A new playbook for startup fundraising • TechCrunch

How many years In the past, founders had only two options when starting a company – bootstrap yourself or turn to VC money, and they would use that money mainly to pursue growth. Later, venture debt began to gain popularity. Although non-dilutive, its problems are similar to those of VC equity: It takes time to secure, comes with a warrant, is not very flexible and not every startup can get it.

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But in recent years, more options have become available to founders. Most startups can now avail of non-dilutive capital, and purpose-specific financing has entered the fray.

While venture capital remains the most popular avenue for startups, founders should take advantage of all funding options available to them. Using the optimal combination of capital sources means using cost-effective, short-term financing for immediate goals, and more expensive long-term money for activities with an uncertain return on the horizon.

What is revenue-based financing?

Let’s define it as capital provided based on future income.

While venture capital remains the most popular avenue for startups, founders should take advantage of all funding options available to them.

So what’s different about revenue-based financing? First, it increased rapidly. Compared to the months-long process typically involved in other forms of equity or debt financing, revenue-based financing can be set up in days or even hours. It’s also flexible, meaning you don’t have to withdraw all the capital up front and choose to take it in chunks and deploy it over time.

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Income-based financing also scales as your credit availability increases. Usually, there is only one simple payment with fixed monthly payments.

How should startups change their funding playbook?

To optimize fundraising with different sources of capital, startups should think about aligning short- and long-term activities with short- and long-term sources of funds. Income-based financing is shorter term, and the typical term is between 12 and 24 months. Venture capital and venture debt are long-term sources of capital, with a typical term of two to four years.

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A startup’s short-term activities can include marketing, sales, implementation and related costs. If a startup knows its economics, CAC and LTV, it can predict how much it will earn if it invests a certain amount in growth. Since the income from these activities can be higher than the cost of revenue-based financing, startups should use revenue-based financing to fund initiatives that will bear fruit as soon as possible.

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