch.

RBI normally requires founders to pay back their investors with a fixed percentage of revenue until they have finished providing the investor with a fixed return on capital, which they agree upon in advance.

I’ve listed below all of the major RBI venture capitalists I’ve identified. In addition, I’ve noted a few multi-product lending firms, e.g., Kapitus and United Capital Source, which provide RBI as one of many structural options to companies seeking capital.


The guide to major RBI VCs

Alternative Capital: “You qualify if you have $5k+ MRR. We have a special program if you are pre-seed and need product development. Since 2017 we’ve managed $3 million in revenue-based financing, which helps cash-strapped technology companies grow. In 2019 we partnered with several revenue-based lending providers, effectively creating a marketplace.”

Bigfoot Capital: According to Brian Parks, “Bigfoot provides RBI, term loans, and lines of credit to SaaS businesses with $500k+ ARR. Our wheelhouse is bootstrapped (or lightly capitalized) SMB SaaS. We make fast, data-driven credit decisions for these types of businesses and show Founders how the math/ROI works. We’re currently evaluating about 20 companies a month and issuing term sheets to 25% of them; those that fit our investment criteria. We’re also regularly following-on for existing portfolio companies.”

Investment Criteria:

  • B2B SaaS or tech-enabled services with proven, recurring contracts
  • ARR of $500K+
  • At least 12 months of customer history, generally 20+ enterprise customers or 200+ SMB customers
  • Rational burn profile, up to 50% of revenue at close, scaling down
  • Capital need of up to $1.5M over next 12 months

Benefits:

  • Non-dilutive, flexible credit offerings that fit SMB or enterprise SaaS
  • Facility sizes of 2-5x MRR
  • Repaid 12-36 months with ability to prepay at reduced cost
  • For RBI, return caps of 1.2x-1.8x and cash share rates of 3-10%
  • Multiple draws available once history established
  • Ability to scale payments to provide initial cash flow relief
  • No board seats or personal guarantees
  • Success fee on M&A can be traded for lower payments

Corl: “No need to wait 3-9 months for approval. Find out in 10 minutes. Corl can fund up to 10x your monthly revenue to a maximum of $1,000,000. Payments are equal to 2-10% of your monthly revenue, and stop when the business buys out the contract at 1-2x the investment amount.”

  • Investment amount of up to 10x monthly revenue, to a maximum of $1,000,000.
  • Payment is 2-10% of monthly revenue, until a Contract Buyout.
  • The Contract Buyout Rate is 1-2x the Investment Amount, depending on the risk of the business.
  • To be eligible, a business must have at least $10,000 in monthly revenue, at least 30% gross margins, and post-revenue for at least 6 months.

According to Derek Manuge, Corl CEO, “Funds are closed significantly quicker than the industry average at under 24 hours. The majority of businesses that apply for funding with Corl are E-commerce, SaaS, and other digital businesses.”

Manuge continues, “Corl connects to a business’ bank accounts, accounting software, payment processors, and other digital services to collect 10,000+ historical data points that are analyzed in real-time. We collect more data on an individual business than, to our knowledge, any other RBI investor, through our application process, data partners, and various public sources online. We have reviewed the application process of other RBI lenders and have not found one that has more API connections that ours. We have developed a proprietary machine learning algorithm that assesses the risk and return profile of the business and determines whether to invest in the business. Funding decisions can take as little as 10 minutes depending on the amount of data provided by a business.”

In the past 12 months, 500+ companies have applied for funding with Corl. The following information is based on companies funded by us and/or our capital partners:

  • The average most recent monthly revenue is $331,229
  • The average most recent annual revenue is $1,226,589
  • The average most recent annual profit is $237,479
  • The average gross profit margin is 55%.
  • The average monthly operating expenses is $70,335
  • The average cash balance is $191,164
  • The mode purpose for funding is (in order of frequency) Sales, Marketing, Market Expansion, Product Development, and Hiring Employees.
  • 30% have been operated by females, 70% have been operated by males.
  • 40% have been operated by “visible minorities”, 60% have been operated by “non-visible minorities”.

Decathlon Capital: According to John Borchers, Co-founder, Decathlon is the largest revenue-based financing investor in the US. His description: “We announced a new $500 million fund in Q1 of 2019, in our 10th year. Unlike many RBI investors, a full 50% of our investment activity is in non-tech businesses. Like other RBI firms, Decathlon does not require warrants, governance involvement, or the types of financial covenants that are often associated with other venture debt type solutions. Decathlon typically targets monthly payment percentages in the 1% to 4% range, with total targeted multiples of 1.5x to 3.0x.”

