Have you ever had so many people want to use your product that you couldn’t keep up with demand?
It’s an exciting yet challenging time for many business owners. They’re acquiring more users, but need more employees to grow, but can’t expand the team until they generate more revenue, but can’t close the sales without more people…it seems like a catch-22.
That’s what customer experience platform Mopinion faced just a few years ago.
When they were ready to scale their commercial operations in 2016, Udesh Jadanansing and his team decided to raise a seed round. Over the next couple of years, they continued to scale successfully. In fact, they were growing so quickly that they couldn’t follow up with all their leads. And so they found themselves on that vicious plateau of growth, which usually means it’s time for a series A.
Udesh understood there was an opportunity for growth, the demand is there, but the financial resources to capitalize on it are not. Here the lack of available growth capital is just slowing down expansion, a great moment to start fundraising.
But that’s not all. Mopinion took a different approach to raising money — one that let them keep their equity as they continued to expand.
At the time of their fundraise, Mopinion had found their product market fit and signed a few contracts with some big enterprises. As a result, they quickly established a reputation for themselves.
More and more companies wanted to improve their online customer experience, and news of Mopinion’s personalized service and affordable prices attracted qualified leads by the dozens.
It’s the dream for any startup: Udesh and his team had an in-demand product and a successful business model. They had grown out of their small-time operations and were ready to scale.
Although they wanted to invest more into sales and marketing, they didn’t have the capital to expand the team to meet their needs. Their team of less than 20 was already juggling multiple responsibilities, but Mopinion couldn’t leave the leads unanswered.
However, they also didn’t want to give away more equity. Why dilute themselves if they were clearly on a path towards self-sustaining growth?
Mopinion wanted to grow ambitiously, but not at the doubling year-over-year rate that VCs often demand. The team had worked hard to develop a solid product, close deals with top notch customers, and implement the software. They earned a low churn rate that meant revenue was steadily increasing.
And that, they realized, could be leveraged for more capital without diluting themselves.
Revenue-based financing (RBF) grants business owners an amount of capital based on their gross revenues. But the investor (Capital Mills in this case) doesn’t take equity, nor do they charge interest on the principal.
Instead, the investor and the founder agree on a total amount to be repaid and a minimum percentage of monthly revenue to be paid back every month, rather than a minimum amount due. In other words, the amount the company pays back to the investor depends on how much they bring in.
And Mopinion had the potential to bring it all in.
“Mopinion had executed a successful content strategy and generated many leads that could not always be followed up,” says Gijs den Hartog of Capital Mills. “Mopinion was gradually increasing their growth rate, and in order to achieve more, an RBF investment helped the team expand.”
Udesh and his team weren’t familiar with this financing option, but once Capital Mills explained how it worked, they realized it was the best fit for Mopinion’s future opportunities.
“Our reservation was the interest rate because it’s a debt on your balance sheet and you have to pay it back,” Udesh recalls. “We also had some concerns with the impact on our monthly cash flow. But we found out that the monthly payment is based on your monthly income, so it does not have a massive impact on our cash flow.”
Udesh also recognized the other long-term benefits of choosing RBF instead of fundraising: “The main reason was not losing equity and still having sufficient funds for future growth. The flexible aspect of RBF and not losing equity makes it really appealing for tech companies.”
Since there are so many options, understanding the cost of capital of different funding methods can have a huge impact on the long-term development of your company. Giving away (too much) equity, when your company hasn’t reached it’s potential, could be a very costly expense. Considering the options available to you might just save you millions in the long run.
Since receiving the funds from Capital Mills, Mopinion has upgraded their skills, boosted marketing efforts, and increased product investments. They’ve successfully onboarded clients such as NS (Dutch Rail), HEMA, KLM, and Calvin Klein. They have offices in Rotterdam, London, New York, Düsseldorf, and Paris. Their team has grown to include nearly 40 full-time employees.
Throughout that expansion, Mopinion has increased their monthly growth rate without compromising R&D or customer support. Churn has remained low without sacrificing an ounce of equity. And, with the extra cash at hand, the monthly operational cash flow management became less stressful, freeing Udesh of any need to micromanage.
In short, the cost of the €370,000 RBF has already been earned back in the first 18 months.
Udesh’s initial reservations about the financing option aren’t uncommon. “RBF is compared to debt instead of equity, and is therefore seen as an expensive loan instead of cheap capital,” says Gijs.
But at a time when tech valuations are skyrocketing and venture capital is itching to get a piece of the pie, holding on to equity is crucial for founders and early teams. RBF gives founders that “cheap capital” quickly and allows them to maintain a clean cap table, all while achieving expedited growth.
Ultimately, founders shouldn’t be focusing on turning a profit for outside investors. You are the one who should be benefiting the most, and RBF gives you that flexibility to grow without sacrifice.
Next time you think about fundraising, consider whether there’s an opportunity to capitalize on and figure out the cost of capital of the available funding methods before you make a decision.
All the unpaid hours, last minute shipments, late nights programming…you deserve the rewards of your labor.
Author: Gijs den Hartog