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Revenue-based financing: The next evolution of early-stage venture investment

 

Introduction

Revenue-based investing (RBI), also known as revenue-based financing, or revenue-share investing, is a natural next step for the private equity and early-stage venture investment industry. However, due to RBI being a relatively new model, publicly available data is limited. 

To address this foundational gap in market information, we have developed a proprietary data set of 32 RBI investment firms, 57 distinct funds, and 134 companies that have secured revenue based investing. Upon thoroughly analyzing the data, we’ve been able to identify the total number of investment firms and amount of capital that comprise the RBI industry, the specific verticals / business models that are most actively leveraging RBI, and the typical profile of companies that access this form of capital. These findings are summarized below, with the full industry-spanning report that defines the overall revenue based investing market as it stands today, available to download here.

As context, the financial structures used by VCs haven’t evolved much since they first emerged in 1957. Today, 63 years later, the model is almost precisely the same, with only incremental changes such as more efficient capital markets and industry standards for structuring deals, pricing companies, and more. 

More recently, we have seen numerous new investment models and financing instruments, including shared earnings agreements and point-of-sale capital. One of the most prominent, and popular, new models for investors is revenue-based investing (RBI). 

However, because the model is new, there is a lack of publicly available data, industry standards have not yet been fully established, and similarly to the equity investment market, there is little transparency into the cost of capital that investees truly pay in exchange for taking on a revenue based investment. Thankfully, there have been some notable efforts to drive transparency in the RBI market. For example, Bigfoot Capital open-sourced their RBI model, outlining it in a blog post and sharing their RBI financial model and anonymized term sheet, but a thorough, quantitative, industry-wide analysis has not been conducted until now. 

 

Overview of Revenue-Based Investing

In order to raise RBI, the company must normally be generating revenue, but is not necessarily required to be profitable, although profitability, or at least a near-term path to profitability, is often an important criteria for many investors.  “For start-ups with revenue, RBI may be a good option because, even though the start-up may not be profitable, it can reduce dilution — especially for founders,” said Emily Campbell, Esq. of The Campbell Firm PLLC, a New York City law firm which represents serial entrepreneurs and venture-backed businesses. “Taking in some smart equity or convertible debt and balancing that money with other financing can be a good strategy for a start-up.”Profitability decreases the risk of default, and assures that the investee has the ability to service the debt. 

In regards to the applications which are best suited to RBI, B2B software-as-a-service (SaaS) companies rise to the top of the list primarily because one is able to — in essence — securitize the revenue being generated by a company and then lend capital against that theoretical security. In addition to SaaS companies, RBI is being used quite frequently in the impact investing community as it solves the problem of a lack of normal M&A or IPO exit paths for impact-driven companies, and are sometimes marketed as a non-extractive form of investment structure. Beyond B2B SaaS and impact investing, many other verticals are adopting the model as well, including ecommerce/D2C, consumer software, food & beverage, and more. It ought to be noted, however, that regardless of the specific business model a company employs, the investee is typically required to have repeatable sales and a track record which demonstrates a strong revenue stream, and therefore a clear ability to return the capital to the investors. 

 

RBI Landscape

Summary of the Market

We have identified 32 U.S.-based firms actively investing via a revenue-based investing instrument, with those firms managing 57 distinct funds representing an estimated $4.31B in capital. Through our analysis of those firms, funds, and investees, we found that: 

 

  • The number of firms and the amount of capital committed to RBI is increasing, and we forecast that this trend will continue.
  • B2B software was not surprisingly the largest consumer of RBI,
  • There was a surprising amount of activity across industries which are not yet typically associated with revenue-based investing such as food & beverage, consumer products, fashion, and healthcare.

Firms were included in the data set (and by extension, determined to be actively making revenue based investments) if they:

  • Invest in companies using an instrument where the return is generated from the principal plus a flat fee which is paid back via a fixed percentage of revenue
  • Payments to investors are made on a monthly (or longer) basis
  • The payback period is expected to be longer than 12 months

 

The specific number of firms we believe to be quite accurate, representing only active, U.S.-based revenue-based investing firms. The number of funds however may be underestimated. This is due to the fact that, although each firm is associated with at least 1 fund, we did not include additional funds beyond that unless they were confirmed through other sources, such as the firms’ public communications, their SEC Form D, or other sources as outlined in the methodology section at the conclusion of the full report.

 

Data Analysis, Investors

The total amount of RBI capital that has already been allocated to companies across all firms and all years is $2.1B. However, it should be noted that this includes the outliers in our dataset, namely Kapitus, Clearbanc, Braavo, and United Capital Source. Once we remove those firms, the remaining 28 firms, representing 51 funds, have allocated $592.8M. This figure of $592.8M is almost certainly an underestimate due to the fact that only 19 of 32 firms had a known “amount of allocated capital”, whereas the remaining 13 firms have unknown values (i.e. zeros) for the amount of capital they have allocated thus far. Therefore, if all 32 firms had a valid and confirmed amount of allocated capital, we can logically conclude that the number would rise dramatically from the current figure of $592.8M.

Increasing Popularity of RBI

New RBI firms have been founded every year since 2013. In 2010, five firms were founded and in 2015 four additional firms were founded, then from 2014-2019, two or more firms were founded each year. 

Clearly, there has been a major uptick in RBI firms being founded since 2005, with a relatively consistent number of new firms being founded over the 15 years since then. In the last 10 years alone, 25 RBI firms have been founded. 

Funds Raised by RBI Investment Firms

Since 2015, 35 distinct funds have been formed by the 32 firms in our dataset. This leaves only 16 funds which were formed prior to 2014, and 6 funds for which we could not confirm the year of formation. With the number of firms entering in the space, it follows that the number of distinct funds would grow accordingly. One particular area of interest, although not addressed in this paper, is whether or not these new firms are directly competing with traditional venture capital as they fundraise, or if they are perhaps raising funds from other pools of capital. 

In regards to capital allocation, the data seems to tell the story that there are a large number of firms still allocating capital from their first fund, as there were 10 firms that formed their first fund since 2017, therefore it’s likely that many, if not all of those firms are actively investing out of their first fund today, depending of course on their individual fund lifecycles. That said, it stands to reason that the number of firms investing out of their inaugural fund is likely to be higher now, in 2020, than it ever has been before.

