Entrepreneurship | November 26, 2019

As unicorns stumble, investors warm to revenue-based financing for ‘zebras’ and ‘Clydesdales’

Amy Cortese
ImpactAlpha Editor

Amy Cortese

ImpactAlpha, Nov. 26 – WeWork. Uber. Peloton. The mounting pile of troubled “unicorns” has fueled a backlash against the get-big-fast venture capital ethos that produced them.

That raises the question of what to call the fallen icons (undercorns, anyone?). A bigger challenge is how to build companies that are inclusive, sustainable, profitable, and beneficial for communities. 

In a note to VCs last week, CBInsights slammed terms like “zebras,” coined by Zebras Unite, to describe the sustainable growth-oriented alternative to buzzy, billion-dollar unicorns (see, “Zebras dazzle as unicorns falter). 

“Zebras, rhinos, narwhals, gazelles, velociraptors, etc.,” the research firm riffed. “None of these have ever or will ever stick.”

Maybe not, but for companies betting on “revenues, not rounds,” revenue-based financing may make more sense than the standard Series A. An increasing number of investors are doing deals in the expectation of getting paid back perhaps three times their capital, from revenues generated by real customers, rather than waiting for the proverbial 10X payout from a skyhigh IPO or acquisition based on fantasies of endless growth. 

Founders First Capital Partners was started in 2015 by serial entrepreneur Kim Folsom to provide opportunities for women, people of color and other often-overlooked founders, typically outside the major capital centers of San Francisco and New York. The San Diego-based firm provides revenue-based financing for service and manufacturing companies generating recurring revenues.

Founders First last week closed $100 million in debt financing from San Francisco-based Community Investment Management, which provides capital for innovative lending models to finance underserved customers and businesses and make markets more efficient. 

Folsom said the backing signals, “There is a clear opportunity and interest in offering revenue-based investment to support positive outcomes for service-based, social-impact companies.” The debt capital will help Founders First expand its lending to businesses with $1 million to $5 million in revenue (Folsom calls them “Clydesdales”).

Revenue financing has found an especially receptive audience with women and founders of color who have been underserved by conventional venture capital. Candide Group last month launched the $40 million Olamina Fund to invest in community development financial institutions and emerging funds such as the Runway Project that offer founder-friendly loans with a racial justice lens.

Term sheet destiny

Founders First, along with Decathlon Partners, VilCap Investments, Earnest Capital and others, are among a growing group of investors promoting revenue-based models that encourage companies to focus on solving problems, generating revenues, growing sustainably and staying true to their mission. That’s a sharp contrast to Silicon Valley-style venture capital that pushes companies to grow fast, incur losses and cash out by going public or getting acquired. 

“The quest for the one mythical unicorn that returns the fund leads to a number of behaviors and incentives among investors and founders that have unethical and other damaging consequences,” Astrid Scholz of Zebras Unite noted in a recent interview.

Terms vary for revenue-based deals, sometimes called royalty financing. Deals are typically structured as loans that the company pays back over time, along with an agreed-upon premium, via a fixed percent of revenues. 

A key attraction: Founders do not have to sell or go public for investors to earn a return, enabling them to preserve their independence and mission. Investors have an incentive to stay involved and help the company succeed.

In a variant known as “redeemable equity,” the company can repurchase an investor’s equity stake over time or at a later date, sometimes with lower-cost debt. In both cases, the repayment premium is generally capped at, say, two or three times the amount of the initial investment. Fledge, a network of social enterprise accelerators, makes equity investments of $15,000–$20,000, which founders repurchase over time via a fixed percentage of their revenues. 

Investment managers like Community Investment Management are taking revenue-based financing from niche to scale. Earlier this month, CIM extended $100 million in debt facility to Kenzie Academy, a college “alternative” that enables students to enroll for as little as $100 and pay for tuition through a share of future income. 

CIM has also provided capital to Seattle-based Lighter Capital, one of the leading revenue-based lenders to small businesses. Lighter Capital has provided over $165 million in revenue-based loans to more than 350 companies since 2012. 

“We have a focus on inefficiencies in the market where there are many people who are underserved yet have the same potential to succeed as elsewhere,” says CIM’s Jacob Haar.


In the U.K., Ustwo Adventure, the investment arm of a U.K.-based design company, provides equity and revenue-based investment to “early-stage companies that are building something bigger than an exit.”  In Mexico, New Ventures has introduced working capital loans of $50,000 to $150,000 with repayments linked to revenues. The goal, says New Ventures Rodrigo Villar, is to finance growing firms with real revenues, but not tech-style exponential growth (see, “New Ventures is accelerating impact entrepreneurs in Mexico and Latin America).

In the U.S., O’Reilly AlphaTech Ventures shifted all of its investments to what it calls the “indie.vc” model, starting with its fourth fund. 

Community development financial institutions, or CDFIs, helped pioneer the new models. New Hampshire Community Loan Fund’s Vested For Growth program has offered revenue-share deals for New Hampshire businesses with $2 million to $15 million in sales for at least a decade. The Flexible Capital Fund (Flex Fund) of Vermont provides debt and revenue-share financing to support sustainable food, forestry and clean tech in the state. 

In February, Flex Fund, New Hampshire Community Loan Fund and Coastal Enterprises, a CDFI in Maine, made a $1 million revenue-based investment in Encore Renewable Energy, a developer of solar power across New England.

Crowdfunding sites such as NextSeed and Mainvest have eschewed equity and SAFEs (for Simple Agreement for Future Equity, a form of convertible note) for revenue-sharing models. The revenue-sharing model is simple to understand and “aligns the interests of investors and businesses,” says Mainvest’s Ben Blieden. 

At least 18 local businesses have issued revenue-sharing notes since Salem, Mass.-based Mainvest launched a year ago. Six have already begun repaying investors.