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How Revenue Based Financing Is Solving The Working Capital Needs For India’s $400 Bn Ecommerce Industry

Working capital crunch hugely hinders the growth of online-first, asset-light businesses since existing financial instruments do not offer effective solutions

Revenue-based financing, a flexible, collateral and dilution free form of financing is addressing this credit gap for online businesses.

Bengaluru-based fintech startup Velocity is India’s largest revenue based financier that follows a capital plus approach to financing

In the past two years, the Indian ecommerce industry has proven to be a massive disruptor. The sector has grown massively — propelled by the rise of internet penetration, digitisation of payments, the government promoting commerce through various initiatives and more. So much so, the market is estimated to reach $400 Bn by 2030, with the direct to consumer (D2C) segment holding majority of the growth — estimated to reach $302.4 Bn by the same year.

While this has opened up a lot of opportunity for aspiring entrepreneurs and new-age brands, it has also resulted in the market being cluttered with options. This not only gives birth to concerns such as acquiring and retaining users but also of gaining the capital required to grow and scale sustainably. A recent analysis revealed that out of more than 75K independent ecommerce stores hosted on enablers such WooCommerce and Shopify, less than 0.5% are equity funded.

This scenario, however, is not just limited to India. Case in point, Australia-based Bhumi, that sells a range of products, made from organically grown and ethically made cotton. The startup wanted to avoid taking investors — for the fear of diluting the value of the brand — but was faced with the challenge of requiring more stock than they had the capital for. This is where Dublin-based Wayflyer came into the picture.

Wayflyer offered the funds required by Bhumi to grow, without any terms requiring them to give up any ownership. Result? “We tripled our sales last year, we simply could not have done this without access to the right capital”, said Dushyant Baravkar, founder, Bhumi Organic Cotton.

While in the global market, startups are finding the solution to their capital based challenges with names such as ClearCo and WayFlyer, in India this story is being carried on players such as Bengaluru-based Velocity and Klub, and Delhi-based GetVantage and N+1 Capital. Out of which, set up in 2020, Velocity claims to have made over 450 investments so far, thus underlining the demand for quick and easy debt funding.

“Today, online-first businesses require credit to scale but traditional financial institutions are not able to service them. These legacy financial institutions face data gaps while evaluating new-age businesses. Of course, VC funding is an option, but VC money suffers from multiple limitations — it is not available to meet the capital requirement of all startups, leads to dilution and therefore loss of control and is an expensive form of capital for working capital requirements” said Abhiroop Medhekar, cofounder and CEO of Velocity, India’s largest provider of revenue-based financing (RBF) for D2C businesses.How Revenue Based Financing Is Solving The Working Capital Need For India's $400 Bn Ecommerce Opportunity

The Working & Benefits Of RBF For D2Cs

Being a part of the apparel business that requires investment in multiple SKUs to attract customers, Hyderabad-based fast-fashion brand Nobero faced the challenge of capital to scale the business. To solve this problem the brand reached out to Velocity.

Satish Bala, cofounder, Nobero elaborated that banks and other financial institutions were not an option for the startup given digital first businesses lack collateral; raising VC money was also less than ideal since it would have led to equity dilution.

“Given the relatively low-risk and no-dilution nature of revenue based financing, we felt it was a no-brainer for us to partner with Velocity,” Bala further told Inc42.

The concept of RBF first emerged in the 1990s when US-based venture capitalist Arthur Fox set up the first RBF fund to showcase this alternative fundraising method. Unlike traditional lending mechanisms that assess a business based on limited metrics like asset size, traction, profitability, availability of collateral, personal and business credit score, revenue based financiers leverage online sales, marketing, credit and taxation data to build a holistic picture of the company’s creditworthiness. 

“RBF can be leveraged by all businesses that have healthy and predictable margins, trackable online revenues and high growth trajectory but need working capital to achieve growth,” explained Medhekar.

If it passes muster, the company can raise financing ranging between INR 10 Lakh to INR 4 Cr that is repaid over a period of 5 – 9 months. Offers for RBF attract a fixed fee between 4-10% of the principal that is also repaid flexibly as a percentage of revenues. Given application submission and due diligence is done digitally, it takes up to four days to approve and disburse loans, way faster than the time required by legacy financiers. 

While there are no collateral requirements or equity stake that is picked in the borrower, revenue based financiers like Velocity significantly mitigate the risk profile of their portfolio by undertaking extensive data analysis on the borrower’s business thereby leading to low risk of default. Repayment of the financing happens continuously via the borrower’s payment gateway and marketplace settlements, to enable automated repayment of a certain percentage of the revenues generated for the month.