 

Total Amount of Capital Allocated to RBI Funds

Narrowing further to focus solely on investors, we found that the mean fund size is $56.2M, while the median fund size is $20M. There are 57 funds associated with the 32 firms in our dataset, with 51 funds being associated with firms that are not outliers. The capital we were able to confirm has been committed to distinct funds is equal to $1.85B.  This figure overall is low, and shows that only $6M of the $1.8B is managed by the firms identified as outliers: Kapitus, United Capital Source, Braavo, and Clearbanc. For each of those firms, we were unable to confirm the size of their distinct funds, and therefore this figure woefully underestimates the assets under management for each of those firms, who collectively claim to have allocated several billions of dollars in capital to small businesses. 

Out of 57 funds, 33 had a known fund size, while 24 remain unknown. Among those firms with known values we found that the average fund size is $56.2M, while the median fund size is $20M.

 

Dry Powder

We estimate a calculated total of $2.18B in dry powder across the industry. Reaching this figure was difficult due to the fact that there were 24 funds for which we did not have any concrete total committed capital data. Therefore estimating the amount of unallocated, yet committed capital is inherently challenging. However, in an effort of good faith to calculate the amount of dry powder in the industry, we took an oversimplified view of the data and made several assumptions to arrive at the final estimate of $2.18B.

Number of Deals Executed by Revenue Based Finance Firms

The firms shown in the chart below have all originated less than 40 RBI investments according to our data set. These figures are likely to be under-reported as we do not have a comprehensive view of their portfolios. However the authors were compelled to only report the data as it is available, and not include data based on assumptions. 

 

 

 

Data Analysis, Investees

The majority of the below investee data has been collected through primary research. We gathered data on 134 companies, all of whom have received revenue-based investing. 

Average Revenue of RBI Investees

The average annual revenue of the investees in this data set is $33.4M, while the median annual revenue is $5.4M. Our hypothesis is that the data set itself is skewed towards larger, high-revenue companies as a result of the larger financings being more publicized than smaller transactions which are less likely to warrant press coverage or publicizing from investors.

The vast majority of companies leveraging RBI typically generate less than $20M in annual revenue, as shown in the chart below. The data included in the chart represents 89 companies (identities redacted) whose revenue was known at the time of writing, and therefore does not include the 45 investees with unknown revenue. 

 

 

 

 

Industry Analysis

As expected, the industry that received the highest number of RBI loans was B2B software, equating to 42 companies of 134, or 31.3% of all investees. Companies within the “B2B software” category included those who were targeting any type of business customer, including large enterprises, small businesses, independent creators, entrepreneurs, retailers, or others. 

B2B software was expected to be the leading industry, and validates (at least by correlation) several theories that have been shared recently by others closely watching the RBI space. For example there has been a recent focus on SaaS revenue securitization, and the potential for creating a high-yield fixed income product off the back of it. It’s interesting to see the first half of this equation coming to life in the form of this investee data, yet the industry hasn’t matured enough yet where the proposed derivative financial products may benefit from any sort of mass adoption. 

 

 

 

 

Age of investees

When reviewing the years in which RBI investees founded their companies as a cohort, there is a clear rise in the number of number of investees/companies which were founded in the years from 2011 – 2015, before the data starts dropping back down, culminating in only one investee who was founded in 2020 and has still managed to execute an RBI deal since then. We were able to obtain the year founded for 127 out of 134 companies, making the data relatively complete for our purposes. 

Because the number of RBI deals have consistently dropped since 2015, if viewed in isolation this data may lead an individual to infer that RBI is declining in popularity. However, that line of thinking does not take into account the fact that companies may simply need 3-5 years to establish a repeatable business model and gain enough traction before they qualify for substantial RBI loans. The other side of the coin is that companies must mature to a point where they fit the risk profiles of RBI investors as well. Therefore the fact that the number of companies that were founded in years 2016 – 2020 is lower than previous years is likely attributable to this fact, and furthermore, that the administrative and transaction costs of applying for, managing, and paying down an RBI loan may not be worth it companies that are only 1-3 years old.

The oldest company within the data set – a well-known hospitality brand – was founded in 1950, whereas the company founded most recently was formed in 2020. We found that the median year of a company’s founding in our data set was 2012, while the average year founded is 2009. 

  • 85 RBI investees, or 63.4%, were founded in the years 2010 – 2020

  • 114 RBI investees, o 85.1% of investees were founded in the years 2000 – 2020

This is an interesting counterpoint to our understanding of the age of investees above, which illustrates that although RBI investees typically must be more than three years old, they also are almost never more than 20 years old. 

 

Conclusion

The goal of this report is to increase the transparency of the overall RBI market, and to provide both investors and investees with concrete data and industry insights. We believe that nearly all of the data point to a growing RBI industry with increasing amounts of capital, higher frequency of originations, specialization among investment firms, and perhaps most importantly, the standardization of investment terms and industry norms, which will allow for even greater transparency and price-competitiveness, ultimately benefiting entrepreneurs.  

Bootstrapp developed this extensive analysis on revenue-based investing for the purpose of accelerating the shift towards greater transparency and standardization within the industry. As we build a platform that automates fundraising for non-dilutive capital, it’s become clear that one of the foundational issues that exists for founders today is simply information asymmetry, which this analysis aims to address head on. 

To that end, we’ve been able to confirm several of the common hypotheses that are shared within the broader RBI community:

First, the number of firms and the amount of capital entering the RBI industry are both increasing, and we expect this trend to continue as the industry matures. Despite not being directly addressed in this report, the awareness of RBI among entrepreneurs and small businesses is still low, and we expect that, as this awareness increases, the demand for this type of financing instrument will grow proportionally.  

Second, among all investees, B2B software companies are the most active subset, theoretically confirming that their business model is best suited to RBI and that predictions of the industry effectively securitizing recurring revenue will continue to ring true over time. Investees are also relatively younger companies, with over 63% of RBI investees being founded in the past 10 years. 

Third, there was a surprising amount of activity across industries which are not typically associated with revenue based investing. Food & beverage, consumer products, fashion, and healthcare were unexpected, and we believe that the use of RBI in these industries may prove it to be a more flexible instrument than previously thought. Anecdotally, we include impact investing in this category of other investment areas as well, although we unfortunately did not have impact investment investees included in our database. 

