To watch or to read? It's viewer's choice! In this video love letter, Managing Partner Melissa Withers talks a little about what Team RevUp has learned since hitting the scene in 2016, what's changed, and what lies ahead in 2021 (spoiler alert: new deal structure!). Rather read than watch? Scroll down for a written summary!
Happy ReveNew Year!
When we started in 2016, using revenue-based funding with earlier stage companies was a very new idea. Today, it’s one of the fastest growing forms of capital on the market.
That’s why I’m excited to share with you a little of what we’ve learned along the way and what’s on deck for 2021.
So to start...
Optionality. Flexibility. Innovation. When we made the switch from equity to revenue-based investing, these ideas were paramount to our decision. We wanted it for ourselves, for investors, and for founders.
Fast forward five years and I am grateful that the optionality, flexibility and innovation that we wanted with RevUp came to be.
We built RevUp because we were frustrated by the constraints of the equity-only model. Frustrated by
1) The dependency on exits as the only way to win
3) We were also troubled by how the amount of money a company raised was overused as a proxy for company quality
4) Most importantly, the venture system, which accounts for just a tiny sliver of overall funding, was overlooking an entire universe of great companies and great founders.
To invest beyond this, we decoupled the RevUp return model from exits, tying it instead to revenue growth..
So five years later, how did it go?
It wasn’t perfect but here are three things that went better than we expected:
1. We invested in a broader spectrum of companies without hesitation
Within equity, navigating to an exit is all about industry-focused follow-on funding and acquisition patterns. This all but requires funds to hyper specialize.
The RevUp model is based on how companies sell into the market as they grow from one to 10 million dollars in revenue.
Our approach is less about exits and more about creating optionality, the kind of optionality that a company gets as it moves up that curve. Get a company to a $10M run rate and you’ve opened a lot of options for what lies beyond.
As a result, we invest across both B2B and B2C, and across more industry verticals than is easy to do using only equity. This is what keeps me in the game. And It’s why I know more today than I did yesterday.
2. We invested more in women, people of color, and founders outside big metros
Building a more diverse portfolio was a major factor in our decision to create RevUp.
The switch to a revenue-based model moved us forward in a big way.
In the last year, 70% of our investments went into women-led companies. 35% of our investments have been into founders that identify as brown or black. And, in 2020, we quadrupled the number of women LPs invested in RevUp Capital’s Fund, an often overlooked part of building a true ‘diversity stack” in early stage investing.
3. Our companies and our investors were able to “win” in more than one way
There is so much value created by businesses beyond how they get sold. We designed our model to lean into that value. And it worked.
We’ve had successful outcomes through the conclusion of our revenue contracts, successful outcomes through company acquisition, and successful outcomes when a company raised a significant amount of money and embarked in a new phase of growth.
So what didn’t go exactly as planned.
1) When we started we thought we would invest into earlier stage companies.
That’s not how it worked out. By 2019, average annual revenue upon entering our portfolio was around $750K. About 30% more than we planned when we first built the model.
Today, there are more revenue based funds investing into very early companies. We haven’t ended up there. No model is free from constraints and this was one of ours.
2) Having only one flavor of deal limited our ability to invest into every great company that we found.
We see a lot of diversity across the companies that we’ve met along the way.
To accommodate this spectrum, we’ve changed our terms through the years, and in some pretty significant ways.
We wanted that flexibility when we started, but putting it into into play wasn’t always simple or fast. There are just limits to what you can do with a “one size fits all” structure.
3) Our growth platform, which is central to what we do, has delivered a lot of value to our portfolio. It’s what makes us unique, and reflects so much about us as managers and business builders. Until now, the growth platform required that companies absorb the resources we provide all in “one bite”. That just wasn’t always the most efficient way to deliver that support.
So, what’s on deck for RevUp in 2021?
1) We now offer more than one deal structure.
Having more that one structure allows us to more easily invest into companies at different stages and with different needs, while addressing different risk factors and growth goals.
These structures represent the best of what we’ve learned across the years. But now, it’s finally all in one toolkit.
2) We redesigned the growth platform into modules that can be delivered as single phases of effort or sequenced together.
This changes the total volume of support that a company receives and the timeline on which it’s delivered. This also changes the investment mechanics around that resource.
Now, the growth platform is less one-size-fits-all and more about what you need when you need it.
One of the great things about innovating a model is that you can change it. So we have.
There’s a lot of history about startup funding left to be written, but here’s what I know for certain:
When it comes to early stage funding flexibility beats orthodoxy. Hands down.
The capital markets are changing so fast. There are wild times ahead, for investors and founders alike. There will be winners and losers, and collateral damage. There will be good products and bad products.
And almost certainly, there will be founders who use good products but at the wrong time, creating outcomes that no one wanted.
But, orthodoxy won’t protect us from that. Only collaboration, empathy and education will.
Speaking of education...The need to offer founders a better capital education is urgent. We can’t ignore the pressures they face navigating this new landscape. We must get better at training, matching founders with capital mentors who can guide them, and be far less precious about whatever orthodoxies we ourselves can’t shed.
In a decade, much of what we once took as fundraising gospel will be a historical footnote.
There will be more competition and more complications than we faced in 2016 when we started. These are the hallmarks of an industry disrupted. And early-stage funding has been disrupted.
Lastly, I want to send a heartfelt thank you to the founders who welcomed us into their companies. You were instrumental in bringing RevUp to life, but also in advancing the entire industry of equity alternatives. You were pioneers too. So thank you.
And with that, I wish you all a Happy ReveNew Year. With health, happiness and lots of growth in the months to come.