Can revenue-based financing revolutionize the way startups raise capital and allow anyone to invest for as little as $100? In this episode of The Angel Next Door Podcast, Marcia is talking to Justin Renfro from Wefunder, who heads up the Revenue-Based Financing division. Together they explore the potential of revenue-based financing as an alternative to traditional equity funding. What is Revenue-Based Financing? It's a unique way growing businesses can receive financial capital in exchange for a percent of ongoing gross revenues. Justin shares insights from his experience working with entrepreneurs and explains how Wefunder aims to democratize investing into startups. Marcia and Justin delve into the challenges faced by founders in raising capital, the infrastructure provided by Wefunder to support startups, and the importance of community-driven investment in fostering economic growth.
Can revenue-based financing revolutionize the way startups raise capital and allow anyone to invest for as little as $100? In this episode of The Angel Next Door Podcast, Marcia is talking to Justin Renfro from Wefunder, who heads up the Revenue-Based Financing division. Together they explore the potential of revenue-based financing as an alternative to traditional equity funding.
What is Revenue-Based Financing? It's a unique way growing businesses can receive financial capital in exchange for a percent of ongoing gross revenues.
Justin shares insights from his experience working with entrepreneurs and explains how Wefunder aims to democratize investing into startups. Marcia and Justin delve into the challenges faced by founders in raising capital, the infrastructure provided by Wefunder to support startups, and the importance of community-driven investment in fostering economic growth.
To get the latest from Justin Renfro, you can follow him below!
LinkedIn - https://www.linkedin.com/in/justinrenfro/
Read more about Revenue Based Financing from Wefunder
Learn more about Sepia Coffee Project - https://wefunder.com/sepia.coffee.project
Learn more about Love Box - https://wefunder.com/lovebox
Learn more about Neutral Ground - https://wefunder.com/neutral.ground
Learn more about SW Basics - https://wefunder.com/swbasics
Sign up for Marcia's newsletter to receive tips and the latest on Angel Investing!
Website: www.marciadawood.com
And don't forget to follow us wherever you are!
Apple Podcasts: https://pod.link/1586445642.apple
Spotify: https://pod.link/1586445642.spotify
LinkedIn: https://www.linkedin.com/company/angel-next-door-podcast/
Instagram: https://www.instagram.com/theangelnextdoorpodcast/
TikTok: https://www.tiktok.com/@marciadawood
Marcia Dawood:
Well. Hi, Justin. Welcome to the show.
Justin Renfro:
Thank you for having me. I'm excited to be here.
Marcia Dawood:
Yes, we have so many things to talk about. We could be here for hours. And as you know, this is the Angel Next Door podcast. We are trying to show people how anyone can invest in change through being an angel investor. And you have so many interesting things that you're going to tell us, especially related to Wefunder, and, of course, the newest thing that you've been working on, which is revenue based financing. So, Justin, maybe just start out by telling us a little bit about your background and how you got here.
Justin Renfro:
Yeah. So I started my career at a nonprofit called Kiva. Kiva facilitates 0% interest micro loans to entrepreneurs all over the world. And I helped launch Kiva in the United States, bringing interest free crowdfunded loans to the masses. And that inspiration kind of drove me to start my own boat charter business. When I was speaking to an entrepreneur at Kiva, they told me his story of, I love boats. I quit my job, I bought a boat, I started a boat business. It's not that complicated. And I was like, yeah, it's really not that complicated. I could do that. So back in 2017, I left Kiva to go start my own boat charter business, which I still own and operate. It's called chill, Charters. And after two years of running the business full time, I rejoined my team that was at Kiva, who are now the core leadership team at Wefunder. So, at Wefunder, I've been helping entrepreneurs raise capital through the Wefunder platform. And, yeah, the background and story is just littered with a love for entrepreneurship.
Marcia Dawood:
I love that. So, for our listeners, give us a little background on what We Funder is kind of how it got started and how now it is one of the main players in the equity crowdfunding space.
Justin Renfro:
Yeah. So We Funder was really created with a mission. We're, a public benefit corporation, to democratize investing into startups. And what that means in practice is, historically, angel investing has been limited to accredited investors. Broad strokes. An accredited investor is someone with a million dollars net worth. So many people were excluded from being able to invest in private companies. And there was a law that changed. I believe it was 2017, maybe 2018, as part of the Jobs Act that allowed for unaccredited investors to invest in startups. And Wefunder, over the past decade, has built a marketplace, a platform where startups can raise capital and investors can find companies to invest in. And at its core, that is what we do. So I work with entrepreneurs in basically being like, this is what We Funder is. This is how it works, and then get them set up so that they can successfully raise for their business.