Ultimately, we believe that the overarching lesson to be derived from this work is that the demand-side (investees) of the RBI market will greatly benefit from greater transparency. It is therefore our recommendation to founders, CFOs, and executives to demand greater transparency from their RBI investors. More specifically, we recommend that companies work to remove confidentiality provisions from investors’ term sheets and/or contractual agreements before executing them. These confidentiality terms solely benefit the investors and hurt the overall efficiency of the market.

 

Authored by Thomas Rush and Daniel Birmingham, with a massive, and well-deserved thanks to all those who contributed to the creation of this analysis, especially: David Teten, John Berger, Dan Birmingham, Brian Parks, Jonathan Bragdon, Zack Mueller, Brian Mikulencak, Samira Salman, and Marco Cesar Solinas

 

About Bootstrapp 

Bootstrapp provides automated fundraising for SaaS companies. We’re democratizing access to capital for founders, with an initial focus on revenue based investing. Request an invite to join the private beta.

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Term Sheets 101: Revenue Based Investing

Reviewing the Details of a Revenue Based Investment Term Sheet

Everyone wants capital to start or growth their business, but understanding the nuances of term sheets is incredibly difficult if you’ve never negotiated an investment previously. In this quick video, we review a term sheet that was open sourced by Bigfoot Capital. 

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Introducing Bootstrapp Bootstrapp is building a community of founders interested in bringing more transparency to the early-stage investing + lending market ...

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Growing Your Small Business In The Digital Age

Bootstrapp’s team of experts are routinely questioned about how to grow a small business. This used to mean hitting the streets to drum up business, marketing yourself via word-of-mouth, and hiring the best employees in your area to run things. Today, the world has changed, and the majority of your business projects likely take place online. If you’re not already working with the internet to grow, it’s going to work for your competitors. 

Understanding the Digital Age

Things move at a much faster pace and considerably more anonymously today than they did just 20 years ago. Because of this, business owners must take greater care to understand the subtle nuances that go along with running a business online. Cybersecurity is one area where entrepreneurs as well as managers should pay close attention. Scams, data breaches, review attacks, and other unfortunate—yet preventable—events are commonplace, and hackers can enter a business via vulnerable networks or devices.

Slow Growth

Although the internet makes it possible to grow quickly, business owners must still remember not to jump at full speed once they obtain growth capital. While a quick injection of money is an obvious benefit of having working capital, it always pays to keep some aside and to grow sustainably. This should include things like investing in marketing and ensuring that your company can keep up with demand and react to customer wants and needs.

Tools of Today

The greatest tools business owners have in this day and age are all directly related to the way the internet has changed the way we function day to day. A great website is one example. Unfortunately, until you know exactly what you need and how many functions your site will serve, it’s difficult to determine your overall operational costs. As WebFX explains, a site launched can cost $12,000 or more on the low end with maintenance running the gamut from about $35 per month to $5000 per month.

Keeping with the mindset of prioritizing cybersecurity, the safety of your company’s assets are also crucial. As a business owner, you’ll want to hire someone to act as webmaster, which is an individual that will keep your site up, running, and functional. They may also handle some of your cybersecurity needs. However, you may also need to invest in someone that can handle digital security exclusively. This would include services like ensuring your antivirus and firewalls are up-to-date, monitoring any cloud services you utilize, and keeping a close watch on your networks.

Other digital tools for today’s business owner include:

  • Social media. Social media is the word-of-mouth of today. However, unlike in times gone by, the world can know in an instant if you’ve done something wrong, and if you do not react quickly you may never get a chance to rectify issues. A social media specialist can help you do just that while maintaining brand awareness and staying in constant contact with your customers.
  • Workflow systems. Workflow management software is one of the most efficient ways to monitor efficiency. These systems allow you to create custom workflows that you can share with your employees no matter where they are. This is crucial in an age where you may have a workforce spread out across the country.

This is just a small sampling of the types of digital help that a business owner may need. They are crucial, however, to success in an ever-changing digital age. The main takeaway here is to prioritize growth, but do so in a way that both keeps pace with the times but also gives you the room to make smart decisions at every benchmark. The internet and other tools can help you find the balance you need to do just that.

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How to Not Get Funded

In speaking recently with Brian Parks, founder of Bigfoot Capital, we touched on the primary reasons that SaaS financing deals ultimately fall through – or fail to even get off the ground in the first place.

Bigfoot receives hundreds of inquiries a year, evaluates ~40% of those inquiries, and ultimately finances ~10% (25% of what they spend time evaluating). Throughout their process, it’s paramount for them to run as efficiently as possible and not string Founders along. In order to do so, they rely on Founders to engage with them, providing data and time to talk through their request for capital and the business holistically.

Even though many founders claim to need growth capital, Bigfoot is at times left standing there with open arms with the founder nowhere to be seen. Without true engagement, the process stalls out, creating a mutually frustrating outcome.

It seems counter-intuitive, perhaps even unlikely, that founders would go radio-silent on a partner who could provide them with much-needed capital and ongoing support, but it happens consistently.

So, why do so many founders ghost?

In our conversation, Brian quickly summarized what he perceives as the primary reasons as to why founders don’t follow through on the funding process, which we’ve summarized below. We’ve also included suggestions for founders/executives to get ahead of these hurdles, so that their own funding process isn’t delayed when it matters most: at the time when capital is needed to sustainably grow your business.

Reason 1: Lack of commitment

Brian sees a lot of Founders come through who lack commitment to truly investing in the fundraising process. For success, alignment of effort between the founder and the potential financing partner is really important. By no means should this be a harrowing experience, but it does take attention, communication and collaboration to succeed, all of which also matter for relationship building and getting the partnership off on the right footing.

Proposed Solution:

Regardless of the type of funding they are pursuing, founders need to mentally and logistically dedicate time to their fundraising processes. “Fundraising is a full time job” is an adage often attributed to raising from VCs, and it ought to apply, at least in part, to the process of raising non-dilutive capital as well. In other words: clear time on your calendar and make sure your team or co-founder can handle the day-to-day of the business for 2-3 days a week so that you’re able to focus solely on the fundraise during those times. 

