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Back in April 2018 I went to the annual Angel Capital Association (ACA) Summit, where I met a fellow by the name of Luni Libes, who was presenting on the topic of revenue-based financing (RBF), which his accelerator/fund, Fledge, uses as its primary investment vehicle. Luni maintains that the angel/VC model is fundamentally flawed and that a new paradigm is needed. What he said makes a lot of sense, and I’m not going to go into detail talking about the ins and outs of that. Luni has a book on Amazon that describes in great RBF in great detail. For those who prefer video, the ACA held a webinar with Luni recently, visible here.

I want to talk here about what I see as the virtues of RBF and where it might go in Boston.

In my previous post I talk about horses, zebras, and unicorns, and how the search for them can warp our investment senses as we try to transform one into the other so that we can profitably invest on the angel/VC paradigm. We’ll convince ourselves that a company has a chance of the 10x exit when, if we were honest with ourselves, it really doesn’t. In retrospect it’s very clear to me that I’ve been guilty of this, and I find that I’ve recently been having more trouble doing it in prospect. Many of the very exciting companies I see are at best building cool features or playing in niche markets. Yes, they can be very successful, and yes, some may have nice exits to bigger companies, but no, they are not likely to be 10x investments.

Without the head-fake of pretending they are 10x-capable, it does not make sense to invest on the standard model. But on Luni’s model we might well be able to make money. And do some good!

There are several attractive features of RBF:

I’ve been working as a mentor with quite a few companies over the past couple of years that I think would really benefit from RBF if it were available. I can’t convince myself of the 10x exit, but I see them doing very well on more conventional business metrics. 

I can’t lead an RBF deal alone, but I’ve been speaking with a number of my investor colleagues, and there’s a chance that there’s sufficient interest to put together a small fund that focuses on RBF. Many detail are still to be worked out, for example, does this fund focus on particular sectors and do we allow only social ventures? But I think there’s virtue in trying to set something up with this model, so I’m continuing to push forward.

== update 2/12/2019 ==

I continue to have interest in this mode of financing, and have seen a little interest from a couple of companies. In addition there are more funds using RBF vehicles that should be mentioned. That said, I have not made any investments using RBF, and I’m finding amazing resistance to the notion from many entrepreneurs. They have been trained to position themselves as unicorns, and it’s very difficult to hear from an investor that those are pipe dreams that should be abandoned in favor of a more conservative approach, even though that approach may be more entrepreneur-friendly. 

Anyway, this is still percolating for me, and I offer the following links to investors using an RBF approach. For some I can offer introductions, even, if you approach me correctly.

RevUP Capital - uses debt-structured RBF

Lighter Capital

Indie.vc - They’ve published their term sheet here, a sample cap table here, a more detailed explanation of their model here, and a podcast featuring indie.vc founder Bryce Roberts here.

==update 4/21/2019==

There are more articles appearing in the business press about RBF and closely related topics. Here are a couple of recent ones:

TechCrunch article focusing on Lighter Capital

Business Insider article by Jonathan Shokrian about focusing on slower growth and profitability

Perhaps this is the beginning of a movement?