Earnest Capital: Earnest is not technically RBI. Tyler Tringas, General Partner, observes, “Almost all of these new [RBI] forms of financing really only work for more mature companies (say $25-50k MRR and up) and there are still very few new options at the stage where we are investing.” From their website: “We invest via a Shared Earnings Agreement, a new investment model developed transparently with the community, and designed to align us with founders who want to run a profitable business and never be forced to raise follow-on financing or sell their business.” Key elements:

  • “We agree on a Return Cap which is a multiple of the initial investment (typically 3-5x)
  • “We don’t have any equity or control over the business…”
  • “As your business grows we calculate what we call “Founder Earnings” and Earnest is paid a percentage. Essentially we get paid when you and your co-founder get paid.”
  • “Founder Earnings = Net Income + any amount of founders’ salaries over a certain threshold. If you want to eat ramen, pay yourselves a small salary, and reinvest every dollar into growth, we don’t get a penny and that’s okay. We get earnings when you do.”
  • “Unlike traditional equity, our share of earnings is not perpetual. Once we hit the Return Cap, payments to Earnest end.”
  • “In most cases, we’ll agree on a long-term residual stake for Earnest if you ever sell the company or raise more financing. We want to be on your team for the long-term, but don’t want to provide any pressure to “exit.”
  • “If you decide you want to raise VC or other forms of financing, or you get an amazing offer to sell the company, that’s totally fine. The SEA includes provisions for our investment to convert to equity alongside the new investors or acquirers.”

Feenix Venture Partners: Feenix Venture Partners has a unique investment model that couples investment capital with payment processing services. Each of Feenix’s portfolio companies receives an investment in debt or equity and utilizes a subsidiary of Feenix as its credit card payment processor (“Feenix Payment Systems”). The combination of investment capital and credit card processing (CCP) fees creates a “win-win” partnership for investors and portfolio companies. The credit card processing data provides the investor with real-time sales transparency and the CCP fee margin provides the investor high current income, with equity-like upside and significant recovery for downside protection. Additionally, portfolio companies are able to access competitive and often non-dilutive financing by monetizing an unavoidable expense that is being paid to its current processors, thus yielding a mutual benefit for both parties.

Feenix focuses on companies in the consumer space across a number of industry verticals including: multi-unit Food & Beverage operators, hospitality, managed workspace (office or food halls), location-based entertainment venues, and various direct to consumer online companies. Their average check size is between $1-3 million, with multi-year term and competitive interest rates for debt. Additionally, Feenix typically needs fewer financial covenants and can provide quicker turnaround for due diligence with the benefit of transparency they receive by tracking credit card sales activity. 10% of Feenix’s portfolio companies have received VC equity prior to their financing.

Founders First Capital Partners: “Founders First Capital Partners, LLC is building a comprehensive ecosystem to empower underrepresented founders to become leading premium wage job creators within their communities. We provide revenue-based funding and business acceleration support to service-based small businesses located outside of major capital markets such as Silicon Valley and New York City.”

“We focus our support on businesses led by women, ethnic minorities, LGBTQ, and military veterans, especially teams and businesses located in low to moderate income areas. Our proprietary business accelerator programs, learning platform, and growth methodologies transition these underserved service-based businesses into companies with $5 million to $50 million in recurring revenue. They are tech-enabled companies that provide high-yield investments for fund limited partners (LPs) that perform like bonds but generate returns on par with equity investments. Founders First Capital Partners defines these high performing organizations as Zebra Companies .”

“Each year, Founders First Capital Partners works with hundreds of entrepreneurs. Three tracks of pre-funding accelerator programs determine the appropriate level of funding and advisory support needed for each founder to achieve their desired expansion: 1) Fastpath for larger companies with $2 million to $5 million in annual revenue, 2) Founders Growth Bootcamp program for companies with $250,000 to $2 million in annual revenue, and 3) Elevate My Business Challenge for companies with $50,000 to $250,000 in annual revenue.”