Reason 2: Coming Unprepared

Bigfoot really tries to communicate and streamline their process and requirements as clearly as possible to minimize any surprises. If companies have their operations in order, it’s pretty straightforward. If not, it’s a lot more manual with more back and forth and confusion/pain.

Proposed Solution: 

Make sure you have your data, story and documentation in order before you begin your investor conversations. A helpful post on this topic can be found here if you need to learn more. Brian recommends utilizing tools like ProfitWell or SaaSOptics to track/share metrics and having at least outsourced accounting/finance support in place. Bigfoot has built SaaSScore.co on top of ProfitWell’s Metrics API to streamline the data acquisition process and provide Founders with an indication of their SaaS health and financing that may be able to access from Bigfoota. Check it out! See in section 4 how this puts you in a position to WOW any potential capital partner, have them lean in and drive a successful financing. Ideally, you are the most buttoned up company they have ever looked at. That’s a good goal to set for yourself and your team from the get go (and applies to any form of financing throughout the life of your company). Being fully prepared across all facets of your business makes every subsequent financing that much easier (and enjoyable). 

3. Fear

Raising money is always an unknown endeavor, whether or not you’ve done it before. If you haven’t done it, it’s fear of the unknown, fear of failure, fear of impending judgement and pain to be inflicted upon you. If you have done it, many of those fears still exist along with any battle scars you still carry from previous fundraising experience. There’s also the psychological fear of debt. What if I can’t pay them back? Can/will they take my company? How will other potential investors view me/my company having taken this money? It’s our job to cut through all of this and deliver comfort and certainty as a partner.

Proposed Solution:

This is unique for each person, so it’s a bit tougher to provide blanket advice. However, remember that you already have a business, you know where you’re headed, and with the right capital partner you’ll be able to simply be even more successful. Any investor who works with you wants you to succeed as well (test them on that, get references) – they’ll be right there, literally supporting you and cheering you on, so don’t view it as a daunting task… instead, perhaps it’s helpful to view the fundraising process as simply finding the partner with whom you’d like to succeed.

4. Value Perception Mismatch

When there is a material mismatch between the perceived investment that you have to put in up front and the resulting value you may receive by having done so, that can foul things up. If you can’t clearly determine the value you can create (and retain) from the capital you’re seeking, you may need to pause and do some thinking. Also, have the potential capital partner help you determine the value (do some collaborative modeling). Take the time to build a relationship with the lender.

Brian mentioned he recently received a 10-page beast of a diligence request from a new capital partner for Bigfoot, and he simply has to satisfy it to get their $ and grow Bigfoot. He and his team cranked it out in four days with focus and collaboration. View this as your opportunity to shine and differentiate. Brian’s proud of the way they have built Bigfoot, so this is an opportunity to expose new parties to how they operate.

How did they do it? They had their sh&t together from the previous three years as they were building their business, with an eye to the future. Founders need to realize that you just have to put in the work (and should do so beginning day 1) and the value will come from doing so.

Proposed Solution:

This is related to both #1 and #2 above, yet we’ve decided to parse it out as it’s focused more on the expectations than it is on the actual documentation and diligence process. Simply remember that someone is going to be cutting you a sizable check. Would you give a stranger $10,000 without asking questions and receiving some assurances from them?  How about $100,000 or $1M?  If you put yourself in the shoes of the investor, you’ll understand why they are requiring certain elements within their diligence process, and as a result, you’ll be a better partner for them as well — all of which will likely result in a better working relationship long term.

If you avoid the hurdles above it certainly doesn’t guarantee that you’ll get funded, but if you go bumping into these hurdles one by one, fumbling through the process because you weren’t prepared – it’s going to be damn hard to get that term sheet in your hands. 

Collaboratively authored by Brian Parks and Thomas Rush

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What do I need to obtain growth capital for my company?

Having your ducks in a row is easy to do, and is critical in order to obtain capital from a lender, investor, VC, or other person / institution. Yet it’s amazing how many founders begin the fundraising process without first preparing their books and proper documentation which will save them a huge headache down the line.

So what do you need to have prepared? In short, you ought to at least have the following documents up to date and ready to go for any lender or investor:

  • Balance sheet (previous 3 years, or as far back as applicable)
  • Income Statement (previous 3 years, or as far back as applicable)
  • Cash Flow Statement (previous 3 years, or as far back as applicable)
  • Previous tax returns (previous 3 years, or as far back as applicable)
  • Cap Table

And then, depending on the type of financing you’re pursuing, it may be helpful to also have the following:

  • Accounts receivable aging report
  • Accounts Payable aging report
  • Investor Deck
  • Financial projections

Most of this you can export out of your accounting software quite quickly, and you’ll have a smoother time with your investor conversations too. It’s a win-win, for a relatively low-effort output.

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Defining “Value Preserved” – A New, But Core Concept in Growth and Debt Financing

The technical explanation: 
At Bootstrapp, we view the “value preserved “”the retention and/or accretion of potential value from the alternative chosen, as compared to other alternatives.” This is typically measured as the amount of equity value, in dollars, that a company’s leadership is able to retain for themselves, employees, and other shareholders instead of needing to sell the equivalent amount of equity-value to equity investors. This value typically grows as one projects into the future, with a strong correlation to the growth in overall enterprise value. 

The Plain English Explanation
Think of value preserved as the of opportunity cost. Instead of missing out on something because you didn’t pursue an opportunity, you actually retain, gain, or preserve value within your company because you did not pursue an opportunity. Furthermore, opportunity cost is defined as “the loss of potential gain from other alternatives when one alternative is chosen.” Value Preserved, as we define it, is a type of opportunity benefit – i.e., “the retention and/or accretion of potential value from the alternative chosen, as compared to other alternatives.”

Let’s use an example: 
What if you sold 10% of your company today for $1M. That would mean that your company is currently worth $10M. Not bad. Now what if in five years, it’s worth $50M. That same 10% of your company is now worth $5M – and recall that in this scenario you sold it for $1M. Obviously that’s all fine and dandy – an investor took a risk on you and they should be rewarded for it. However, what if you – as a savvy founder – were able to obtain that same $1M that you had originally needed, but split it up and took out $500k in debt, and then only sold 5% of your company for $500k – so that you still ended up with the same capital that you would have had otherwise, but you sold only half of the equity. 
 
