Revenue-Based Finance Startups: Are the Good Times Over?

Revenue-based financing providers, offering e-commerce and SaaS startups an alternative to venture capital financing, have been popular in the past few years.

18 RBF providers have originated in Europe since 2017 and have raised a record $671 million in venture capital in the last year alone.

But lending to start-ups is about to get much riskier. RBF providers are exposed to interest rate fluctuations and depend on their clients seeing strong returns; When their lending portfolio gets hurt, they suffer, too.

Troubled times are already nibbling on. Layoffs have begun within the sector, smaller players have stopped lending altogether and larger RBF companies have told Sifted they are in the process of taking over as valuations drop.

“When we’re at the height of the credit cycle, it’s easier to get credit, deploy more esoteric forms of financing and do the funky and unconventional types of lending,” Alistair Brown, CEO of Shard Capital Partners, tells Sifted.

“But when the tide recedes, we will have a lot of lenders swimming without pants. We will see some lending portfolios where we think, How did they manage to build a portfolio at a default rate that much?”

Is revenue-based financing a risky business?

Giving companies an advance loan that is repaid as a percentage of future revenue per month — the business model for revenue-based financing — did well in the good times of 2020, when the SaaS startup market was worth $145 billion Annual revenue increased at an average of 78%.

But it is a riskier business than traditional secured loans, which are backed by assets as security if the debtor cannot repay the loan. RBF providers have no such guarantees in the event of customers defaulting.

“When we’re at the height of the credit cycle, it’s easier to get credit and do the more fun and unconventional types of lending”

“Usually it’s unsecured credit that has a problem when there’s a crisis coming because you don’t have anything to back it up,” says Altin Kadareja, CEO of private debt platform Cardo AI.

“Suddenly your customers’ revenue isn’t guaranteed anymore, and you have no guarantee that they’ll get back to you.”

Risk Management

Last week, London Stock Exchange-listed Forward Partners published Forward Partners 2021 annual results – Including RBF Arm, Forward Advances.

Forward Advances’ write-offs totaled 8.4% of its 2021 loan pool, driven in large part by defaults on three unnamed accounts. She attributed this level of write-offs to its rapid expansion and said it had “put in place mitigation measures to reduce future delisting risk” – including enhancing its technology, using new data sources and introducing additional governance measures.

👉 Read: Revenue-Based Finance in Europe: Comparing Competitors

Although most RBF Sifted providers say they don’t see default rates rising above expectations, many say they are “watching the situation closely” as the macroeconomic situation changes.

Clearco, which began offering loans in 2017, tells Sifted that default rates are already beginning to fall — and that having more historical data on companies and the market makes it easier to know which customers are eligible to subscribe.

It’s time to rethink

However, even Canadian-HQ’d Clearco, Europe’s most well-funded and active RBF startup, has been affected by the market downturn. In June it 10% layoff of staff at its European hub in Dublin, just two months after it announced 125 new positions there.

Meanwhile it is not covered, One of the best funded companies Players from Europe in the market, made 26% of her team is redundant in May.

One fintech investor told Sifted that the RBF model has been delayed because companies resorting to this type of funding do so “because there are no alternatives, so there are a lot of negative choices that will fail completely in a recession.”

“Additionally, higher interest rates will make the model more difficult to extract value from players,” the investor says, noting the fact that liabilities will increase.

Other RBF providers have enough problems to offer loans. Investors tell Sifted that two small players have already stopped lending altogether as they struggle to raise capital. Those who have managed to increase the salary recently are looking to acquire smaller, less valuable competitors.

Outfund acquired Spanish Clicfunds last year to enter the Spanish market, and Levenue acquired Requr in Amsterdam in January. Last month, the founder of Outfund Mankhool said It was acquiring a smaller German competitor.

portfolio diversification

RBF Startup Loan for companies with recurring revenue, which generally means e-commerce companies or software as a service (SaaS) companies. With consumer spending falling sharply and startups making cuts, a narrow portfolio focus could be dangerous.

“Retail and SMEs are the closest to where the economic crisis is going to hit, so we can see some of these companies unwinding their sectoral strategy towards other sectors,” Kadarga says.

But so far, the founders have told Sifted that they are sticking to their guns.

Some RBF providers, such as Wayflyer, Clearco, Uncapped, Outfund, and ViceVersa, have a loan portfolio consisting mostly of e-commerce businesses and within that, small and medium retail.

“The more diverse your customer base, the better”

Others, such as Silvr, Karmen, re:cap, Capchase, and Vitt, either have a SaaS half or mostly SaaS lending portfolio.

Silvr, which raised $20.6 million in Series A in February, has already split its risks into both categories. 80% of the funding you publish is split evenly between e-commerce companies and SaaS, with the remaining 20% ​​going to mobile apps.

“The more diverse your customer base, the better,” Co-Founder and CEO Nima Karimi told Sifted.

Most RBF providers loans in Europe are designed to be paid off within 12 months, so they can transform their portfolio very quickly.

“If you insure the loans correctly and realize that in the future, a certain type of business will be less profitable, you can simply run your book and get your money back, and then choose the next type of business that will be lending,” one investor told Sifted.

“But if you have losses in your portfolio, then it becomes a problem. People forget that lending companies are naturally leveraged. One damn has a tenfold — or even a hundredfold — effect on you.”

Do Revenue-Based Finance Startups Need to Pivot?

Revenue-based finance startups may also choose to add adjoining services such as inventory financing and data provision.

Clearco began offering inventory financing at the end of 2020 and also has a sort of matchmaking service designed to facilitate mergers and acquisitions among its portfolio companies.

Uncapped announced plans to move into commercial banking last May, and appointed Revolut’s head of business banking to go global. But those plans were abandoned and the company told Sifted that it has secured some product announcements in the next quarter that will be “tailor-made to help online businesses through economic uncertainty”.

Investors tell Sifted that the fact that these companies’ loans are relatively short is what gives them confidence: Once the 12 months are up, RBFs with enough capital can be smart and pivotal to survive. This could mean that the RBF market doesn’t do much RBF in a year.

“My view is negative on core loans, but it’s not negative on the market as a whole,” Kadareja says.

“While the smaller players may completely disappear, the bigger players will find a way to navigate the changing market environment – ​​which is the good thing about being Fintechs, not banks.”

Amy O’Brien is a reporter for financial technology company Sifted. She tweets from Tweet embed And the Writes our newsletter for fintech – You can register here.