Marcia Dawood:
And on Wefunder's platform, if somebody went on there and they weren't very familiar with necessarily a specific company and they just wanted to search around or look around. How do they do that?
Justin Renfro:
So we use tags. A lot of investors choose to invest in certain industries. So if you go to the Wefunder Invest page, it's Wefunder.com explore. You can invest in brick and mortar companies, climate change, entertainment, food and beverage technology, AI, agriculture. So we have companies in all of these different categories and you can kind of pick a category that's interesting to you and then kind of look through a couple of different companies that are in that same category and see if any of them might be a company that you want to invest in.
Marcia Dawood:
Well that's great because I know it was actually May of 2016 that the rules were changed and I only know that from being on the board of the ACA for so long. And so it's been only a handful of years that we've had the ability for people to do equity crowdfunding. So really Wefunder is one of the few platforms that are out there right now that are built out enough and kind of they've incorporated all of the SEC guidelines and they have like a built out user interface that's actually friendly and things like that. So I just wanted to make sure our listeners knew how they could find some of the things that they're interested in on broader terms as opposed to they heard about a company that was fundraising and then they just go search for that.
Justin Renfro:
Right? Yeah. It's somewhat intuitive to kind of see the different types of companies that are fundraising. I think the most important thing to note is a lot of founders come to Wefunder thinking that there's so many investors on Wefunder, we're going to fund everything that we need from Wefunder's network. And I think where the real value proposition is on the founder side is providing that infrastructure. So the legal contracts, the investment contracts, the SEC compliance, the ease of people being able to check out with a credit card, have a lower minimum investment, be able to participate even if they're not rich. That's really the value of Wefunder is the infrastructure that it provides. It's really designed to make fundraising easier, more flexible, and with less stress. So that's where We Funder has been able to grow in helping a lot of different startups is through that strong infrastructure.
Marcia Dawood:
I see, so the company puts their raise up on the platform and then they bring some of their own investors or the people that are also friends of the company. But then We Funder will also kind of supplement with all the investors that are on the platform. Is that right? Yeah.
Justin Renfro:
Key emphasis on supplement. And the target investor that I'm most excited about is customers. Getting customers to invest. I think that's where this model becomes very rich. If a customer invests, they are more engaged, they're more bought in, they're going to buy more product they're going to talk about it more. I think that's where there's so much value is getting customers to invest. That's a big part of the community. Round.
Marcia Dawood:
Totally. I know several companies that have done equity crowdfunding raises just so that they could not only allow their customers to become owners this way, but also so that people would have even more of a vested interest in recommending and using the product. And their brand loyalty goes up significantly when you know you have even if it's so tiny, they still have an equity ownership in the company.
Justin Renfro:
Exactly. And hopefully more than just ownership is liquidity. So hopefully they can actually make money on these investments and investors and founders can win together.
Marcia Dawood:
Yes. Love that. So in January of 2023, you started working on a separate division of wefunder dealing with revenue based financing. So please tell us more about that.
Justin Renfro:
Yeah, I think it's important to kind of understand how equity works in more of the upstream markets. When you go into institutional funding, where big VCs are writing multimillion dollar checks, when you raise on equity, you're kind of putting yourself on that track. That track is positioned to institutional investors. So for a lot of companies, they'll raise different equity rounds and then they'll get stuck when they try and transition to institutional. And I started to see this trend more and more often where companies were struggling to make that jump. And I was like, does equity actually make the most sense? What I think most venture capitalists look for is venture scale and power law dynamics. Venture scale basically means can this company grow exponentially? I don't want to see a doubling every year. I want to see a ten X growth. I want to have growth to the nth degree. Most companies aren't designed for exponential growth just as a byproduct of who they are and what kind of business that they have. So that piece of venture capital, that's very important. That box isn't checked for most companies in the United States. The other was power law dynamics, meaning that most venture capitalists invest with the hope that one of their investments has to be able to pay off the entire portfolio, but they have to make a bet that could pay off their portfolio. Every bet needs to be that. And for a lot of companies, having 100 or 1000 X multiple to investors is just not realistic based on that business. So I had some serious questions kind of bubble inside of me, like is equity the right path? Does equity make sense? Are equity investors seeing positive returns from their investments? And I have a very interesting vantage point with 1000 founders fundraising on wefunder not a lot of exit events or liquidation where investors get repaid. So I kind of went down the alternative structure route where it was basically what are different forms of financing that might make more sense? And I was really looking for myself, trying to find a selfish reason to find deals that I wanted to personally invest in. And it's taken me down this really exciting path of thinking about financing for startups in a different way. And my current kick is revenue based financing, which at a high level is if you invest in a company, they're going to pay you back two X your investment. They're going to pay you back on a small percentage of revenues quarterly until your two X is realized. And I just love that framework, that structure, that model. Every deal is a little bit different. But I think broad strokes that's the basic infrastructure is like, give investors the opportunity to make a two X on their investment. If they invest in you to grow, it just makes sense.