Later on, using the same scenario, the 5% of equity that you sold would be worth $2.5M – meaning that the 5% of the company that you DIDN’T sell would also be worth a cool $2.5M. You just preserved $2.5M in equity that you now own instead of the investors owning it. You get to keep that cash during a liquidation event instead of them.
 
Now obviously, in this scenario, you’ve also taken out debt – and so you’ll be paying interest on that debt as well. So it’s not a perfect comparison. But it’s easy to also calculate the interest payments you’ll be making on the proposed $500k of debt, especially if you have concrete offers from financiers with hard numbers so that you can simply run the math. 

And so the next step is easy: you take the $2.5M of equity that you preserved, subtract the interest payments that you’ll need to make as a result of the debt, and voila: You have your “Preserved Value”. Depending on a number of factors, the preserved value can sometimes be in the millions – and many founders simply sell that value to equity investors without giving it a second thought.  
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Directory of Investor Marketplaces: Are they the next big thing? It’s doubtful.

Investor marketplaces seem to be all the rage nowadays. In fact there are eight of them that we’re currently aware of:

There are several issues with equity investment marketplaces however. 

First, and most often mentioned among founders and investors alike, is the issue of adverse selection. Strictly speaking, adverse selection is a market situation where buyers and sellers have different information. That itself, in the strictest sense, is common across almost every market — since nearly zero markets actually have perfect information symmetry. However, perhaps even more relevant is an example of adverse selection: George Akerlof’s idea of the Market for Lemons, in which the sellers (founders in this case) are selling both lemons (a terrible car with lots of problems) and peaches (a great car that will require minimal repairs). 

In this scenario, buyers (investors) change the price they are willing to pay to accommodate the risk of buying a lemon. However, that drives peaches out of the market, further reducing the price that a buyer is willing to pay because now the chance that they end up buying a lemon is even higher. Imagine you’re buying a car from a very high-end dealership dealing only in brand new cars under warranty — surely you’ll pay a premium for the risk that has been reduced for you as compared to the scenario of purchasing a car from a small roadside used car lot, where the risk of a lemon is greater. This is the kind of market that investor marketplaces often generate: one where the number of lemons is unknown, and therefore affects the prices of even the strong assets for sale. As the price drops due to the unknown quantity of lemons within the available inventory (whether the inventory is cars, companies, or something else), more and more peaches are driven out of that specific market, and the feedback loop continues until, in the worst case scenario, only lemons are left. 

That is one example of why these marketplaces don’t work, however, I think there are broader issues at play as well. 

1. Most equity investors rely on social proof as a filter for making investments, whereas these marketplaces strip that away from the process (for the most part). 

2. The best investors don’t use these marketplaces. Therefore, we end up with the reverse scenario as described above – where the best founders now avoid these marketplaces because they are aware that the top investors are only found elsewhere. Thus creating a feedback loop that continues to degrade the quality of both deal flow and investors participating. 

3. The obvious: there are eight — count ’em — eight marketplaces listed here. Meaning that even if the other issues were overlooked, both sides of the market are now fragmented further, and they are 87.5% less likely to be matched with their ideal counterpart. 

All of that said, these marketplaces clearly garner participation from both sides of the market — demonstrating that although they may not be perfect, they are serving a need.

This directory is a living document and we work to update it as often as possible. Please contact the team at Bootstrapp if you would like to submit an organization for consideration — you can simply shoot a quick note to [email protected] and we will review your submission. 

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The Best Growth Capital Tools from Around the Web

Growth capital tools are an ideal solution when you want to transform complex masses of information into an easy-to-understand chart, summary, or calculation for your business.

Using these tools can be beneficial since they help you make decisions, but finding the right tools is difficult. To help you get started we’ve selected our pick of the best growth capital tools and apps out there. To give you more choice, we’ve included both free and paid options.

Give these top tools a try and let us know which ones you get on with by sharing your favorites on Twitter.

Cash Flow

Runway: A free, visual tool to help you understand, manage and extend your cash runway. (Free)

Float: Get a real-time view of your cash flow and make more confident decisions about the future of your business. ($49/mo)

Equity

Foundrs: Calculate the proposed equity percentage that each founder ought to receive based on time, money, and resources invested into the company. (Free)

Capshare: Issue stock and manage all your equity in one place without getting bogged down in spreadsheets and paperwork.  (Free)

Accounting

Bench: Get a professional bookkeeper at a price you can afford, and powerful financial reporting with zero learning curve.

Pilot: Pilot takes care of your bookkeeping from start to finish so you can focus 100% on making your business succeed.

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Revenue Based Financing for SaaS Companies

At this point I’ve spoken to nearly every revenue based financier in New York, and one theme continues to rear its head, which is that B2B SaaS are the clear favorites of the RBF industry.

If you’re a B2B SaaS company with a regular income stream, you have a very good shot at obtaining Revenue Based Financing. I’d certainly recommend you check out all of the RBF Options we have available on our site, as I think you’ll find you qualify for quite a few.

The reasons for this are fairly obvious:

  • B2B companies have a higher price point and can typically afford to pay for a service for the foreseeable future.
  • SaaS companies inherently have steady revenue streams – thus making the borrower much more solvent in the long-term.

Have other questions we could answer? Feel free to reach out.

Are there topics you’d like us to write about or features you’d like us to build? Request it here.

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Revenue Based Financing Firms and Companies

I get a lot of questions about revenue based lenders, and you can obviously find all of the growth capital options yourself using our web app which will provide you with customized recommendations. However, to make it even easier for everyone who would like to do their own research please refer to the list below of revenue based financiers that we’re aware of. Do you know of any others? We’d love to hear about them! Please just drop the name of the fund / company here.

List of companies / funds that offer Revenue Based Financing:

Next we’ll be covering the question of How to Choose a Revenue Based Financing provider. It’s a super complicated question that we’ll simplify for you.

Have anything else you’d like to see us write about or build? Drop your idea here.

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How much does revenue-based financing really cost?

There’s an incredibly counter-intuitive aspect of revenue-based financing, which is this: the more successful you are as a company, the higher the cost of capital associated with your RBF.

