A Winning Strategy: Why Revenue Financing is Moneyball for Tech Startups

October 14th, 2016

By Greg Smith, Chief Investment Officer
TIMIA Capital

I don’t know why I love baseball.

Perhaps it’s my optimistic nature that no game is lost until the last out of the final inning.

Maybe it’s the combination of numbers and athleticism that appeals to my sport geek side, or watching all of the work and dedication that goes into building a winning team.

I was reminded of baseball recently, not just while watching the Blue Jays advance to the #ALCS playoffs, but while my partners and I were out raising money for our revenue financing company, TIMIA Capital. After a presentation, one prospective investor commented, “You guys are like the Moneyball of venture capital.” Boy, did that resonate. I knew exactly what he meant. That afternoon I went online and purchased the movie. I have watched it plenty of times since.

There’s one scene in particular, where the Oakland A’s managers are talking about prospects, in particular their attitudes and how they swing. One of them pipes up to say, “ugly girlfriend means no confidence,” as a reason not to pursue one player. The A’s general manager, Billy Beane (played by Brad Pitt), is shaking his head through the whole conversation. His comment: “You guys are talking the same old nonsense… what’s the problem we are trying to solve?”

It reminds me of my old venture capital days when we’d sit around and try to figure out which companies to invest in based on how much money they raised or “the look” of the founders. Instead, we should’ve been looking at what really mattered: numbers and logic, not impressions.

That was Beane’s strategy: not to buy players, but to buy wins, based on their ability to get on base and score runs.

It should be no different in the startup space, or any business for that matter. Investment decisions should be based on performance. What do the numbers show? That’s where the interests of investors and entrepreneurs align, and where the true growth begins.

It’s also where revenue financing fits in. Also known as RBF (revenue-based financing), this financial model sees investors pour capital into a growing business in return for a percentage of future revenues. The alternative financing option compliments both debt and equity financing, while allowing entrepreneurs to retain control of their business.

RBF has been used for decades in the oil and gas business, as well as film production and biopharma, but is newer to the technology sector. In the startup world, entrepreneurs benefit from the capital injection RBF provides, while not having to give up a proportion of their company shares. Repayment is scaled to revenue. On the flip side, investors benefit from access to early-stage growth, without having to take an ownership position. They also receive a monthly payment in return.

Technology companies are ideal targets for this type of business financing because of the potential steady stream of recurring income in the fast-growing software-as-a-service (SaaS) industry. SaaS companies are poised to grow nearly five times faster than traditional software companies, according to IDC.

South of the border, one of the biggest players in the RBF technology space is Seattle-based Lighter Capita l, which recently allocated $25 million of its $100-million fund to go after the Salesforce ecosystem. Lighter Capital has provided funding to 26 Salesforce-based technology companies, which have gone on to grow monthly revenue by 45 per cent within four months, and doubled their total revenue within 24 months.

The financing model for TIMIA Capital is much the same, targeting SaaS-based entrepreneurs and meeting the market’s craving for income and growth, especially in today’s low interest-rate environment.

Of course, there are some risks to the RBF model. For example, the company may not grow as fast as planned (or worse, they go out of business), or competition could cause the economics of their business model to collapse. This is where having the data to track performance helps reduce risk. Just like the Oakland A’s in 2001, whose data-driven business model forever changed the economics of how professional sports teams are managed, RBF is about finding the right players with the proven ability to get on base and score runs.

At TIMIA, we’re not looking for Fabio either (if you’ve seen the movie, you know what I mean), just trying to solve the access-to-growth-capital problem through committed, reliable entrepreneurs who are working to score runs, one base at a time.