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What Investors Actually Think About Your Revenue-Based Financing
They say getting revenue-based financing is easy. That you just show your MRR, sign a few papers, and the money magically appears in your bank account.
They’re lying to you.
I’ve seen it from both sides. As a founder who raised millions for my own companies, and as an angel investor in over 200 startups, including some of the biggest names in AI like Anthropic and OpenAI. I’ve reviewed thousands of pitches and I can tell you this: most founders who try for revenue-based financing get it completely wrong. They walk in with a pretty deck and a smile, and they walk out with nothing but a bruised ego.
Why? Because they don’t understand what’s actually going on in the investor’s head. They see the "founder-friendly" marketing and think it’s a charity. It’s not. It’s a calculated investment, and if you don’t speak the language of the investor, you’re going to lose.
The Great "Easy Button" Myth
Let's be honest, the whole idea of "easy" money is a myth. Especially in Silicon Valley. I remember back when I was building RemoteTeam, we were burning cash like it was going out of style. We had a solid product, a great team, and paying customers, but we were always on the edge. The pressure is immense. You’re responsible for people’s livelihoods. You have to make payroll. You have to keep the lights on.
So when someone comes along and tells you there’s an “easy” way to get cash, it’s tempting to believe them. It’s a lifeline. But it’s also a trap. The truth is, there’s no such thing as an easy button in fundraising. Every dollar you take comes with strings attached. And with revenue-based financing, those strings can be thicker than you think.
I once had a founder come to me, super excited about an RBF deal he was about to sign. He thought it was a no-brainer. "I don't have to give up any equity!" he said. I asked him to walk me through the terms. The repayment rate was so aggressive that he would have been suffocated in a matter of months. He was so focused on the "no equity" part that he completely missed the fact that the deal would have killed his company. I told him to walk away. He was shocked, but he listened. A few months later, he closed a seed round from a top-tier VC. He dodged a bullet. '''
What We're Really Thinking When You Pitch Us RBF
When a founder pitches me on a revenue-based financing deal, I’m not just looking at their MRR. That’s table stakes. I’m looking for the story behind the numbers. I’m looking for a founder who understands their business inside and out, and who has a clear plan for how they’re going to use my money to grow.
Here’s a peek inside my brain during an RBF pitch:
Unit Economics: I want to see that you know your Customer Acquisition Cost (CAC) and your Lifetime Value (LTV). And I want to see a healthy ratio between the two. If you’re spending $500 to acquire a customer that’s only going to pay you $1000 over their lifetime, that’s not a great business. I’m looking for a 3:1 LTV to CAC ratio, at a minimum. Show me you have a repeatable, scalable way to acquire customers profitably.
Growth Rate: Your MRR is important, but your growth rate is even more important. Are you growing 5% month-over-month? 10%? 20%? I want to see a consistent, predictable growth trajectory. A one-time spike in revenue is nice, but it doesn’t tell me anything about the long-term health of your business. I want to see at least 3-6 months of consistent, double-digit month-over-month growth.
Churn: This is a big one. If you’re losing customers as fast as you’re acquiring them, you have a leaky bucket. And I’m not interested in pouring my money into a leaky bucket. I want to see a low churn rate, ideally less than 5% per month. And I want to see that you have a plan to reduce it even further.
The "Why": Why do you need my money? And why now? I want to see that you have a specific, well-thought-out plan for how you’re going to use the capital. Are you going to hire more sales reps? Are you going to increase your marketing spend? Are you going to invest in product development? I want to see a clear ROI on my investment. Don’t just tell me you need money to “grow the business.” Tell me exactly how you’re going to do it.
I remember a founder who pitched me for RBF for his SaaS company. He had a great product and a solid team. But his pitch was all over the place. He couldn’t clearly articulate his unit economics, his growth was flat, and he had no real plan for the money. I passed. A year later, he came back to me. He had a new deck, and it was a night-and-day difference. He had a deep understanding of his numbers, he had a clear plan for growth, and he had a compelling “why.” I invested on the spot. He ended up 10x-ing his revenue in the next 18 months.
The Brutal Reality: It's Not a Free Lunch
That "no equity" line is the oldest trick in the book. And founders fall for it every single time. They get so mesmerized by the idea of not diluting their ownership that they ignore the cold, hard math of the deal. Revenue-based financing isn't a gift. It's a loan with a very specific, and often very aggressive, repayment structure.
Here’s what the RBF providers don’t put in their flashy marketing materials:
The Repayment Squeeze: They take a percentage of your top-line revenue every single month. Not your profit. Your revenue. So if you have a month where your expenses are high, you could be in a world of hurt. I’ve seen companies that were technically profitable on paper go bankrupt because they couldn’t make their RBF payments. It’s a cash flow killer if you’re not prepared.