This is counter-intuitive for a few reasons:

  • It’s the opposite of how society typically views capital. If you walk into a bank and have a successful business, you’ll get a cheaper rate because you’re a less-risky borrower – not a more expensive one.
  • Most people – myself included – generally equate time with money. (You know, the old saying goes…). For example, if you take out a car loan and then pay it back earlier than expected, you’d pay less interest than if you took the full term to pay it back. This makes sense – the lender has their principal plus the pro rata interest, so now they can go lend it to the next person. And you, the borrower, just saved all of the interest that would have been accrued moving forward – had you kept the loan open.
  • It appears that RBF has a structure that punishes borrower for good behavior. In this case ‘good behavior’ meaning that they run a successful company. When someone is more successful than expected, are they expected to actually pay a higher cost of capital?

However, the kicker that will clarify it all is this: The amount of capital paid back in addition to the principal is set in stone, and time is the variable that can change, which is the inverse of the typical model. Compare this to the car loan example above in #2 – where the total amount of money paid back is flexible dependent on when its paid back, and the interest is fixed – based on a fixed period of time set by the lender. For example, many car loans may be structured for 60 months. Time is set in stone, and how much you pay back depends on your ability to pay that loan back faster (assuming no pre-payment penalties).

 

Let’s simplify and use some real numbers. Scenario A: If you were to take out a traditional car loan of $10,000 and pay it all back 1 day later. You’ll only have to pay interest on that 1 day when you had the capital. If you took out a relatively expensive loan and agreed to pay a 10% APR, that 1 day of borrowing would only cost you .027% in interest.

 

However, let’s run Scenario B, this time using the revenue-based financing model: You take out a loan of $10,000 with a fee of $1,000. Most RBF lenders operate on this fee-based model which gives the borrower flexibility as to when they pay back the loan (i.e. time is the variable that can change). Now, no matter when you pay it back, you have to pay back $11,000. If you were to follow the same payback timeline as scenario A, and pay back the $11,000 the next day – your APR would be 3,650%.

 

Obviously RBF loans aren’t built to be paid back the next day, but the math illustrates an incredibly important point: revenue-based financing can be tricky to leverage, as you may actually be leveraging incredibly expensive capital if you’re more successful than you originally projected. It’s a relatively new model where time is a major factor in the cost of capital you use to grow your business – and adds to the complexity of your decision: which instrument do you choose to finance that growth?

How does revenue based financing work?

Check out a quick video walk-through of the tradeoffs you’ll want to consider:

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Who acquires small businesses? The Official Directory of Bootstrapped-Company Acquirers

Who actually acquires small startups and small businesses? If you’re not a high-growth rocket ship, or perhaps your business doesn’t fit within the corporate strategy of a tech giant like Google, then who out there is truly acquiring normal, healthy businesses that are growing a decent rate?

  • Empire Flippers: We take the friction out of buying and selling online businesses
  • FE International: Sell Your Online Business With a Website Broker You Can Trust
  • Flippa: #1 platform to buy and sell online businesses
  • HoriZen Capital: Experienced M&A Advisors backed by a powerful network of investors and entrepreneurs.
  • Investors.club: Investors Club gives you private access to buy proven and growing online businesses that aren’t listed anywhere else.
  • MicroAcquire: Startup acquisition marketplace.
  • Perch: Acquires and operates Amazon FBA businesses
  • Respawn Ventures: Respawn Ventures buys, grows, and sells niche tech companies. Our focus lies within B2B SaaS but if we see a project with an opportunity for global reach, we’ll seriously consider giving it a second life.
  • SureSwift Capital: Dream exits for bootstrapped founders. Sell your SaaS business.
  • Tiny Capital: We start, buy, and invest in wonderful internet businesses.

This directory is a living document and we work to update it as often as possible. Please contact the team at Bootstrapp if you would like to submit an organization for consideration — you can simply shoot a quick note to [email protected] and we will review your submission.

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Equity vs. Debt: There’s Less Choice Than You Think

Let’s simplify things.

I’ve worked with tens of founders, many of whom are interested in non-dilutive capital despite the fact that they have zero, or very little actual revenue. So before we dive into the details, let’s make this easier on all of us and eliminate a few options right out the gate:

  • If your company doesn’t generate revenue, you can’t take on debt.
  • If you don’t have a high-growth business, you can’t take on equity financing.
  • Finally, if you want full control and ownership of your company, then don’t take on equity financing.

Put another way, the above three points can also be stated in the affirmative as such:

  • If you have revenue, you have the option between debt and equity.
  • If you are pursuing a low-growth business or a small market, debt is your only option.
  • If you want control and ownership of your company, debt is your best option.

At this point, you ought to understand generally which category your company fits within, and whether or not you even have the option to pursue debt as a method of financing your company. If you are generating a solid amount of revenue (at least $5k/month at a minimum) we’ll dig into the decision-making process in the next post.

And until the next post is published, to save you the time of scouring the internet, I’ve also gathered up the top articles on equity vs. debt and provided the main takeaway from each:

  • An example scenario of two identical companies – one that chooses debt, and one that chooses equity financing, and then shows the financial impact on each, which is a useful in demonstrating how the mechanics of each work.
    Article: Equity vs Debt Capital Funding: Comparing the Costs

    Takeaway: “if you’re looking for a lower cost of capital for startups, venture debt is often the best way to go long-term (as this scenario explained). But, if you’re looking for operational funding to maintain your organization as you scale up or have already utilized debt financing, SaaS equity financing may be the better route for you.” (take this with a grain of salt as it’s a sales pitch).
  • A well-written article that essentially explains the different types of equity and debt funding, along with some pros and cons.
    Article: Debt vs. Equity Financing: Pros And Cons For Entrepreneurs

    Takeaway: “the biggest and most obvious advantage of using debt versus equity is control and ownership.”
  • A bullet point list of attributes for both debt and equity that has a number of great points buried within it.
    Article: Debt vs Equity in the Startup Venture

    Takeaway: “A company must maintain a debt to equity ratio that meets the capital needs of the company while not making the company fiscally vulnerable. An investor will be reluctant to invest in a highly leveraged business (i.e., has lots of debt) because the equity investment is always subordinate in priority of payment to the debt.”
  • A bunch of quotes from various founders on their one-sentence opinions of the two options. The quotes are all over the map and not very helpful.
    Article: Debt vs. Equity, Which is Right for Your Startup?

