Revenue-based finance (RBF) offers an attractive funding source that is complementary to classic angel finance and beneficial to both investors and early-stage companies.  For the investors, RBF offers regular cash flow and lower risk.  For the companies, RBF provides non-dilutive growth capital.  For both, it eliminates negotiations over valuation and conversations around exit strategy.

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Unlike classic angel investments, revenue-based investments are not dependent upon an exit. Rather, the company taking the investment makes regular payments to the investor based upon its sales achievements until the investor has received a multiple of the investment, typically 2 to 3 times the original amount. What is uncertain is the amount of time it will take to yield that return.

 

This case study reviews a recent investment made by Sage Growth Capital.1

 

Refactr (www.refactr.it)

 

Founded in 2017 by military veterans, who are cloud and cybersecurity industry experts, Seattle-based company, Refactr, provides a DevSecOps Automation Platform that enables the collaboration between DevOps and cybersecurity teams.  Here is what the company says about its services on its website:

 

Refactr’s radically simple DevSecOps Automation Platform bridges the gap between DevOps and Cybersecurity. Cybersecurity teams are leveraging our visual drag-and-drop builder while DevOps teams are augmenting their existing CI/CD workflows using tools they love. Teams can start with customization or jumpstart the agile solution delivery process via pre-built pipelines through solution catalogs.

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Financing

 

In March 2020 Refactr received a SBIR Phase I contract and were notified of being selected for SBIR Phase II contract in December 2021 from the US Air Force but were waiting on final contracting.  The company needed additional working capital to support scaling up resources in lieu of the SBIR Phase II contract that was awarded in March 2021.  They approached Sage and we made a non-dilutive $150,000 revenue-based investment in February of 2021.  

 

The investment instrument was a convertible note.  Unlike traditional convertible notes, the Sage convertible note bears no interest rate, converts to equity only upon maturity and then only on any amount that remains unpaid.  The note is unsecured and unguaranteed, and therefore sits in the capital stack as an unsecured liability.  

 

The terms of the investment were:

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Acquisition of Refactr

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On July 10th, 2021, Refactr made its first regular payment to Sage. On August 2nd, 2021, Refactr was unexpectedly acquired by Sophos. As part of the acquisition, Sophos required the note be retired.  

 

Even though Sage was entitled to $225,000, we agreed to accept an early payoff of $175,000.  This saved Refactr a significant amount of money while still producing an internal rate of return to Sage of nearly 41%.   

 

Summary

 

• $150,000 of revenue-based investment enabled Refactr to help catalyze its Air Force contracts.

• The company’s payment structure was 6.00% of cash receipts until it reached its repayment caps.

• The company’s repayment caps varied based on length of time to payment: 1.5x for 3 years, 2.25x for 4 years, and 2.5x at 5 years.

• Six months after the initial investment, Refactr was acquired.

• Sage agreed to accept $175,000 as Refactr’s full payment. 

• The Fund achieved an IRR of about 41%

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About Sage Growth Capital

Sage Growth Capital makes revenue-based investments in companies who need growth capital. It is our mission to provide a more flexible funding option to growing companies who do not fit traditional lending models or for whom equity is not the best current choice. To learn more about Sage Growth Capital or to apply for funding visit: www.sagegrowthcapital.com.