Revenue-Based Financing Powers A Tech Company To The Inc. 5000

Money is the fuel that powers growth. You can use your company’s profits to grow, but when that is not enough to finance your high-growth company, what other options are available?

Debt? Sure, but you will have limits on how much capital banks will lend.

Venture capital? Sure, if you get it. And, if you do, you can’t give away more than 49% of your company in exchange for the money, because it will no longer qualify for certification as a Minority- Women Owned Business Enterprise (M/WBE). Being certified opens doors to government and corporate contracts.

Revenue-based financing or royalty-based financing (RBF) may be a good alternative for fueling your growth. Companies in industries as diverse as technology, healthcare, services, light industries, and CPG are using this financing option. In 2019, RBF was valued at $901.41 million, according to Allied Market Research, and it is projected to reach $42.3 billion by 2027.

During the financial crisis of 2007 and 2008, Valerie King-Bailey, founder and CEO at OnShore Technology Group, read Good to Great: 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 company at the intersection of:

  • What you are deeply passionate about.
  • What you can be the best in the world at.
  • What best drives your economic or resource engine.

Identifying the overarching hedgehog concept for King-Bailey’s three companies was transformational. The three companies specialized in different things related to technology:

  • Tactical and strategic marketing.
  • Engineering and construction.
  • On-demand technology resources that included doing independent validation and verification.

“I figured out we were the best at independent validation and verification,” said King-Bailey. “By focusing only on validation and verification, that’s when the company started on its growth path.”

OnShore took advantage of supplier-diversity programs within corporations, Chicago, and Illinois, as well as federal and international opportunities. The company is certified as a Woman Business 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 sciences companies went from paper processes to digital. Valarie King-Bailey, founder & CEO at OnShore Technology Group, which does independent validation and verification in the life sciences industry, needed capital to develop technology and hire engineers. OnShore was perfectly positioned to take advantage of this new trend. But it needed money to develop technology and hire people.

The company had a line of credit from a bank, but it had a ceiling of $100,000. That doesn’t get you very far when you need to hire expensive talent like engineers, commented King-Bailey. She received merchant cash advances (MCA). These are not loans. They give you an upfront sum of cash in exchange for a slice of your future sales, typically paid daily.

King-Bailey loves the ease of applying and speed of approval for MCA. But, “it is super expensive money because capital is repaid daily,” she said. However, it can be a good source of short-term (12 months or less) financing.

Even if she could have gotten venture capital, it might have complicated her M/WBE status. It’s not just that the company might fall below the 51% women- or minority-owned requirement; it’s that when you’re not 100% owned by women or minorities, the certifying organizations scrutinize your application.There’s been cheating, commented King-Bailey. Men have put their wives up as the company owners when they are not involved in day-to-day management.

In hopes of finding funding, “I had gone through many training programs that claimed there would be capital at the end of the program,” said King-Bailey. “There was no capital or even connections to money.” When she met Kim Folsom of Founders First, King-Bailey was dubious that there would be capital at the end of her training program.

“I’m going to bottom line this for you, [Folsom],” said King-Bailey. “I have a software application making lots of money, and I need capital to grow my business, not another training program.” Folsom replied that she knew all the other programs that King-Bailey had gone through. The Founders First program is different. Since it was just a three-day program, King-Bailey gave it a try.

Unlike the other programmes, the Founder First program was laser-focused on the individual needs of each of the eight businesses in the training. King-Bailey’s previous experience was that training programs were general and served a mix of businesses from newbies to established high-growth companies in industries as divergent as nail salons and tech companies.

“I am in the technology space,” said King-Bailey. “I’m talking to directors, vice presidents, and sometimes presidents of life sciences companies about patient safety. It’s all about confirming that the systems they use to make the drugs, medical devices, biologics, and vaccines perform according to their intended use and that they have the 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 that her software, Validation Master, sits on top of, which makes OnShore much more valuable when the time comes to sell it.

To receive RBF, companies need to have a proven revenue model from which they can accurately project sales. In exchange for capital, you pay a pre-established percentage of future revenues until a certain multiple of the original investment has been repaid. You don’t pay the money back daily, you pay it back at agreed upon intervals. While your company doesn’t have to be profitable, it must generate income. Investors also want to see that you have strong enough margins to continue growing and pay them back. If your company is on a slow-growth trajectory, RBF may not be for you.

“We experienced 70% growth,” said King-Bailey. “After that, we landed on the Inc. 5000 list and did it again this year.”

How will you fund your growth?

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