Marcia Dawood:
And what's the timing then of how that gets paid back, or does it depend on the company?
Justin Renfro:
Yeah, so typically the target repayment is generally four to five years. So based on revenue, it's kind of like a math equation. You kind of look at their revenue history, then you look at their revenue projections and then it's like, all right, if I were to raise $250,000, I could pay investors back in four years based on these revenue projections. So it's a very different story because when you raise on equity, you're telling the story of a big exit. This is who's going to acquire me, this is how you're going to get a 50 X here. You don't have to tell that story. It's just like we've been growing, we're looking to grow faster. We're going to be able to pay you two X if we hit these revenue projections. So, functionally, founders submit a quarterly payment that is a flat percentage of revenues and they continue to pay investors every quarter until investors have received the stated multiple.
Marcia Dawood:
And it's usually a two X.
Justin Renfro:
Two X. Yeah, you kind of see different businesses can design it in different ways. I've seen 1.5 X, I've seen 2.5 X. So in that range.
Marcia Dawood:
And tell us about some of the types of companies that you've seen be successful raising like this.
Justin Renfro:
Well, I'll tell you about the companies I'm most excited about right now. On my top list of my tracker, I've got a beauty care company in Clarksdale, Mississippi. I've got a coffee shop in Detroit. I've got a Disc golf course in central North Carolina, a bike shop in Bentonville, Arkansas, a lettuce farm in Cleveland, a New Orleans restaurant in Chattanooga, Tennessee, and a cigar lounge in Birmingham, Alabama. And so those are really the types of companies that, you know, eyeing for this structure and this model primarily because they're community hubs. A bike shop, a coffee shop, a cigar lounge, those are hubs of physical community. And I believe that we can activate those communities to invest in these local businesses. So I've been really focused on the invest local where it's like, we can activate investment dollars within these communities to support entrepreneurs within that community.
Marcia Dawood:
That is so interesting because, of course, we don't usually, as angels, invest in a coffee shop or lettuce farm or things like that. So really fascinating. I like the concept of the community part because I hear a lot of people tell me, well, I want to give back in my community. I want to invest in things that are happening in my community. And it doesn't apply so much anymore because of COVID and everything going online. But there was a rule for many, many years amongst angel investors that they would only even invest in somebody if they could drive to their offices and back in the same day, so that they could have a meeting with them because they wanted to invest in their backyard. Right?
Justin Renfro:
Yeah, exactly. That's the basic premise here. But I think the model also fits with just like, healthy economics. The community focus for me is kind of personalized. But I think if you look more broadly into how revenue based financing could be applied, I think that if you have a sound business model, a Pragmatic reason to raise capital. If there's a good story to tell that you can grow in the coming years, a two X return as an investor is a very balanced risk reward. And my hope is that more angels, people like you in the communities that you've served, like, I would love to get a two X supporting a coffee shop in Detroit. That's sweet. Doesn't even need to be in my community. I think it's a Pragmatic offer of risk and reward. As an angel investor, I want to invest in this company that could generate me a two X. I love that premise with my angel investor hat on.
Marcia Dawood:
I totally agree. I was just going to actually ask you, so what is the sell then, for somebody to invest who doesn't live in Detroit in the coffee shop? But you kind of just answered that. I mean, as angel investors, if we were in this solely for the financial returns, we might not be in it. There's so many other reasons why we help entrepreneurs and why we want to help grow communities right. Areas.
Justin Renfro:
Right, exactly. Well, for me, I don't live in Detroit. I'm going to invest a small amount of money into this deal because I think I'm going to two X my money. And I think that's a great outcome. So it's very pragmatic. With my non emotional Pragmatic money hat on, it makes sense. And from an impact sense, it makes sense.
Marcia Dawood:
Right. So now, are most of the companies that are coming onto wefunder doing revenue based financing, are they similar to the companies that you've mentioned? Or are there also companies who are like a traditional tech or consumer product that an angel might see in a normal angel setting?
