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.

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.”

Baidu beats estimates on strong video streaming growth

Chinese search giant Baidu on Monday posted a revenue of 26.33 billion yuan ($3.73 billion) for the quarter that ended in June, beating analysts’ estimates of 25.77 billion yuan ($3.65 billion) as its video streaming service iQiyi style="font-weight: 400;"> continues to see strong growth. The 19-year-old firm’s shares were up over 8% in extended trading.

The company, which is often called Google of China, said revenue of its core businesses grew 12% since the same period last year “despite the weak macro environment, our self-directed healthcare initiative, industry-specific policy changes and large influx of ad inventory.”

Net income for the second quarter dropped to 2.41 billion yuan ($344 million).

“With Baidu traffic growing robustly and our mobile ecosystem continuing to expand, we are in a good position to focus on capitalizing monetization and ROI improvement opportunities to deliver shareholder value,” Herman Yu, CFO of Baidu, said in a statement.

Today’s results for Baidu, which has been struggling of late, should help calm investors’ worries. In recent years, as users move from desktop to mobile and rivals such as ByteDance win hundreds of millions of users through their mobile apps, many have cast serious doubts on Baidu’s ability to maintain its growth and hold onto its grip on advertising business. (On desktop, Baidu continues to command over three quarters of the Chinese market share.)

In the quarter that ended in March this year, Baidu posted its first quarterly loss since 2015, the year it went public.

Baidu’s shares were trading at about $114 in extended hours, pushing its market cap to about $40 billion — still less than half of about $100 billion in mid-May last year.

Robin Li, Baidu co-founder and CEO, said Baidu app was being used by 188 million users everyday, up 27% from the same period last year. “In-app search queries grew over 20% year over year and smart mini program MAUs reached 270 million, up 49% sequentially,” he added.

Baidu’s video streaming service iQiyi style="font-weight: 400;"> has now amassed over 100.5 million subscribers, up from about 87 million late last year, the company said. Revenue from iQiyi stood at 7.11 billion yuan ($1.01 billion), up 15% since last year.

iQiyi inked a deal with Netflix in 2017, which does not operate in China, to cross-license portion of one another’s content. But the partnership has since ended because the “results weren’t as good as iQiyi had expected,” a company top executive said earlier this year. iQiyi continues to maintain its relationship with all six of the major local movie studios.

“On Baidu’s AI businesses, DuerOS voice assistant continues to experience strong momentum with installed base surpassing 400 million devices, up 4.5 fold year over year, and monthly voice queries surpassing 3.6 billion, up 7.5 fold year over year, in June. As mobile internet penetration in China slows, we are excited about the huge opportunity to provide content and service providers a cross-platform distribution channel beyond mobile, into smart homes and automobiles,” he added.

Revenue from online marketing services, which makes a significant contribution to overall sales, fell about 9% to 19.2 billion yuan ($2.72 billion).

More to follow…

China’s Transsion and Kenya’s Wapi Capital partner on Africa fund

Chinese mobile-phone and device maker Transsion is teaming up with Kenya’s Wapi Capital to source and fund early-stage African fintech startups.

Headquartered in Shenzhen, Transsion is a top-seller of smartphones in Africa that recently confirmed its imminent IPO.

Wapi Capital is the venture fund of Kenyan fintech startup Wapi Pay—a Nairobi based company that facilitates digital payments between African and Asia via mobile money or bank accounts.

Investments for the new partnership will come from Transsion’s Future Hub, an incubator and seed fund for African startups opened by Transsion in 2019.

Starting September 2019, Transsion will work with Wapi Capital to select early-stage African fintech companies for equity-based investments of up to $100,000, Transsion Future Hub Senior Investor Laura Li told TechCrunch via email.

Wapi Capital won’t contribute funds to Transsion’s Africa investments, but will help determine the viability and scale of the startups, including due diligence and deal flow, according to Wapi Pay co-founder Eddie Ndichu.

Wapi Pay and Transsion Future Hub will consider ventures from all 54 African countries and interested startups can reach out directly to either organization, Ndichu and Li confirmed.

The Wapi Capital fintech partnership is not Transsion’s sole VC focus in Africa. Though an exact fund size hasn’t been disclosed, the Transsion Future Hub will also make startup investments on the continent in adtech, fintech, e-commerce, logistics, and media and entertainment, according to Li.

Transsion Future Hub’s existing portfolio includes Africa focused browser company Phoenix, content aggregator Scoop, and music service Boomplay.

