Everyone’s talking about revenue-based financing (RBF) like it’s some magic pill for startups. They paint this pretty picture of non-dilutive capital, easy access, and founder-friendly terms. They’re lying. Not entirely, but they’re leaving out the ugly parts. The parts that can kill your company if you’re not careful.
I’ve seen it happen. I’ve had over 200 angel investments in companies like Anthropic, OpenAI, and Scale AI. I’ve seen founders get lured in by the promise of fast cash, only to find themselves trapped in a cycle of debt they can’t escape. I’ve also used RBF successfully, but only after learning the hard way what not to do.
So, let’s have a real conversation about revenue-based financing. No sugarcoating. No buzzwords. Just the brutal reality of what it takes to win at this game.
The RBF Dream vs. The Brutal Reality
The dream of RBF is simple: you get a cash advance based on your monthly recurring revenue (MRR), and you pay it back as a percentage of your future revenue. No giving up equity, no board seats, no loss of control. It sounds perfect, right? Especially for SaaS companies with predictable revenue streams.
But here’s the reality: RBF is not a substitute for venture capital. It’s a specific tool for a specific job. And if you use it for the wrong job, you’re going to get burned.
I remember one of my early investments, a promising SaaS startup with a solid product and a growing customer base. They were doing about $50k in MRR and were on the verge of raising a solid seed round. But they got impatient. They wanted to grow faster, so they took on a significant RBF deal. At first, it seemed to work. They hired more engineers, ramped up their marketing, and their MRR started to climb.
But then, a few months later, their growth started to slow down. A new competitor entered the market, and they had to cut their prices to stay competitive. Suddenly, that RBF payment, which was a small percentage of their revenue when they were growing fast, became a huge burden. They were paying out so much in RBF that they didn’t have enough cash to invest in product development or customer support. They were stuck. They couldn’t raise a seed round because their margins were too low, and they couldn’t get out of the RBF deal because they didn’t have the cash to pay it off. They eventually had to sell for a fraction of what they could have been worth.
This is the dark side of RBF that nobody talks about. It’s the part where you’re so focused on top-line revenue that you forget about everything else. You become a slave to your MRR, and you lose the flexibility to make the right long-term decisions for your business.
The 10% Playbook: How to Win at RBF
So, how do you avoid this trap? How do you become one of the 10% of founders who actually win at revenue-based financing? It’s not about avoiding RBF altogether. It’s about being smart about it. It’s about having a playbook.
Here’s my playbook, based on my experience as a founder and an investor:
1. Know Your Numbers Inside and Out
This sounds obvious, but you’d be surprised how many founders don’t have a deep understanding of their unit economics. Before you even think about RBF, you need to know your customer acquisition cost (CAC), your lifetime value (LTV), and your churn rate. You need to know how much it costs you to acquire a new customer and how much you can expect to make from that customer over time.
If you don’t know these numbers, you’re flying blind. You’re making a bet that you can’t afford to lose. You need to be able to model out different scenarios and understand how that RBF payment will impact your cash flow and your margins. You need to be able to answer this question: if my growth slows down by 20%, will I still be able to make my RBF payments and run my business?
2. Don’t Use RBF for Everything
RBF is not a blank check. It’s a specific tool for a specific job. The best use case for RBF is to fund predictable, repeatable growth channels. For example, if you know that for every $1 you spend on Google Ads, you get $3 in new revenue, then it makes sense to use RBF to scale up your ad spend. You’re essentially borrowing money to make more money, and you have a high degree of confidence that it will work.
But don’t use RBF to fund things like product development, hiring, or market expansion. These things are not as predictable, and you don’t want to be on the hook for a big RBF payment if they don’t pan out. For these types of investments, you’re better off raising equity financing from investors who are willing to take on more risk.
3. Negotiate the Terms
Don’t just accept the first RBF offer you get. These deals are negotiable. You can negotiate the repayment rate, the total repayment cap, and the fees. You can also negotiate for more flexible terms, such as a grace period before you have to start making payments, or the ability to pause payments if your revenue drops.
Remember, RBF providers are in the business of making money. They want to do deals, but they also want to protect their downside. If you can show them that you’re a good risk, that you have a solid business with strong unit economics, then you’ll have more leverage to negotiate for better terms.
4. Have a Backup Plan
Even if you do everything right, things can still go wrong. You could have a sudden spike in churn, a new competitor could enter the market, or your growth could slow down for reasons you can’t control. That’s why you always need to have a backup plan.
Before you take on an RBF deal, you need to know how you’re going to get out of it if things go south. Do you have a line of credit you can draw on? Can you raise a bridge round from your existing investors? Can you cut costs to free up cash? You need to have a clear plan for how you’re going to make your RBF payments, even if your revenue drops to zero.
The Future of Fundraising is Not One-Size-Fits-All
The fundraising landscape is changing. It’s not just about venture capital anymore. There are more options than ever before, from RBF to SAFEs to traditional bank loans. And that’s a good thing for founders. It means you have more control over your destiny.
But it also means you have to be smarter. You have to be more strategic. You can’t just follow the herd and do what everyone else is doing. You have to understand the different fundraising options and choose the one that’s right for your business.
I’m not saying that RBF is always a bad idea. It can be a powerful tool for the right company at the right time. But it’s not a magic pill. It’s not a substitute for building a great business with strong fundamentals. And it’s not something you should do without a clear plan and a deep understanding of the risks.
So, before you jump on the RBF bandwagon, take a step back. Do your homework. Know your numbers. And make sure you’re doing it for the right reasons. Your company’s future may depend on it.
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.
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.
How can I apply this thinking to my own situation?
Start by identifying the core principle behind the opinion, not the specific example. Then ask yourself: does this principle apply to my context? If yes, test it in a small, low-risk way before going all in.