I’m going to tell you something that might sting a little. That revenue-based financing deal you’re so proud of? It might be the very thing that’s getting you passed on by every investor you meet. I’ve seen it happen more times than I can count, from both sides of the table.
Back when I was raising for my first company, I was obsessed with non-dilutive funding. The idea of giving up equity felt like giving away a piece of my soul. So, when a revenue-based financing (RBF) offer landed in my inbox, I thought I’d hit the jackpot. Money in the bank, no dilution. What could be better?
It turned out to be one of the most expensive lessons of my career. Not in terms of dollars, but in lost opportunities. We got the cash, sure. But we also got a monthly payment that choked our cash flow and a covenant that made it nearly impossible to raise our Series A. We were stuck.
Now, as an investor with over 200 angel investments in companies like Anthropic and OpenAI, I see founders making the same mistake every single day. They see RBF as a magic bullet, a way to get capital without the strings of venture capital. The reality is far more complicated.
The Seductive Lie of Non-Dilutive Capital
Let’s be clear. I’m not entirely against revenue-based financing. It has its place. If you’re a bootstrapped SaaS company with predictable, recurring revenue and no plans to raise venture capital, it can be a fantastic tool for growth. You can pour that money into marketing, hire a few sales reps, and scale your business without giving up a single percentage point of ownership.
But that’s not who I’m talking to. I’m talking to the founders who have venture-scale ambitions. The ones who want to build a billion-dollar company, who are planning to raise a Series A, B, and C. For you, RBF isn’t just a different type of funding; it’s a different philosophy, and it often clashes violently with the expectations of venture capitalists.
Investors are in the business of buying equity. We’re looking for companies that can provide a 100x return, and that only happens through ownership. When we see a company with a significant RBF deal on its cap table, we don’t see a savvy financial move. We see a red flag. A big, flapping, crimson red flag.
Why? Because that RBF deal tells us a few things, none of them good.
First, it tells us you’re not confident in your ability to raise venture capital. You took the “easy” money because you didn’t think you could get the “smart” money. It signals a lack of ambition, a willingness to settle. That’s not the kind of founder I want to back.
Second, it tells us you’re prioritizing short-term cash flow over long-term growth. RBF deals require you to start making payments almost immediately. That’s money that could be going into product development, hiring engineers, or expanding into new markets. Instead, it’s going to your lender. You’re trading your future for your present.
Third, and most importantly, it complicates your cap table and makes it harder for us to invest. RBF agreements often come with restrictive covenants that can limit your ability to take on additional debt or even raise equity. I’ve seen deals fall apart at the last minute because of a single clause in an RBF contract. It’s a legal and financial nightmare that most investors would rather avoid.
The Counterintuitive Approach That Actually Works
So, what’s the alternative? If you need cash to bridge the gap to your Series A, what should you do? The answer is counterintuitive, but it’s the one that has worked for me and for the most successful founders I know: you raise a small, priced round or a SAFE with a high valuation cap.
I know what you’re thinking. “But Sahin, that’s dilutive! You said you hated dilution!” And you’re right. I do. But there’s a difference between strategic dilution and desperate dilution. Strategic dilution is giving up a small piece of your company to bring on partners who can help you grow. Desperate dilution is giving up a huge chunk of your company because you’re running out of cash.
Revenue-based financing often leads to desperate dilution. You take the RBF money, you burn through it, and then you’re in an even worse position than you were before. Your revenue is flat, your cash is gone, and you have a monthly payment you can’t afford. Now, when you go to raise your Series A, you have no leverage. You’ll take whatever terms you can get, and you’ll end up giving away a massive slice of your company.
A small, priced round or a SAFE, on the other hand, can be a powerful tool for strategic growth. It allows you to bring on angel investors who have experience in your industry, who can make introductions to customers and partners, and who can help you navigate the fundraising process. They’re not just giving you money; they’re giving you their time, their expertise, and their network.
I’ve seen this play out time and time again. A founder I backed was struggling to get traction. They had a great product, but they couldn’t get anyone to pay attention. They were considering an RBF deal to fund a big marketing push. I advised them against it. Instead, we put together a small, $500k round from a group of experienced SaaS investors. Those investors didn’t just write a check; they opened up their Rolodexes. They made introductions to VPs of Marketing at Fortune 500 companies. They helped the founder refine their pitch and their go-to-market strategy. Six months later, the company had signed three major enterprise customers and was in a prime position to raise a massive Series A at a 10x valuation.
That’s the power of strategic dilution. It’s not about giving up a piece of your company; it’s about making the pie bigger for everyone.
How to Talk to Investors About Your Funding Strategy
If you’ve already taken on revenue-based financing, don’t panic. It’s not a deal-breaker, but you need to be prepared to have a very frank conversation with potential investors. You need to be able to explain why you took the RBF deal, what you used the money for, and how you plan to manage the payments.
Here’s what I want to hear from a founder in that situation:
- Acknowledge the trade-offs. Don’t try to spin the RBF deal as a brilliant financial move. Be honest about the fact that it was a trade-off. You needed the cash, and it was the best option available at the time.
- Show me the ROI. I want to see that you used the RBF money to create real, tangible value. Did you increase your MRR? Did you improve your churn rate? Did you sign a key customer? Show me the numbers.
- Have a plan to pay it off. I don’t want to invest in a company that’s going to be saddled with RBF payments for the next five years. I want to see a clear plan to pay off the loan as quickly as possible, either through revenue growth or by using a portion of the Series A funding.
Ultimately, what I’m looking for is a founder who is thoughtful, strategic, and transparent. A founder who understands the trade-offs of different funding options and who can make the tough decisions that are in the best long-term interest of the company.
Revenue-based financing can be a useful tool, but it’s not a substitute for a sound funding strategy. If you have venture-scale ambitions, you need to be thinking about how you’re going to attract venture capital from day one. That means building a great product, getting traction with customers, and surrounding yourself with the right investors and advisors.
Don’t let the seductive lie of non-dilutive capital derail your dreams. Think bigger. Think bolder. And for goodness sake, think before you sign that RBF term sheet.
Frequently Asked Questions
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.
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.