Five Trends That Defined Revenue-Based Financing In 2022

The Indian startup ecosystem has seen exponential growth over the past several years. Innovative business models are evolving, even as existing businesses are expanding into new geographies and creating cutting edge products for their consumers.

By Bhavik Vasa

abbe sublett

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The Indian startup ecosystem has seen exponential growth over the past several years. Innovative business models are evolving, even as existing businesses are expanding into new geographies and creating cutting edge products for their consumers. To match this progress, venture funding, too, has evolved. And among the various funding models, revenue-based financing (RBF) has seen a clear uptick in the past one year.

RBF via fintech is an innovative new-age model that allows business owners to access the funding they need without diluting equity or pledging collateral. Compared with traditional funding options, it is simpler, faster and more accessible. Given these advantages, it is perhaps easy to see why from zero at the end of 2019, India now has a number of platforms that offer RBF to emerging businesses. In 2021, we saw a growing awareness of RBF in the country, resulting in many D2C and e-commerce businesses exploring this model. In hindsight, RBF was defined by the following five trends in 2022:

Increasing investor confidence

As per the Revenue Based Financing Market Research Report (2022-2027), the global RBF market size was valued at $1.75 billion in 2021 and is expected to reach $30 billion by 2027. Global markets such as the US and Europe have witnessed an explosion of RBF companies in the past year, and investors in India and Asia are piling in too as the sector gathers incredible momentum.

Investors are backing this form of financing also because there is potential for substantial returns with relatively little risk. Innovation in technology and platform has allowed for real-time monitoring of businesses which brings down the percentage of NPAs substantially, compared to traditional lending instruments.

An exciting new asset class

Until a couple of years ago, if HNIs or family offices wanted to invest in private markets or startups, they could only do so based on equity (either into VC funds or directly in the startup). RBF has given the modern investors an option to diversify their portfolio. Apart from being an extremely flexible form of investment, the return horizon in RBF ranges from six months to two years, as opposed to equity investments where it is 8-10 years. Besides, of the companies raising venture capital, only a handful will make the kind of blockbuster exit that provides 50 times returns. There is a wider universe of revenue earning startups that may not merit VC funding but make for a great investment otherwise.

Momentum shift to AltFi

As per a report by Association of Chartered Certified Accountants (ACCA), nearly 50.7 million enterprises lack access to traditional lending channels and the credit gap for Indian MSMEs is a whopping $380 billion. Addressing this credit gap can encourage entrepreneurship, generate employment and increase financial inclusion and development in the country. In 2022, by providing online-first, asset-light businesses with access to non-dilutive capital, RBF platforms brought investors together, harnessing the momentum around RBF as more see a clear opportunity to be a part of this growth.

The D2C boom

By disrupting the traditional wholesaler-distributor network, home-grown D2C brands have been leading e-commerce growth in India. Most of these brands are small, digitally run businesses but they have immense growth potential. However, it's difficult for them to raise capital in order to achieve that potential through equity or debt. VCs don't target these brands because most of them don't have the aspiration or the potential to be unicorns. At the same time, banks are unlikely to approve a loan without collateral.

But since the pandemic, we have seen a massive spurt in the number of D2C brands operating in India. In 2020, there were 70,000 D2C brands in India and the number is expected to rise to 250,000 by 2025 as per Statista. This growth, to a large extent, has been made possible by a simultaneous rise of RBF in India. RBF has enabled many businesses to stay afloat during the pandemic. D2C brands that are doing steady businesses and need capital for advertising and marketing spends or inventory have been supported by RBF platforms to meet their capital needs, ensuring growth. RBF has clearly emerged as a positive lever in the Indian D2C growth story.

Next Stop: SaaS

In the past year, there has been a marked increase in the number of SaaS companies going the RBF route. SaaS companies work, primarily, on monthly revenue rate (MRR). This makes RBF a prime option for them to access capital, especially if they are profitable and growing but not yet ready for equity investment or an IPO. Additionally, they have subscription-based services with a stable working capital cycle making it easier to predict revenue. RBF can become a predictable source of capital for SaaS companies and help them grow to a point where equity-based funding can become a viable option. In 2023, not only will we see more SaaS companies funding themselves through RBF but segments such as insurance, edtech and OTT are also likely to jump on the RBF bandwagon.

Blue skies ahead

By offering hassle-free and quick funding, RBF has become a popular source of financing for businesses with solid cash flow. But so far, its impact has remained limited to the metros. For investors, there is still plenty of untapped potential, especially in tier II and tier III cities. And while it's still early days for RBF in India, players in the sector have scaled up in the past year and are ready to power the capital needs of thousands of fast-growing businesses that will drive the future of India's digital economy.

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