Wapi Capital adds to the list of African located and run venture funds—which have been growing in recent years—according to a 2018 study by TechCrunch and Crunchbase. Wapi Capital will also start making its own investments and is looking to raise $1 million this year and $10 million over the next three years, according to Ndichu, who co-founded the fund and Wapi Pay with his twin brother Paul.

Transsion’s commitment to African startup investments comes as the company is on the verge of listing on China’s new Nasdaq-style STAR Market tech exchange. Transsion confirmed to TechCrunch this month the IPO is in process and that it could raise up to 3 billion yuan (or $426 million).

Transsion sold 124 million phones globally in 2018, per company data. In Africa, Transsion holds 54% of the feature phone market — through its brands Tecno, Infinix and Itel — and in smartphone sales is second to Samsung and before Huawei, according to International Data Corporation stats.

Transsion has R&D centers in Nigeria and Kenya and its sales network in Africa includes retail shops in Nigeria, Kenya, Tanzania, Ethiopia and Egypt. The company also has a manufacturing facility in Ethiopia.

Transsion’s move into venture investing tracks greater influence from China in African tech.

China’s engagement with African startups has been light compared to China’s deal-making on infrastructure and commodities.

Transsion’s Wapi Pay partnership is the second recent event — after Chinese owned Opera’s big venture spending in Nigeria — to reflect greater Chinese influence and investment in the continent’s digital scene.

 

 

 

 

 

 

 

Launching out of YC, Blair is aiming to reshape the financing of college tuition

It’s generally agreed that Higher Education in the United States has gradually become more and more unaffordable. Students are dependent on external financial resources for which many of them do not even qualify. Students that are able to secure a loan, often have to take on debts they can’t really afford. And if they don’t eventually land a job with enough income, they are saddled with debt for a very long time.

Much of the problem is that most student loan companies are not concerned with the overall financial well-being of their students, who often feel stuck, trying to repay a loan they cannot afford, without a backup organization that will help them figure it all out. We can see that in the figures. The student loan debt in the US has just reached $1.6 trillion dollars and more than quadrupled in the last 15 years.

With the student debt crisis getting out of hand, the topic has become a semi-permanent issue in the news.

Launching next week is a new startup under the Ycombinator accelerator called Blair which aims to address this seemingly intractable problem.

Blair finances college students through what’s called “Income Share Agreements” (ISA). Students receive funding for their tuition or costs of living and in turn pay back a percentage of their income for a fixed period of time after they graduate. Repayments adjust to individual income circumstances and by deferring payments in times of low income we protect the downside of the students.

It thus provides students with an alternative to debt which is tailored to their individual circumstances to ensure affordability. Blair’s underwriting process is based on the future potential of a student and not their credit score or co-signer, which could be a deal-breaker in traditional settings. Blair’s competitors are traditional student lenders: Sallie Mae, Sofi, Earnest, Wells Fargo, Citizen Bank, other banks. ISA companies include Vemo Education, Leif, Almapact, Lumni and Defynance.

In contrast to traditional student loan companies, Blair relies on being more aligned with the financial incentives of students, the idea being that it supports students in improving their employability by placing them in internships early, giving them access to industry mentors and coaching them individually on their career prospects.

The founders came up with the idea from personal experience. Constantin, one of the co-founders, is on an ISA himself, as are a lot of the company’s friends. They stumbled across the problem of student debt over and over again while studying in the US and noticed a stark difference between their friends in the US and their friends in Germany. The main reason is that 40% of the students at their alma maters in Germany use Income Share Agreements to finance their studies. They plan to use their experience from Europe and make ISAs more widespread in the US.

Students apply for funding on the website, and within minutes and get a personal quote shortly after. If they accept the quote, they receive their funding within a couple of days which they can use to pay for their tuition or cost of living. Once Blair issues the funding, it crafts a holistic career plan for each individual student and starts supporting them in landing the internships and jobs they want. This includes, for example, optimizing their application documents, preparing them for interviews or connecting them to mentors in their target industry. For context, they batch students together in funds and let external investors invest in the funds.

It receives a cut of the student repayments and carried interest if a student fund performs better than the target return. Additionally, it partners with companies that hire talent through the platform.

Blair has raised the first fund for 50 students and disbursed money for the first ten. The rest of the students will receive their money within the next weeks. After YC’s Demo Day the company will deploy a larger fund that will support 200 additional students.

“Our underwriting model is unique since we have based it on data from concluded ISA funds in European countries,” says cofounder Mike Mahlkow.