“We believe that different forms of capital are appropriate for different use cases. Venture capital is suitable to fund use cases like product R&D and technology investments which are longer term and riskier in nature while revenue-based financing enables businesses to plug working capital gaps, grow their business and have the same ownership of a business that is more valuable,” said Medhekar.

 

Understanding Revenue Based Financing

Having leveraged Velocity’s offering to grow the business, Nihaal Mariwala, the founder of Mumbai-based nutrition supplement brand Setu, said, “The fact that repayments are directly linked to the company’s growth ensures that Velocity and our incentives are aligned. This creates a unique dynamic wherein Velocity via its partnerships and other products like Insights, tries to ensure that its portfolio companies are on an exponential growth trajectory.”

Concurring with the sentiment, Nobero’s cofounder Satish Bala, said, “The primary advantage of raising revenue-based financing for us has been the fact that we get access to a tap of liquidity that we can turn on and off as per our business’s requirements. Moreover, raising money from Velocity is frictionless — the entire process is digital and takes under a week.” 

While Nobero raised over INR 2.5 Cr via Velocity and has since seen a 2.1x increase in revenue, Setu saw  a 1.4x increase in its monthly revenue in the two months since having raised the money from the RBF platform. 

The Bengaluru based lender also offers additional services that enable the growth of its portfolio companies. The most noteworthy of these is Velocity Insights, an analytics tool kit that helps businesses gain actionable insights into their sales and marketing efforts and streamline operations accordingly. Velocity generates comprehensive reports on sales and marketing metrics across platforms like Shopify, Amazon, Google, Instagram and Facebook to ensure that its clients stay at the top of their game by leveraging business intelligence. These reports are delivered daily to the founders via Whatsapp.

“Velocity Insights has received an extremely warm response from the Indian D2C community. Today, Insights is used by over 1500 D2C businesses, it helps founders keep a tab on their business’s performance and make quick decisions that can spur growth,” said Medhekar. 

Revenue-Based Financing As A Growth Driver 

“We used Velocity’s capital to source higher ticket size products. These products resulted in an immediate uptick in our basket size which in turn resulted in better unit economics for our business. Velocity’s Insights has also been extremely useful for us in the sense that it enables us to keep a finger on the pulse of the business. We are able to see clear impact such as changes in the marketing budgets, refreshing creatives, introduction of new SKUs and others have on revenues,” said Nobero’s Bala.

Similarly Setu told Inc42 that the capital raised from Velocity helped the brand expand its product line, which immediately translated to a higher top line for the brand. “At the same time, raising capital from Velocity to fund our inventory freed up the rest of our capital base to fund long tail expenses like research and development that will drive future growth for our business, “ added Mariwala.

Today revenue-based financing serves as a convenient option to bridge working capital gaps that spur business growth. The fundamentals of RBF zero-collateral and dilution are primarily used by companies to scale up operations and enter a higher revenue bracket. Moreover, businesses with healthy margins are able to gain access to additional cash flows that can be utilised to further spur exponential growth. 

“On average, our portfolio companies have seen a 1.5x increase in revenue after using our funding. Deploying our capital towards marketing and inventory creates fast ROI for D2C businesses, which in turn creates a repetitive cycle of higher demand as long as capital deployment is prudent.” said Medhekar.

Velocity claims to have a retention rate of 78%, which means most borrowers return for a second or even third-time round of financing. Further, the repeat rate also underlines the popularity of the RBF model among D2C businesses and the net positive effect to operations they have witnessed via the capital raised.

To deliver on its mission of providing value beyond capital to its borrowers, Velocity has partnered with multiple ecommerce enablers such as AWS, Shiprocket, AdYogi and others to offer discounted discounts to Velocity’s portfolio companies.

Interestingly, the largest global D2C investor is Toronto-based Clearbanc, which is a RBF company. It has so far invested more than $2.5 Bn in the segment. Revenue-based financing has today emerged as a viable lending instrument in India and abroad. A report by Allied Market Research says that globally, the RBF market reached $901.4 Mn in 2019, and it is expected to hit $42.3 Bn by 2027, growing at a CAGR of 61.8%. 

The global buzz surrounding RBF is sure to impact adoption in the Indian market as well, opening up a hassle-free mode of accessing growth capital for thousands of digital first businesses that are looking to scale. 

While it’s still early innings for RBF in India, the model can help accelerate credit penetration in India where 50.7 Mn businesses do not have access to credit, the credit gap according to ACCA has reached $380 Bn in the last five years. These factors coupled with the scale achieved by Indian RBF players in a short span, point towards a sunny future where the ease of access to RBF is expected to be a positive lever in the Indian D2C growth story.

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