“Founders First Capital Partners (FFCP) runs a 5-step process:

  1. Attend the Appropriate Pre-Funding Accelerator Program. Programs are offered in both online, in-person, and hybrid format with cohorts of leadership teams for an average of 10 companies. Most programs culminate with a Pitch Day and Investor Networking Event where the companies present their newly defined and expanded growth playbook.
  2. Apply for funding. After completion of the relevant pre-funding program, FFCP will review company funding applications and conduct due diligence.
  3. Get Funding. FFCP-approved companies receive revenue-based loans of up to $1 million to support the implementation of a customized 5-year growth playbook for their businesses.
  4. Growth support. FFCP uses its proprietary performance technology platform, structured growth program curriculum, and executive-level coaching operations to assist funded companies with the development, implementation, and iteration of their custom 5-year growth playbook.
  5. Graduate. Companies repay loans with growth revenue generated over a 5-year term, capped at 2x the amount financed. Companies gain predictable revenue streams with significant and measurable increases in revenue and profits to graduate to either traditional debt or equity sources of growth capital.”

According to Kim Folson, Co-Founder, “Founders First Capital Partner (F1stcp) has just secured a $100M credit facility commitment from a major institutional impact investor. This positions F1stcp to be the largest revenue-based investor platform addressing the funding gap for service-based, small businesses led by underserved and underrepresented founders.”

GSD Capital: “ GSD Capital partners with early-stage SaaS founders to fund growth initiatives. We work with founding teams in the Mountain West (Arizona, Colorado, Idaho, Montana, Nevada, New Mexico, Utah and Wyoming) who have demonstrated an ability to get sh*t done… We empower founders with a 30-day fundraising process instead of multiple months running a gauntlet. ”

“To best explain the process of RBF funding, let’s use an example. Pied Piper Inc needs funding to accelerate customer acquisition for its SaaS solution. GSD Capital loans $250,000 to Pied Piper taking no ownership or control of the business. The funding agreement outlines the details of how the loan will be repaid, and sets a “cap”, or a point at which the loan has been repaid. On a 3-year term, the cap amounts typically range from 0.4-0.6x the loan amount. Each month Pied Piper reviews its cash receipts and sends the agreed upon percentage to GSD. If the company experiences a rough patch, GSD shares in the downside. Monthly payments stop once the cap is reached and the loan is repaid. In a situation where Pied Piper’s revenue growth exceeds expectations, prepayment discounts are built into the structure, lowering the cost of capital.”

“Requirements for funding consideration:

  • Companies with a minimum of $50k in MRR
  • We can fund to 4x MRR (Monthly Recurring Revenue)
  • Companies seeking funding of $200k to $1mm
  • Limited amount of existing debt and a clean cap table”

Indie.VC: Part of the investment firm O’Reilly AlphaTech Ventures. See Indie VC’s Version 3.0 . “On the surface, our v3 terms are a fairly vanilla version of a convertible note with a few key variables to be negotiated between the investor and the founder: investment amount, equity option, and repurchase start date and percentage.”

  • Investment amount “is what it is”.
  • Equity option is, ” a simple fixed percentage which converts into that % of shares at the time of a sale OR into that % shares prior to a qualified financing.”
  • Repurchase start date and percentage is, “We chose 24 months from the time of our investment (but can be whatever date the founders and investors agree upon) and a % of gross revenue shared to repurchase the shares. With each revenue share payment, our equity option decreases and the founder’s equity increases. With v3, a team can repurchase up to 90% of the original equity option back at any point prior to a qualified financing through monthly revenue share payments, a lump or some combination of both until they reach a 3x cap. “

Kapitus: Offers RBI among many other options. “Because this [RBI] is not a loan, there is no APR or compounded interest associated with this product. Instead, borrowers agree to pay a fixed percentage in addition to the amount provided.”

Lighter Capital: “Since 2012, we’ve provided over $100 million in growth capital to over 250 companies.” Revenue-based financing which “helps tech entrepreneurs get to the next level without giving up equity, board seats, or personal guarantees… At Lighter Capital, we don’t take equity or ask you to make personal guarantees. And we don’t take a seat on your board or make you write a big check if you’re having a down month.”