    Takeaway: None, but it does provide a number of different perspectives on this issue and shows how difficult a decision this can be without access to proper advice and data.
  • The first article that even references the actual decision. Finally! and thank you.
    Article: The Difference Between Debt and Equity Financing

    Takeaway: None. However, this was the first article to at least mention the question of “How to choose between debt and equity financing” – they just didn’t answer their own question, and instead referenced the weighted average cost of capital (WACC) which isn’t relevant for a decision between debt and equity, but instead helps a company compare scenarios where BOTH equity and debt are involved.
  • This article just defines the different types of financing, for the 1 millionth time on the internet, but does provide a good point about tenure.
    Article: Debt Funding Vs Equity Funding For Startups: Pros And Cons

    Takeaway: “In comparing equity fund vs debt funds, tenures are usually longer for equity funds, while debt funds are categorised into short term and long term. Long term debt funds are raised for capital costs which have high-interest rates, and have company assets as collateral. Whereas short term funds are utilised in recurring payments, have lower interest rates and minimal collateral requirements.”

In my next post, we’ll get into the a more nuanced decision-making process for determining the best path forward among all of the financing options available to you – particularly if you’re a high-growth revenue-generating company, which essentially means the world is your oyster.

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Equity, Speed, and Cash Flow: You Can Only Pick Two

I have a hypothesis, which is that between the three options of:
1. Keeping equity
2. Reducing / eliminating any negative impact on your cash flow
3. Increasing the velocity of your startup / company

that you can only pick two. I drafted up a diagram to help illustrate the point:

To my mind, you can’t ever get all three of those corners of the triangle to align so perfectly that you are able to accomplish each goal simultaneously.

As an example, if you take out any sort of loan / debt, you obviously have put a dent in the future cashflows of your business, however you get to accelerate the velocity of your firm while keeping equity – landing you on the right side of the triangle.

If you don’t want to impact cash flow, or perhaps you don’t have any cash flow to speak of, yet you want to increase the velocity of your company – then you land yourself at the bottom of the triangle within the equity financing realm of the world. Get your pitch deck ready.

And finally, if you don’t want to – or can’t – reduce your future cash flow, and would also like to keep your equity, then you’ll likely need to simply bootstrap your company: that is, self-fund it.

It’s pretty simple. However, if you see any issues with the above mental model I’d love to hear them. Tweet at me if you have any thoughts: @thomasgrush.

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Director of Venture Strategy

Introducing Bootstrapp

Bootstrapp is building a community of founders interested in bringing more transparency to the early-stage investing + lending market. We believe that the capital markets that serve startups will become increasingly fragmented over time, and that owning the interface – where customer decisions are made – will create the most value for founders, Bootstrapp team members, and society. 

We are a very early-stage startup that is working directly with other founders, non-dilutive financiers, and a small group of advisors 

We are entering a decade which will likely uproot the traditional financial ecosystem – driven by the ability to programmatically manage capital, generate data-driven insights into true impact of investments, and a cultural shift towards equitable access to capital.


Description of the Director of Venture Strategy Role:

  • Implement an early-feedback loop to enable continuous feedback, learning and iteration for Bootstrapp’s products and services
  • Lead the development of a comprehensive go-to-market strategy which includes the ability to remain agile and react to market forces, customer feedback and more. 
  • Create intellectual property, points of view and industry-related content which will help elevate your professional profile
  • Lead the development of the Bootstrapp corporate development strategy by deeply understanding the market opportunity, customer feedback, and product roadmap. 
  • Ensure that the Bootstrapp team is consistently synthesizing market feedback to recommend opportunities for changes or improvements to be included in subsequent releases
  • Foster an atmosphere of innovation and excellent user experience for our customers
  • Support conversations with potential investors, advisors, and/or corporate partners. 
  • Be honest with other team members and partners, have fun, and work on the things that you find the most interesting.

As Director of Venture Strategy, you will benefit from having the following attributes and experience: 

  • A deep interest in value creation and startups. 
  • A desire to learn about prototyping, design, FinTech, and technology-enabled services. 
  • Considerable experience with strategy development, business planning and future-visioning. 
  • Design or product development expertise preferred, but not required.
  • An ability to operate effectively within ambiguity – i.e. being able to understand how to create value as an individual and company, and then drive relentlessly towards it, as you will have full autonomy on how you achieve the goals that we mutually agree on.

To apply, please provide your information here.

Bootstrapp provides equal employment opportunities (EEO) to all employees and applicants for employment without regard to race, color, religion, sex, sexual orientation, gender identity, national origin, age or disability.

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The Full Spectrum of Non-dilutive Growth Capital

The first major venture capital deal was made in 1957, in the form of a $70,000 investment in Digital Equipment Corporation (DEC). Since then, the industry has hardly evolved at all, until recently. 

Over the past few years, the pace of evolution has quickened. There are various investment models (the SAFE, the SEAL, revenue-based financing, and more). However, because the models are still quite young, there isn’t much publicly available data on them, let alone clearly defined definitions of each. 

This post is a simple attempt to simplify the conversation. I’ll dive in much deeper in following posts, breaking each financial instrument down into its component parts so that we can better understand the mechanics of them, but for now let’s consider that detailed breakdown as out-of-scope. 

Today, it’s all about simplifying the world of startup financing – particularly the non-dilutive realm. So let’s start with the basics: 

How are each of the non-dilutive financial instruments defined in layman’s terms? 

Leaning heavily on my experience in the startup finance space, lots of reading, research, and the collection of data on over 140 non-dilutive financing options, I’ve developed the below definitions. They are ordered roughly along a spectrum from debt → equity – meaning that the first item listed (Term Loan) is the most debt-like, while the last (SEAL) is the most equity-like. 

Definitions of growth capital: term loan, venture debt, working capital loan, invoice factoring, merchant cash advance, revenue-based financing, safe, convertible note, seal.

Have a different perspective? Do you disagree with any of the definitions above? I’d genuinely love to hear your thoughts. Please shoot me a note or comment so that we can develop a shared language (i.e., a commonly understood set of references, visions, experiences, and/or interactions that provide a foundation for strong communications) with regards to non-dilutive financing. 