“In the last two weeks, we received applications for funding totaling over 4 million dollars. Many of our students come from underprivileged backgrounds, often without any support network. Our goal is to build a human capital platform where individuals can access capital based on their future potential instead of their past and investors can participate in the upside potential of individuals in an ethical way” he adds.

TransferWise’s debit card launches in Australia and New Zealand, with Singapore to follow

International money transfer startup TransferWise’s debit card is now available in Australia and New Zealand, with a Singapore launch expected by the end of this year as the company expands its presence in the Asia-Pacific region. TransferWise’s debit card, which features low, transparent fees and exchange rates, first launched in the United Kingdom and Europe last year before arriving in the United States in June. Since its launch, the company claims the debit card has been used for 15 million transactions.

Australian and New Zealand customers will have access to the TransferWise Platinum debit Mastercard (a business debit card is also available). Cards are linked to TransferWise accounts, which give holders bank account numbers and details in multiple countries, making it easier and cheaper to send and receive multiple currencies. The company says that over the past year, customers have deposited more than $10 billion in their accounts.

TransferWise’s debit cards allow users to spend in more than 40 currencies at real exchange rates. In an email, co-founder and CEO Kristo Käärmann told TechCrunch that TransferWise decided to launch its debit card in Australia and New Zealand because its business there has already been growing quickly. “In addition to responding to customer demand, launching the card in Australia and New Zealand was also driven by the fact that Aussies and Kiwis are being overcharged by banks for using their own money abroad. It is expensive to use debit, travel and credit cards for spending or withdrawals,” he said.

Käärmann added that “independent research conducted by Capital Economics showed that Australians lost $2.14 billion last year alone just for using their bank issued card abroad. This is because banks and other providers charge transaction fees every time someone uses their card abroad, plus an inflated exchange rate. Similarly, in New Zealand, Kiwis lost $1 billion simply for using their card abroad.”

One of TransferWise’s competitive advantages is that unlike most legacy banking and money transfer services, its accounts and cards were designed from the start to be used internationally. “While there are existing multi-currency cards that exist in Australia and New Zealand, they are prohibitively expensive to use. For example in Australia, the TransferWise Platinum debit Mastercard is on average 11 times cheaper than most travel, debit, prepaid and credit cards,” Käärmann said.

TransferWise cards don’t have transaction fees or exchange rate markups and cardholders are allowed to withdraw up to AUD $350 every 30 days for free at any ATM in the world.

The company is currently talking to regulators in several Asian countries, a process that can take up to two years, Käärmann said. It was recently granted a remittance license in Malaysia and plan to make its remittance service available there by end of this year.

Credit Karma glitch exposed users to other people’s accounts

Users of credit monitoring site Credit Karma have complained that they were served other people’s account information when they logged in.

Many took to a Reddit thread and complained on Twitter about the apparent security lapse.

“First time logging in it gave me my information, but as soon as I refreshed the screen, it gave me someone else’s info,” said one Reddit user. “Refreshed again and bam! someone else’s info — it’s like roulette.” Another user said they logged in and out several times and each time they had “full access to a different random person’s credit file,” they said.

One user told TechCrunch that after they were served another person’s full credit report, they messaged the user on LinkedIn “to let him know his data was compromised.”

Another user told us this:

The reports are split into two sections: Credit Factors — things like number of accounts, inquiries, utilization; and Credit Reports — personal information like name, address, etc.. The Credit Reports section was my own information, but the Credit Factors section definitely wasn’t. It listed four credit card accounts (I have more like 20 on my report), a missed payment (I’m 100% on time with payments), a Honda auto loan (never had one with Honda), student loan financing (mine are paid off and too old to appear on my report), and cards with an issuer that I have no relationship with (Discover).

Several screenshots seen by TechCrunch show other people’s accounts, including details about their credit card accounts and their current balance.

Another user who was affected said they could read another person’s Credit Factors — including derogatory credit marks — but that the Credit Report tab with that user’s personal information, like names and addresses, was blank.

One user said that the login page was pulled offline for a brief period. “We’ll be right back,” the login page read instead.

Credit Karma spokesperson Emily Donohue denied there was a data breach, but when asked would not say how many customers were affected.

“What our members experienced this morning was a technical malfunction that has now been fixed. There is no evidence of a data breach,” the statement said.

The company didn’t say for how long customers were experiencing issues.

Credit Karma offers customers free credit score monitoring and reports. The company allows users to check their scores against several major credit agencies, including Equifax, which last month was fined at least $575 million for a 2017 data breach.