  • “Up to 1/3 of your annualized revenue run rate”
  • “Up to $3M in growth capital for your tech startup”
  • “Repaid over 3–5 years”
  • “You pay between 2–8% of monthly revenue”
  • “Repayment caps usually range from 1.35x to 2.0x”

Novel Growth Partners: ” We invest using Revenue-Based Investing (RBI), also known as Royalty-Based Investing… We provide up to $1 million in growth capital, and the company pays that capital back as a small percentage (between 4% and 8%) of its monthly revenue up to a predetermined return cap of 1.5-2.2x over up to 5 years. We can usually provide capital in an amount up to 30% of your ARR. Our approach allows us to invest without taking equity, without taking board seats, and without requiring personal guarantees. We also provide tailored, tactical sales and marketing assistance to help the companies in our portfolio accelerate their growth.” Keith Harrington, Co-Founder & Managing Director at Novel Growth Partners, observes that he sees two categories of RBI:

  • Variable repayment debt: money gets paid back month over month, e.g., Novel Growth Partners
  • Share buyback structure, e.g., Indie.vc. Investors using this model typically can ask for a higher multiple because they wait longer for cash to be paid back.

He said, “We chose the structure we did because we think it’s easier to understand, for both LPs and entrepreneurs.”

Podfund: Focused on podcast creators. “We agree to provide funding and services to you in exchange for a percentage of total gross revenue (including ads/sponsorship, listener support, and ancillary revenue such as touring, merchandise, or licensing) per quarter. PodREV terms are 7-15% of revenue for 3-5 years, depending on current traction, revenue, and projected growth. At any time you may also opt to pay down the revenue share obligation in full, as follows:

  • 1.5x the initial funding in year 1
  • 2x the initial funding in year 2
  • 3x the initial funding in year 3
  • 4x the initial funding in year 4 “

RevUp: “Companies receive $100K-250K in non-dilutive cash… [paid back in a] 36-month return period with revenue royalty ranging from 4-8%, no equity .”

Riverside Acceleration Capital: Closed Fund I for $50m in 2016. Fund II has raised over $100m as of mid-2019.

Investment size : $1 – 5+ million, significant capacity for additional investment.
Return method: Small percentage of monthly revenue. Keeps capital lightweight and aligned to companies’ growth.
Capped return: 1.5 – 2x the investment amount. Company maximizes equity upside from growth.
Investment structure: 5-year horizon. Long-term nature maximizes flexibility of capital.”

Jim Toth writes, “One thing that makes us different is that we live inside of an $8Bn private equity firm. This means that we have a tremendous amount of resources that we can leverage for our companies, and our companies see us as being quite strategic. We also have the ability to continue investing behind our companies across all stages of growth.”

ScaleWorks: “We developed Scaleworks venture finance loans to fill a need we saw for our own B2B SaaS companies. No personal guarantees, board seats, or equity sweeteners. No prepayment penalties. Monthly repayments as a percentage of revenue.”

United Capital Source: Provides a wide structure of loans, including but not limited to RBI. The firm has provided more than $875 million in small business loans in its history, and is currently extending about $10m/month in RBI loans. Jared Weitz, Founder & CEO, said, “[Our] typical RBF client is $120K-$20M in annual revenue, with 4-200 employees. We only look at financials for deals over a certain size.

For smaller deals, we’ll look at bank statements and get a pretty good picture of revenues, expenses and cash flow. After all, since this is a revenue-based business loan, we want to make sure revenues and cash flow are consistent enough for repayment without hurting the business’s daily operations. When we do look at financials to approve those larger deals we are generally seeing a 5 to 30% EBITDA margin on these businesses.” United Capital Source was selected in the 2015 & 2017 Inc. 5000 Fastest Growing Companies List.

Note that none of the lawyers quoted or I are rendering legal advice in this article, and you should not rely on our counsel herein for your own decisions. I am not a lawyer. Thanks to the experts quoted for their thoughtful feedback. Thanks to Jonathan Birnbaum for help in researching this topic.

Revenue-based investing: A new option for founders who care about control

Does the traditional VC financing model make sense for all companies? Absolutely not. VC Josh Kopelman makes the analogy of jet fuel vs. motorcycle fuel. VCs sell jet fuel which works well for jets; motorcycles are more common but need a different type of fuel.

A new wave of Revenue-Based Investors are emerging who are using creative investing structures with some of the upside of traditional VC, but some of the downside protection of debt. I’ve been a traditional equity VC for 8 years, and I’m now researching new business models in venture capital.

I believe that Revenue-Based Investing (“RBI”) VCs are on the forefront of what will become a major segment of the venture ecosystem. Though RBI will displace some traditional equity VC, its much bigger impact will be to expand the pool of capital available for early-stage entrepreneurs.

This guest post was written by David Teten, Venture Partner, HOF Capital. You can follow him at teten.com and @dteten. This is part of an ongoing series on Revenue-Based Investing VC that will hit on:

So what is Revenue-Based Investing? 