The Growth Ceiling: The repayment structure can actually stifle your growth. If you’re giving up a significant chunk of your revenue every month, that’s less money you have to reinvest in your business. It’s a catch-22. You take on debt to grow, but the debt itself prevents you from growing as fast as you could. It’s like trying to run a marathon with a parachute strapped to your back.
The "Friendly" Fees: Don’t even get me started on the fees. There are origination fees, prepayment penalties, and all sorts of other hidden costs that can add up quickly. I once saw a term sheet where the fees were so outrageous that the effective interest rate was over 50%. That’s not “founder-friendly.” That’s predatory.
I had a portfolio company, a really promising e-commerce startup, that got into trouble with RBF. They were growing like a weed, but they were also burning through cash. They took on a big RBF deal to fund their inventory. But they didn’t fully understand the terms. The repayment rate was tied to their daily sales, and it was crippling. They were constantly scrambling to make payments, and they couldn’t invest in marketing or product development. They were stuck. We had to do a bridge round to bail them out and restructure the debt. It was a mess. And it all could have been avoided if they had just read the fine print.
The Playbook to Be in the 10%
So, am I saying you should never, ever consider revenue-based financing? No. Not at all. It can be a powerful tool, if you use it correctly. It’s not for every company, and it’s not for every situation. But if you fit the right profile, and you go in with your eyes wide open, it can be a great way to fuel your growth without giving up a chunk of your company.
Here’s the playbook I give to the founders I mentor:
Know Your Numbers Cold: Before you even think about talking to an RBF provider, you need to have a rock-solid understanding of your financials. I’m talking about your MRR, your growth rate, your churn, your CAC, your LTV, and your gross margins. You should be able to recite these numbers in your sleep. And you should have a dashboard where you can track them in real-time. If you don’t have this, you’re not ready.
Build a Financial Model: Don’t just show up with a spreadsheet of your historical data. Build a detailed financial model that projects your revenue, expenses, and cash flow for the next 12-24 months. Show how the RBF capital will impact your growth, and how you’ll be able to comfortably make the repayments. This shows that you’re a sophisticated founder who thinks strategically.
Shop Around: Don’t just go with the first RBF provider that sends you a cold email. There are a ton of them out of there, and they all have different terms and different specialties. Do your homework. Talk to other founders. Read the reviews. Get multiple term sheets and compare them. And don’t be afraid to negotiate. Remember, you’re the prize. They need you more than you need them.
Read the Fine Print: I can’t stress this enough. Read every single word of the term sheet. And if you don’t understand something, ask a lawyer. Don’t just rely on the summary that the RBF provider gives you. The devil is always in the details. Pay close attention to the repayment rate, the fees, the prepayment penalties, and any other covenants or restrictions.
Have a Plan B: What happens if you don’t get the RBF deal? What happens if your growth slows down? What happens if you can’t make the repayments? You need to have a contingency plan. The best founders are always prepared for the worst-case scenario. It’s not about being pessimistic. It’s about being a realist.
I have a founder in my portfolio who runs a subscription box company. She followed this playbook to a T. She knew her numbers inside and out. She built a beautiful financial model. She got term sheets from five different RBF providers. She negotiated a great deal with a low repayment rate and no prepayment penalty. And she had a clear plan for how she was going to use the capital to grow her business. She’s been crushing it ever since. She’s a perfect example of how to do RBF the right way.
The Bottom Line: It's Your Company, Your Choice
Look, I get it. Fundraising is a nightmare. It’s a full-time job on top of your already full-time job of running a company. It’s stressful, it’s emotional, and it’s easy to get desperate. And when you’re desperate, you make bad decisions.
I’ve been there. When I was raising money for MovieLaLa, my second company, I made a classic rookie mistake. I got a term sheet from a VC that I was really excited about. I was so focused on the valuation that I didn’t pay enough attention to the other terms. The liquidation preference was stacked against me, and the drag-along rights were brutal. I was so close to signing it. But my gut told me something was wrong. I took a step back, I talked to my advisors, and I ended up walking away from the deal. It was one of the hardest decisions I’ve ever had to make. But it was also one of the best. A few months later, we got a much better offer from a different firm, and we ended up having a great exit to Gfycat.
My point is this: don’t let anyone rush you into a decision. Don’t let anyone pressure you into signing a deal that you’re not 100% comfortable with. And don’t ever, ever, ever sign anything you don’t fully understand. Whether it’s a SAFE, a convertible note, a Series A term sheet, or a revenue-based financing agreement, you need to be the expert. You need to own the process.
Revenue-based financing can be a fantastic option for the right company at the right time. But it’s not a silver bullet. It’s not a substitute for building a great business. And it’s not a decision to be taken lightly. So do your homework. Know your numbers. And most importantly, trust your gut. At the end of the day, it’s your company. Your dream. Don’t let anyone else screw it up for you.
Frequently Asked Questions
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.
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.
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'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.