Revenue-based financing propels tech company to The Inc. 5000
Money is the fuel that fuels growth. You can use the profits from your business to grow, but when that isn’t enough to fund your high-growth business, what other options are available?
Capital risk ? Of course, if you get it. And, if you do, you can’t give away more than 49% of your business in exchange for the money, because it will no longer qualify for certification as a minority and women-owned business (M /WBE). Being certified opens doors to government and corporate contracts.
Revenue-Based Financing or Royalty-Based Financing (RBF) can be a good alternative to fuel your growth. Companies in industries as diverse as technology, healthcare, services, light industrial and CPG are increasingly using this financing option. In 2019, the RBF was valued at $901.41 million, according to Allied Market Research, and it is expected to reach $42.3 billion by 2027.
During the financial crisis of 2007 and 2008, Valerie King-Bailey, founder and CEO of OnShore Technology Group, read good to excellent: Why some companies make the leap…and others don’t by Jim Collins. The book identifies the hedgehog concept, which is a simple principle that focuses a business at the intersection of:
- What excites you deeply.
- What you can be the best in the world at.
- What best fuels your economic or resource engine.
Identifying the overall hedgehog concept for the three King-Bailey companies was transformational. The three companies specialize in different things related to technology:
- Tactical and strategic marketing.
- Engineering and construction.
- On-demand technology resources including independent validation and verification.
“I understood that we were the best at independent validation and verification,” King-Bailey said. “By focusing only on validation and verification, that’s when the company started growing.”
OnShore has taken advantage of supplier diversity programs within companies, Chicago and Illinois, as well as federal and international opportunities. The company is certified as a Women’s Enterprise (WBE) by WBENC, and certified as a WBE and Minority Business Enterprise (MBE) as well as a Disadvantaged Business Enterprise (DBE) by Chicago, Illinois and federal agencies .
When the pandemic hit, life science companies transitioned from paper-based processes to digital. Valarie King-Bailey, founder and CEO of OnShore Technology Group, which performs independent validation and verification in the life sciences industry, wanted to capitalize on this trend. But he needed money to develop technology and hire people.
The company had a line of credit with a bank, but it had a limit of $100,000. It doesn’t get you very far when you need to hire expensive talent like engineers, King-Bailey commented. She received merchant cash advances (MCA). These are not loans. They give you an initial sum of money in exchange for a slice of your future sales, usually paid daily.
King-Bailey likes the ease of application and speed of approval for MCA. But, “it’s super expensive money because the principal is repaid daily,” she said. However, it can be a good source of short-term funding (12 months or less).
While she could have secured venture capital, it could have complicated her M/WBE status. It’s not just that the company might fall below the 51% women or minority requirement; it is that when you do not belong 100% to women or minorities, the certifying bodies scrutinize your application. There was cheating, commented King-Bailey. Men have appointed their wives as owners of the business when they are not involved in day-to-day management.
Hoping to find funding, “I had gone through many training programs that claimed there would be capital at the end of the program,” King-Bailey said. “There was no capital or even money ties.” When she met Kim Folsom of Founders First, King-Bailey doubted there would be capital at the end of her training program.
“I’ll take stock for you, [Folsom]”, King-Bailey said. “I have a software application that makes a lot of money and I need capital to grow my business, not another training program.” Folsom replied that she knew all other programs that King-Bailey attended The Founders First program is different, as it was only a three-day program, King-Bailey tried it.
Unlike the other programs, the Founder First program focused on the individual needs of each of the eight bootcamp companies. King-Bailey’s previous experience was that the training programs were general and catered to a mix of businesses from first-timers to high-growth established businesses in industries as diverse as nail salons and technology companies.
“I’m in the tech space,” King-Bailey said. “I talk to directors, vice presidents, and sometimes presidents of life science companies about patient safety. It’s about confirming that the systems they use to manufacture drugs, medical devices, biologics and vaccines are performing in accordance with their intended use and have documentation to submit to the FDA [or similar agencies] around the world.”
At the end of the program, OnShore received RBF for $1 million from Founders First and Novel Capital.
King-Bailey purchased the platform on which its software, Validation Master, is based, which makes OnShore much more valuable when it comes time to sell the company.
To receive the RBF, companies must have a proven revenue model from which they can accurately project sales. In exchange for capital, you pay a pre-determined percentage of future earnings until a certain multiple of the initial investment has been repaid. You don’t repay the money daily, you repay it at agreed intervals. Although your business doesn’t have to be profitable, it must generate revenue. Investors also want to see that you have strong enough margins to keep growing and paying them back. If your business is on a slow growth trajectory, RBF may not be for you.
“We’ve seen 70% growth,” King-Bailey said. “After that, we landed on the Inc. 5000 list and did it again this year.”
How will you fund your growth?