RBI structures have been used for many years in natural resource exploration, entertainment, real estate, and pharmaceuticals. However, only recently have early-stage companies started to use this model at any scale.

According to Lighter Capital, “the RBI market has grown rapidly, contrasting sharply with a decrease in the number of early-stage angel and VC fundings”. Lighter Capital is a RBI VC which has provided over $100 million in growth capital to over 250 companies since 2012.

Lighter reports that from 2015 to 2018, the number of VC investments under $5m dropped 23% from 6,709 to 5,139. 2018 also had the fewest number of angel-led financing rounds since before 2010. However, many industry experts question the accuracy of early-stage market data, given many startups are no longer filing their Form Ds.

John Borchers, Co-founder and Managing Partner of Decathlon Capital, claims to be the largest revenue-based financing investor in the US. He said, “We estimate that annual RBI market activity has grown 10x in the last decade, from two dozen deals a year in 2010 to upwards of 200 new company fundings completed in 2018.”

Men’s personal care startup Huron raises $1M

Huron founder and CEO Matt Mullenax is hoping to build a big business around body wash.

“For us, the broader mission is A+ personal care for guys everywhere — not just guys in New York or guys in the Bay Area or guys in Los Angeles,” he said.

The startup has raised $1 million in seed funding from RXBAR founders Peter Rahal and Jared Smith, CXT Investments, and Lean Luxe founder M. Paul Munford.

Mullenax told me he became interested in this market after working as a finance and operations analyst at Bonobos, where he “fell in love with the [direct-to-consumer] model.” He also said he has personal experience with bad skin, but “couldn’t justify paying $75 a month for face wash.”

So the goal at Huron is to create products that can stack up against “brands on the shelves at Bloomingdale’s, Neiman Marcus or Nordstrom,” but without the costs and price markup associated with a big department store. The initial lineup includes body wash ($14), face wash ($14) and face lotion ($15), with plans for more products soon.

Consumers can buy Huron products individually, as part of a larger kit or via subscription. Mullenax said the Huron website is designed to be friendly and educational for men who don’t know a lot about personal care, but at the same time it doesn’t isn’t “forcing this guy into a subscription mechanism,” and instead allowing them “come to the site and just transact on a bottle of bodywash.”

As for the broader competitive landscape — which includes companies that started with razors or cologne but have broader ambitions in men’s personal care — Mullenax said, “The industry is becoming increasingly competitive, and it it should be, it’s a huge category.”

He argued that the market has room more than just “one winner or two winners or five winners.” And in his view, Huron will be set apart with its “ability to create a brand with a tone of voice that resonates, with products that work, at a price point that makes senes for this guy.”

Ally raises $8M Series A for its OKR solution

OKRs, or Objectives and Key Results, are a popular planning method in Silicon Valley. Like most of those methods that make you fill in some form once every quarter, I’m pretty sure employees find them rather annoying and a waste of their time. Ally wants to change that and make the process more useful. The company today announced that it has raised an $8 million Series A round led by Accel Partners, with participation from Vulcan Capital, Founders Co-op and Lee Fixel. The company, which launched in 2018, previously raised a $3 million seed round.

Ally founder and CEO Vetri Vellore tells me that he learned his management lessons and the value of OKR at his last startup, Chronus. After years of managing large teams at enterprises like Microsoft, he found himself challenged to manage a small team at a startup. “I went and looked for new models of running a business execution. And OKRs were one of those things I stumbled upon. And it worked phenomenally well for us,” Vellore said. That’s where the idea of Ally was born, which Vellore pursued after selling his last startup.

Most companies that adopt this methodology, though, tend to work with spreadsheets and Google Docs. Over time, that simply doesn’t work, especially as companies get larger. Ally, then, is meant to replace these other tools. The service is currently in use at “hundreds” of companies in more than 70 countries, Vellore tells me.

One of its early adopters was Remitly . “We began by using shared documents to align around OKRs at Remitly. When it came time to roll out OKRs to everyone in the company, Ally was by far the best tool we evaluated. OKRs deployed using Ally have helped our teams align around the right goals and have ultimately driven growth,” said Josh Hug, COO of Remitly.

Desktop Team OKRs Screenshot

Vellore tells me that he has seen teams go from annual or bi-annual OKRs to more frequently updated goals, too, which is something that’s easier to do when you have a more accessible tool for it. Nobody wants to use yet another tool, though, so Ally features deep integrations into Slack, with other integrations in the works (something Ally will use this new funding for).