With definitions of each type of financing somewhat settled, I then captured all of the typical attributes of each as well: 

Attributes of growth capital: term loan, venture debt, working capital loan, invoice factoring, merchant cash advance, revenue-based financing, safe, convertible note, seal.

There are certainly exceptions to the typical attributes as I’ve outlined them above. However, in my experience these are directionally correct in the vast majority of cases. If you disagree – please chime in so that the entire community of startup founders can benefit. 

No silver bullet

With a very general and broad understanding of the financial instruments we’ve covered here, it’s clear there is no silver bullet for all founders, and there’s no way to be 100% certain that a particular source of capital is the best one. However, after speaking with hundreds of founders looking for funding, it’s become incredibly clear to me that it’s really difficult to even understand the trade-offs between the various options. And if you can’t even properly account for the trade-offs, a founder can’t be expected to make the best decision for their company. 

As such, this is a framework that is meant to help all founders consider what trade-offs they are making when they decide to choose one type of financing over another. 

Hope it helps, and reach out to our team if you have any questions about anything growth capital-related.

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There Is No Golden Rule

First off, there are no golden rules that come to the world of financing. As any mortgage lender would say, they “take into account numerous factors.”
But that’s not very helpful, is it?

What is helpful, is knowing precisely what works. And from the numerous conversations I’ve had with lenders, investors and financiers overall, the ideal business to lend to is this:

A B2B SaaS company, generating $100k in monthly gross revenue with 80 – 90% profit margins.

Easy right? You just have to go build the perfect business and then someone will finally lend you some cash. But that doesn’t mean you must meet all those criteria for funding. Far from it actually.

In fact, we have an investor in our database who funds a revolving line of credit for as little as $1,000. Now THAT seems reasonable. You don’t need a 90% margin, million-dollar run rate business to justify $1,000 in credit. What do you need? Use our web app to find out.

See you there,
Thomas

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Is Revenue-based Financing Right for You?

If you want to learn about revenue-based financing (RBF), you typically end up at a site where they are also trying to sell it to you. And as a result, the message gets muddled. All of the benefits of RBF are raining down on you from on-high, and along with them, the trade-offs have been stripped out.

If you’re thinking of RBF, you’re going to be making trade-offs, so let’s display them loudly here:

You’ll pay more cash long-term, in order to pay less during your months with lower-revenue.

That’s the primary value prop of RBF. Your repayment of the loan goes up and down with your revenue, which is great, because as a startup you’re no longer stuck servicing a debt that you may not have the revenue to properly cover if you’re going through a slow month or two. The repayment adjusts to the performance of your business. However, as a result, the lender is taking a bit more risk on you. i.e. What if every month for your startup ends up being a “down-month”? Well, to make up for that risk, they charge higher interest. 

Lighter Capital for example, explains that “repayment caps usually range from 1.35x to 2.0x”. This means that the greatest amount you’ll pay back, regardless of what happens with your revenue, is 1.35 to 2 times the amount you borrowed. Seems simple enough.

That is the “cap”, which feels good to have a limit on how much you’ll be forced to repay. On the other hand though, if you went into a bank and they informed you that you’d be paying 100% APR on a loan, it may sound somewhat ludicrous. Essentially, you’ll likely be paying a high interest rate, but you’re getting lots of flexibility in return.

You’ll also give up far less long-term, than you would otherwise with equity-based investments from an angel of VC (that is, if  your startup does well).

Paying 2x the amount of the loan seems outlandish, that is, until your startup succeeds and you compare it to equity. 2x on a $500,000 RBF loan that helps you scale is certainly hefty, but it’s nothing compared to 20% of equity in a company that ends up being worth $10M. Instead of paying $500,000 of effective interest, you’re giving up $2M in equity at the exit (in this scenario at least). Those numbers obviously get even more dramatic if your company grows beyond that and becomes worth more. Imagine having a $50M startup, giving up $10M in equity – all when you could have taken out a $500k loan and paid a “measly” $500k in interest back on that over time. It kind of hurts to consider.

Revenue-based Financing is non-dilutive.

Simple. You’re trying to attract the best talent. If you have more equity on your cap table, you have more flexibility when creating compensation plans for potential co-founders or employees.

Save yourself time.

If RBF is a good fit for your company, you won’t have to spend 4-6 months doing the VC roadshow. Assuming you qualify, there are typically a few meetings, a few emails, and some paperwork and then you’re off to the races. Much better than pitch after pitch, and then driving the VCs to a close.

The obvious caveat: All of this only works if you are generating revenue.
It may be obvious, but let’s be explicit. If you’re super early-stage and don’t have revenue, RBF will clearly not be a fit. You then may have to go the angel / pre-seed route.

See what we’re working on as it relates to revenue-based financing over at Bootstrapp. I also plan to keep digging deeper into this subject moving forward so stay tuned and let me know if you’d like to see anything else in particular.

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The Founder’s Capital Stack

Let’s get on the same page: The “capital stack” refers to the legal organization of all of the capital placed into a company or secured by an asset through investment or borrowing. The capital stack determines who has legal rights to certain assets and income, who receives priority of payment in the event of an uncured default, and in which order each party may be repaid or given authority to take over or liquidate assets in the event of a bankruptcy.  (source)

Now, if you search “capital stack startup” you’ll see more than a few articles, nearly all of which have the baked-in assumption that the company in question is being financed with venture capital.

Certainly, a capital stack is extremely relevant during a venture raise. With the number of lawyers, investors, founders, lenders, and advisors potentially involved a founder must be sure that their cap table and capital stack is in check. However, what about a capital stack that exists to align the company to the desires of a founder, and not the preferences of institutional investors?

When considering what a Founder’s capital stack might look like, not surprisingly, it’s essentially in direct opposition to that of a traditional venture-funded capital stack. Here’s what a typical capital stack looks like, according to Chessboard Capital

Note that revenue is king. If you can generate revenue and bootstrap to success, you’ve just eliminated 3 of the 4 sections within the above stack, and you’re all that’s left when payday comes. 

Even if you have to take out debt from cash flow, you’ve now eliminated two of the sections, and two players who are going to get paid before you do. Your new capital stack emerges like this:

Now, as you pay off that debt, obviously you become increasingly in a better position as a founder. Understanding your company’s capital stack is critical for venture fundraising – but it also provides insight into the fact that you may want to avoid it entirely.