Revenue Based Financing promises to be the next big funding model for startups

To dilute or not to dilute? The million-dollar question that every entrepreneur chasing funding wrestles with. An equity dilution for early-stage startups usually comes at the cost of founders letting go of equity at a price that is dear to them. Debt financing, the other option for startups, comes with its own set of complications – especially in India. Financial institutions that offer debt aren't usually as savvy as equity-seeking venture funds when it comes to understanding startups or their business and revenue models. Besides, debt is still expensive in India.


Equity-based funding, while awarding the overwhelming majority of funds raised by startups, can be a bit of a double-edged sword. Venture capital funds that pump startups with excessive amounts of capital, expect them to burn through the funds in an attempt to chase hypergrowth and scale. Owing to the lack of funding alternatives, many startup founders have opted to sign up for venture capital equity funding, which they have come to regret later – either from choosing unviable growth paths leading to failure or diluting more equity than they would have liked.


What about those entrepreneurs who want to build commercially viable enterprises but not in the hypergrowth model that runs the risk of premature scaling? Or those who don’t wish to dilute their stake before time. Revenue Based Financing offers startups a more sustainable alternative, giving founders complete autonomy over the growth path they choose, as well as to retain ownership in their businesses. 


Shyplite, an AI-powered logistics platform, which enables businesses to automate their logistics and increase shipping efficiency, is one such startup that was bootstrapped by its founding team consisting of Nisschal Jain (Co-founder), Sugam Jain (CEO & Co-founder) & Parinay Itkan (Co-founder & COO). Shyplite was started as a service centric logistics platform for solving logistics bottleneck challenges for the e-commerce ventures of Sugam and Parinay in 2015-16. 


Green shoots and early growth 


“The ecosystem was not really there for multi carrier platforms, the sellers were not aware what was going on and we were bootstrapped so we were not doing any marketing, our customers did not understand what a multicarrier platform is and how it makes life easy. At the same time we realised that even without spending anything on marketing, in the first 90 days we had about 100 active users,” says Nisschal Jain, whose initial role was that of an investor and mentor who helped with strategic direction. While many of the active users were family and friends of the founders who were in the same domain, soon seller blogs and microblogs were talking about Shyplite.


The introduction to GST proved to be a turning point for the business. Prior to that, logistics firms faced challenges related to target times and state sales tax. Goods would take seven to eight days to reach recipients, as checks at each state border would slow down their movement. GST removed some of these bottlenecks, slashing delivery times by half, resulting in rising logistic volumes and the exponential growth of e-commerce in India. As the founders had consciously decided to grow without taking seed funding, they focused instead on staying profitable and building a strong base to scale from in the future. That time to scale arrived in 2021. 


“When we were reaching out to investors, their concern was profitability is good, but how do we scale? And the answer was now we were ready to scale, we were ready to take external funding. While those conversations were happening, we happened to get introduced to N+1 Capital through Lets Venture. And that's when the conversation started,” says Nisschal. What followed was an exercise in full transparency and building trust, starting with the first conversation with Ashish Singla and Rahul Chowdhury, the Co-Founders and Managing Partners at N+1 Capital in February. The term sheets were quickly produced and simple, prompting Shyplite to even forgo the mandatory legal check-ins with their lawyers for the $1 million investment.


Trust and other foundations


Ashish’s initial impressions on meeting the founding team of Shyplite was the palpable energy in the latter’s office despite the pandemic’s effects. Aside from this, what impressed him was the level of detail and transparency that the founders could provide quickly. “It really does help build confidence. What differentiates a poor portfolio relationship from a good one is the trust that you build in the initial days and more importantly maintaining that trust post funding. ShypLite has built and retained that trust with us through timely and clear communication.,” says Ashish. Blown away by the professionalism, Ashish had no hesitation at asking the founders to meet some of N+1 Capital’s Limited Partners.


What tilted the deal for Shyplite’s founders wasn’t just the comfort of growth capital without having to dilute their equity, but the fact that this investment came without the need to give N+1 Capital a board seat (or even an observer seat on the startup’s board). Additionally, the nature of the relationship was people centric and not just capital centric, which meant that the investing team was always at hand to guide, mentor and provide strategic direction, apart from bringing connections.


“The beauty of the structure with NP1 that we have is that we are investing in our future growth and that is when we grow we have to pay them, we have received that investment and we are able to invest that to build our team and marketing and we will have time to repay that capital over a period of time and it is a relationship that is going to continue for a while. I would highly recommend Revenue Based Financing to my fellow entrepreneurs". says Nisschal.


Growth is life


Shyplite will invest the funds in expanding into new segments such as fulfilment centers and hyperlocal deliveries, to attempt becoming an end-to-end logistics firm. The startup is in the process of setting up nine fulfilment centers across India in cities including Delhi, Mumbai, and Bengaluru. Additionally, it is also tying up with last-mile logistics companies like Dunzo, Wefast and Shadowfax to support its client base with last-mile and same-day delivery. Shyplite, which has been cash flow positive since March 2017, is on track to surpass 1 million shipments per month. Trusted by over 90,000 sellers, it provides 30 courier services, multiple marketplaces and carts integrations, shipping to 26000+ serviceable pin codes pan- India and globally.


“We have set aggressive targets, we should be growing about 2.5X to 3X this year and we are looking at offering some more disruptive services, the first of which has happened in July this year. We are the only company in India to provide cross border logistics as a service, so that is an early product that we have come up with, we are currently live for about 40 countries, this number should go up to 70 countries soon and by the end of the year we should be serving 220 countries out of India. It is helping MSMEs and there is a lot of transparency in our cross-border logistics process,” says Nisschal.


A funding model whose time has come


Revenue Based Financing, while still new as an asset class in India, might just become a further shot in the arm for the booming venture capital funding space. In the first half of 2021, Indian startups raised a total of $361 million across 31 deals in debt funding and $9.75 billion across 508 deals in equity funding, according to data from YourStory Research. Apart from providing a middle ground between equity and debt funding, revenue-based funding has achieved optimum alignment of interests between the entrepreneur and the investor who are often misaligned on valuation. Revenue Based Financing gives entrepreneurs quick access to capital minus any personal collaterals, equity or board seats. On the Investor end, N+1 Capital earns continuous return without having to rely on a big bang exit event down the road.


“That connect between equity and debt is critical for founders - as founder of LetsVenture my belief is that the intersection of the two forms of funding will become more obvious as the ecosystem matures. The choice of which instrument to use to capitalise business should be available to founders easily, and from credible people who have been founders themselves,” says Shanti Mohan, Co-Founder at LetsVenture, India’s first online investment platform, and venture partner to N+1 Capital.


“Revenue Based Financing funds have been prevalent for over a decade (globally) now and we are excited to support a homegrown fund to bring this alternative financing opportunity to startups. For our investors on our platform (angels, UHNIs and family offices) investing in N+1 Capital provides a good opportunity for them to balance their private market portfolios between equity and debt,” adds Nimesh Kampani, Co-founder & CEO, Trica. 


As India’s startup ecosystem grows, the evolution of the funding side is also inevitable as both startups and funds seek creative ways of raising money. While conservation and reserving cash is the key factor for any startup today, debt funding, especially Revenue Based Financing is emerging as a powerful driver of growth, without the strings of collaterals, or prior venture funding attached. Entrepreneurs and founders of startups like Shyplite are also welcoming this non-dilutive capital model with open arms. As a founder-friendly alternative Revenue based Financing promises to be just the boost that India’s start-up ecosystem needs.

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