Justin Renfro:
Yeah, I think this has broad strokes application primarily. Let's think about CPG CPG is very hard to scale. CPG has been hammered by market environments. I think that there are a lot of CPG businesses out there that would love to raise equity, but there's just not a lot of investor demand. That's not where the checks are going. And you just have to call a spade a spade. Like CPG companies got rocked by the downturn in terms of available angel capital. So if you're a CPG company that has good bones, good economics, a sound business model, a clear pathway for investors to get a two X, I think it might be an easier sell. It's going to be easier for them to raise capital, offering something that might make more sense. So I'm trying to keep a very broad lens in terms of who this might be relevant for. I think it's a very healthy alternative to seed stage Angel Round convertible notes. I think this is a more pragmatic approach, especially for companies at that stage.
Marcia Dawood:
And how much revenue do they need to have before they would think about doing this?
Justin Renfro:
I think it's very situational, but if your business is like revenue is not a focus, revenue is not part of the journey. We're about exponential user growth or we're about massive B to B contracts that flood the business with cash. This is not a relevant option, but I think that if you have a sound business model, the structure is very dynamic, it's very flexible. I've seen 100 different structures that were all a little bit different for different use cases, different stages, different target raises. There's a lot of creativity there, which I love.
Marcia Dawood:
And what is the typical amount of money that companies can raise like this?
Justin Renfro:
I mean, technically 5 million. It's no different than how we funder works. On the equity side, you're just switching the contract, so all the same rules apply. I would say the majority of companies I'm talking to are probably in that like 200 to 400K range in terms of the capital they need and how they're looking at this structure towards their business.
Marcia Dawood:
Interesting. And then as they're paying it back, it kind of depends on their level of revenue, what percent they end up paying back each month, or you said quarterly. Right.
Justin Renfro:
It's a flat quarterly clip. So 5% of revenues, the business has more revenues, it's more money back to investors faster. If they had a bad quarter, it'll be a lower payment. So it's variable payments on the founder side, that's a flat percentage of revenues that's paid back to investors quarterly.
Marcia Dawood:
Great. And so what is the future then, at Wefunder with revenue based financing and other things? Anything cooking?
Justin Renfro:
I mean, We Funder wants to have a very broad reach across the capital spectrum. A spillover from this revenue based financing initiative has been what about hybrid contracts where there's equity and debt and then we obviously have the equity side. But wouldn't it be cool if all entrepreneurs had the option of going pure equity hybrid or RBF and then layering. On top of that, we're building a Reg D product. So maybe you don't want to do a community round. You only want to raise from angel investors. Now we have a Reg D product that you can use. So really trying to expand our product offerings so that we can cater to more entrepreneurs and for our audience. Explain Reg D. Reg D is a private fundraise only with accredited investors. So typically you'd be looking for $25,000 plus checks from accredited angel investors. Typically that are filling around, typically in this precede through Series A is when you would run a private accredited investor raise. That's called a reg d. Great.
Marcia Dawood:
And for our entrepreneurs who are out there listening if they have an idea of what they want to do. But they are just getting started in the business and they don't have any revenues yet. Are they able to start on a revenue based financing thing with the promise that it might happen a year or two from now or how does that work?
Justin Renfro:
Yeah, you got to raise capital however it makes sense. So if that's how it makes sense, then the options there, obviously, the earlier stage, the less revenues, the higher risk, the harder it is going to be to get checks. But that applies whether it's revenue based financing or equity. So I'm a huge fan of Pragmatism when it comes to fundraising. Offer something to investors that makes sense for you and for them.
Marcia Dawood:
That is so well stated, because it's so true. It's not just a one time thing. This is like a marriage. You're together for a little longer than the five minutes it took you to kind of review the information on the site or even find out about the company. There takes some diligence and it takes some time. And then once you even make an investment, it's going to be a little while that you're going to be in this relationship. So it's good that you have both sides being.
Justin Renfro:
Clear expectations.
Marcia Dawood:
Clear expectations. Totally. All right, Justin. Well, thank you so much for coming on the show today. I really appreciate it. And we loved hearing about revenue based financing and everything that we funder is doing. And I love hearing about the expansion and the ideas that we can start to get more funding into the hands of entrepreneurs, which is, of course, something I'm super passionate about, too. So thank you so much.
Justin Renfro:
Do you think I could do financing rap?
Marcia Dawood:
Sure.
Justin Renfro:
I'm going to work on that over the weekend.
Marcia Dawood:
I think that would be fantastic. Have you seen my Rap battles?
Justin Renfro:
I watched it right before I jumped on, and it was the highlight of my day.