Since adopting OKRs isn’t always easy for companies that previously used other methodologies (or nothing at all), Ally also offers training and consulting services with online and on-site coaching.

Pricing for Ally starts at $7 per month per user for a basic plan, but the company also offers a flat $29 per month plan for teams with up to 10 users, as well as an enterprise plan, which includes some more advanced features and single sign-on integrations.

RedDoorz raises $70M to expand its budget hotel network in Southeast Asia

Singapore-based budget hotel booking startup RedDoorz is tiny in comparison to fast-growing giant Oyo. But it is holding its ground and winning the trust of an ever growing number of investors.

On Monday, the four-year-old startup announced it has raised $70 million in Series C financing round, less than five months after it closed its $45 million Series B. The new round, which is ongoing, was led by Asia Partners and saw participation from new investors Rakuten Capital and Mirae Asset-Naver Asia Growth Fund.

The startup, which has raised $140 million to date, has been seeing “tremendous interest from investors, so it is decided to do a back-to-back rounds,” said Amit Saberwal, founder and CEO of RedDoorz, in an interview with TechCrunch.

Regardless, the new funds will help RedDoorz fight SoftBank-backed Oyo, which is already aggressively expanding to new markets. Oyo currently operates in more than 80 nations.

Saberwal isn’t necessarily threatened by Oyo, on the contrary, he sees Oyo’s success as a testament that there is room for more players to be in the space. He is confident that RedDoorz is “on the right track to create the next tech unicorn in Southeast Asia,” and trade in public exchange in the next two to three years.

RedDoorz operates a marketplace of “two-star, three-star and below” budget hotels, selling access to rooms to people. Currently it has 1,400 hotels on its network, said Saberwal. By the end of the year, the startup aims to grow this number to 2,000.

The startup operates in 80 cities across Indonesia, Singapore, the Philippines and Vietnam, and plans to use the new capital to expand its network in its existing markets, said Saberwal. At least for the next one year, RedDoorz has no plans to expand beyond the four markets where it currently operates, he said.

“Anything in the accommodation is our playground. We have all kinds of properties. We have three-star hotels, some hostels, so we will continue to go deeper and wider moving forward,” Saberwal, a former top executive at India’s travel giant MakeMyTrip, said.

It’s a great combination: Making the ubiquity of typically unorganized local guesthouse-style rooms with the more organized and efficient — but pricier — hotel option.

Some of the new capital will also go into broadening RedDoorz’s tech infrastructure, building a second engineering hub in Vietnam. (RedDoorz’s current regional tech hub is based in India.)

ClearBrain launches analytics tools focused on connecting cause and effect

Businesses need to understand cause and effect: Someone did X and it increased sales, or they did Y and it hurt sales. That’s why many of them turn to analytics — but Bilal Mahmood, co-founder and CEO of ClearBrain, said existing analytics platforms can’t answer that question accurately.

“Every analytics platform today is still based on a fundamental correlation model,” Mahmood said. It’s the classic correlation-versus-causation problem — you can use the data to suggest that an action and a result are related, but you can’t draw a direct cause-and-effect relationship.

That’s the problem that ClearBrain is trying to solve with its new “causal analytics” tool. As the company put it in a blog post, “Our goal was to automate this process [of running statistical studies] and build the first large-scale causal inference engine to allow growth teams to measure the causal effect of every action.”

You can read the post for (many) more details, but the gist is that Mahmood and his team claim they can draw accurate causal relationships where others can’t.

ClearBrain analytics screenshot

The idea is to use this in conjunction with A/B testing — customers look at the data to prioritize what to test next, and to make estimates about the impact of things that can’t be tested. Otherwise, Mahmood said, “If you wanted to measure the actual impact of every variable on your website and your app — the actual impact it has on conversation — it could take you years.”

When I wrote about ClearBrain last year, it was using artificial intelligence to improve ad targeting, but Mahmood said the company built the new analytics technology in response to customer demand: “People didn’t just want to know who was going to convert, they wanted to know why, and what caused them to do so.”

The causal analytics tool is currently available to early access users, with plans for a full launch in October. Mahmood said there will be a number of pricing tiers, but they’ll be structured to make the product free for many startups.

In addition to launching the analytics tool in early access, ClearBrain also announced this week that it’s raised an additional $2 million in funding from Harrison Metal and Menlo Ventures.