I’m going to say something that might get me in trouble with some of my friends in the finance world. Revenue-based financing, as most people practice it, is a trap. A siren song for desperate founders. I've seen over 500 pitches for revenue-based financing, and I've noticed a pattern. The top 1% do things differently. Here's their secret.
I get it. You're a founder, you're grinding, and you need cash. Payroll is a monster that always needs to be fed. You see an ad for "founder-friendly" financing, no dilution, and it feels like a godsend. You think, "Finally, someone who gets it!" But you’re not seeing the full picture. Most founders are so focused on the "no equity" part that they walk straight into a deal that can cripple their company.
The 2024 Way: A Masterclass in How to Strangle Your Startup
Let’s talk about the way 90% of founders approach RBF. They treat it like a credit card for their business. They’re a little short on cash, so they take a draw. They need to hire a new engineer, so they take a draw. They want to run a marketing campaign, so they take a draw. Before they know it, they’re giving up 10-15% of their top-line revenue every single month. And that’s a death sentence for a growing company.
I once met a founder—a brilliant guy, super passionate—who had built a SaaS company to $2M in ARR. He was proud, and he should have been. But he was also bleeding cash. He had taken on three separate RBF deals. He was paying out 20% of his monthly revenue. Think about that. For every $100 that came in the door, $20 went straight to his lenders. He couldn’t invest in growth, he couldn’t hire, he couldn’t even give his team a raise. He was stuck in a cycle of debt, and it was suffocating his business.
This is the "2024 way" of doing RBF. It’s a reactive, desperate approach that focuses on survival, not growth. It’s using a powerful tool for the wrong job. It’s like using a sledgehammer to crack a nut. You’ll get it open, but you’ll destroy the nut in the process.
The 1% Secret: RBF as a Scalpel, Not a Sledgehammer
The founders who get it right—the ones who build massive, venture-backed companies—use RBF completely differently. They use it as a scalpel, not a sledgehammer. They use it for specific, measurable, and repeatable growth initiatives. They use it to pour gas on a fire that’s already burning.
I have an investment in a D2C company that sells high-end coffee. They have a fanatical customer base and their unit economics are fantastic. They know that for every $1 they spend on Facebook ads, they get $4 back in 90 days. That’s a money-printing machine. So what do they do? They use RBF to scale their ad spend. They take a draw, pour it into Facebook ads, and triple their growth rate. They pay back the RBF provider in a few months, and they’ve built a much bigger business in the process. They didn’t give up any equity, and they didn’t get stuck in a debt cycle.
That’s the secret. RBF is for financing growth, not for financing your burn rate. If you’re using it to make payroll, you’re doing it wrong. If you’re using it to hire engineers for a product that’s not selling, you’re doing it wrong. If you’re using it to pay for your office lease, you’re doing it wrong.
My Unpopular Opinion on RBF
Here’s where I’m really going to get myself in trouble. I think most RBF providers are predatory. They prey on the desperation of founders. They offer a quick fix, but they don’t tell you about the long-term consequences. They’re the payday lenders of the startup world.
I’m not saying all RBF is bad. I’m saying you need to be incredibly careful. You need to read the fine print. You need to understand the true cost of capital. And you need to have a plan. If you don’t have a clear, data-driven plan for how you’re going to use the money to generate a positive ROI, then you’re just gambling with your company’s future.
How to Do RBF Like the Top 1%
So, how do you do it right? Here’s a simple framework:
Know Your Numbers: Before you even think about RBF, you need to know your unit economics inside and out. What’s your LTV? What’s your CAC? What’s your payback period? If you can’t answer these questions in your sleep, you’re not ready for RBF.
Have a Plan: Don’t just take a draw because you can. Have a specific, measurable, and repeatable plan for how you’re going to use the money. “We’re going to spend $50,000 on Google Ads to acquire 1,000 new customers at a CAC of $50, and our LTV is $200.” That’s a plan.
Negotiate Everything: Don’t just accept the first offer you get. Negotiate the revenue percentage. Negotiate the repayment cap. Negotiate the fees. Remember, you’re the customer. You have the power.
Choose the Right Partner: Not all RBF providers are created equal. Some are better than others. Do your homework. Talk to other founders. Find a partner who is aligned with your interests.
The Future of Fundraising is Not RBF
Revenue-based financing is a tool. It can be a useful tool in the right hands. But it’s not the future of fundraising. The future of fundraising is a hybrid model. It’s a mix of equity, debt, and other creative financing solutions. It’s about finding the right capital for the right stage of your business.
So, before you sign that RBF term sheet, take a step back. Take a deep breath. And ask yourself: “Am I using this as a scalpel, or a sledgehammer?” The answer to that question will determine the future of your company.
Frequently Asked Questions
What experience informs this perspective?
This perspective comes from over a decade of building companies in Silicon Valley, two successful exits (RemoteTeam to Gusto, MovieLaLa to Gfycat), and investing in 200+ startups including Anthropic, OpenAI, and Scale AI. I write about what I've lived.
Do all experts agree with this view?
No, and that's fine. The best ideas in business are often contrarian. I share my perspective based on my experience and data, but I encourage you to seek out opposing viewpoints and form your own conclusions.
What's the most common pushback you get on this?
People often push back by citing exceptions or edge cases. And they're usually right that exceptions exist. But building a strategy around exceptions rather than patterns is a losing game for most founders.
How has this view evolved over time?
My thinking on most topics has changed significantly over the years. Early in my career, I held many conventional views that experience proved wrong. I try to update my beliefs when the evidence changes.