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Published on 
March 1, 2024

Investing in crowdfunding: understanding revenue-sharing investments

Revenue based financing (RBF), commonly known as revenue-based financing, is an alternative financing model gaining popularity in the current financial landscape. Designed to provide businesses with a flexible capital source tailored to their growth, RBF offers several advantages and unique characteristics.
Investing in crowdfunding: understanding revenue-sharing investments

What is revenue sharing?

In simple terms, revenue sharing means a business gets funding in exchange for a slice of its future earnings. This model is especially appealing because it's flexible. Companies repay investors based on how much money they make.

How does it work?

Unlike fixed loans, revenue sharing adjusts to how well a business is doing. If the business earns more, it pays more. If earnings dip, payments do too. It’s a fair deal that ties your returns directly to the business's success.

Key players in the scene

WeDoGood: A pioneer in financing startups, offering investors a share in revenues for 3 to 5 years.
erable° : A newer player focusing on financing business assets, enhancing transparency and direct investor-project connections through Web3 technology.

What are the advantages when you invest in crowdfunding?

Alignment of interests between investors and funded projects

Since returns are indexed to revenue, this investment model is flexible and adapts to the funded company's activity. It promotes mutual commitment between project holders and investors for project success.

Traceability of funds and positive impact

Unlike traditional financing that focuses on a company's capital, erable° allows financing specific assets within companies. This approach offers increased transparency, allowing investors to know exactly where their money is being used.

Stable returns and frequent liquidity events

Financed assets generating revenue contribute to a common treasury, thus ensuring a more stable and less risky source of income compared to stocks.

This model reduces uncertainties and increases the chances of success for investors compared to traditional options where liquidity is less frequent, and the risks of losses are higher.

What are the risks?

Although revenue sharing has many advantages, it also carries potential risks for the two parties involved. For companies, the main risk is having to repay a portion of their revenue, even in financial difficulties.

For investors, the risk lies in the possibility that the company does not generate enough revenue to repay the financing, which could lead to financial losses.

Absence of shareholder status

This reduces investors' governance capacity in monitoring companies while avoiding certain disadvantages associated with shareholder status, such as being repaid last in the event of company closure.

A new model

Another risk lies in the novelty of the model. Although some sectors like real estate are starting to adopt this financing model, it remains less common than traditional methods such as stock or bond investment.

In case of liquidation

The right of investors to claim their debt is another point raised. Although they have this right, in practice, they are often not prioritized compared to traditional creditors, such as banks.

What solutions to mitigate these risks?

The first concerns fund allocation, ensuring that allocated money is used precisely, especially in financing tangible assets such as machinery or recycling equipment. This approach offers some security by guaranteeing transparent use of funds.

Enhanced commercial due diligence

As returns are correlated to revenue, it's crucial to assess the financial health of companies, but also their ability to market their offering.

Framing on asset ownership

Initially, erable° took full ownership of the assets to offer additional security to investors. Recently, an approach favoring fund allocation has been adopted, allowing companies to retain ownership of the assets while ensuring their proper use through specific clauses.

In conclusion, Revenue Based Financing offers an attractive alternative to traditional financing models for companies seeking growth capital. By understanding the ins and outs of this model, companies and investors can leverage the benefits of RBF while mitigating potential risks.

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