Revenue-Based Finance: What Would Google Do?

When it comes to revenue-based funding (RBF) one of the most common questions from startups is “how does it compare to selling stock?”  At the end of the day, is it smarter to sell some shares to an angel investor or venture capitalist, or to take an RBF obligation instead?  The problem is, a lot depends on the intricate details of any one situation.  So rather than getting bogged down in all possible variations, perhaps we can shed some light by asking a different question: What about Google?  Would RBF have been a good or bad idea for Google as an alternative to selling stock?

To play with this example let’s transport ourselves back to 2004, the year Google had its IPO.  Not only was Google a household name but it had crunched out an impressive $1.4 billion in revenue the year before.  Let’s also imagine that for some reason… say to buy new foosball tables… Google wanted to raise $220 million.

Option A is to sell some stock.  Google’s IPO kicked off at $85 per share, so to raise $220 million it would have needed to sell around 2.5 million shares (we’re using round numbers).  Today, seven years later, Google’s share price is around $624 (must be nice).   So today’s value of the 2.5 million shares Google sold is roughly $1.6 billion.   In other words, the hindsight cost of raising $220 million through stock was in excess of $1 billion.

Option B is to use RBF.  What if Google raised $220 million through RBF instead of selling shares?  Let’s say its RBF agreement called for 5% of monthly revenue to be repaid to the investor up to a maximum lifetime repayment ceiling of $660 million (a ‘3X cap’).  Looking back through Google’s historical sales since 2004, it turns out Google would have repaid the full $660 in less than 2.5 years.  The cost of raising $220 million through RBF was $660 million and the repayment time was relatively short.

Conclusion: It turns out selling stock would have cost Google nearly $1 billion more (around $955 million) than if they’d used RBF to raise the $220 million instead.  Rather than paying off its RBF obligation just after two years, selling stock would have also forced Google to indefinitely relinquish 2.5 million shares of ownership and control.

So if you think you’re sitting on the next Google, let this be a cautionary tale.  While selling stock feels like “free money” to amateurs the true cost can be through the roof.  It certainly pays to know your options.  If you still aren’t convinced… Google it yourself.

Author: Thomas Thurston, Growth Science International, LLC

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7 Responses to Revenue-Based Finance: What Would Google Do?

  1. Pingback: Saving Google a billion dollars « RevenueLoan Blog

  2. Giuseppe says:

    First of all congratulations for your posts: they are very interesting. The impression I had by reading them (I am only a law student, not so expert into this field) is that you consider the revenue-based finance as an aut-aut possibility, alternative to equity or debt. But what do you think about a mixed solution?? For example Equity + RBF? Do you think that a RBF, pure or mixed, could represent a win-win game? I’m sorry for my rude English, but I hope my questions are clear! Thanks.

    • rlucas says:

      Giuseppe, I do think it can be win-win, and I do think that a mixed round can be helpful. At RevenueLoan, we are happy to structure a hybrid equity / revenue / royalty financing round. In one case, we helped an entrepreneur who was raising a certain amount of money on a fixed premoney valuation. Each dollar of equity, therefore, diluted him and his team more. We found a balance where about 75% of the money came in as equity (with no cash flow implications), and our money, 25% of the round, was a “turbo boost” on top structured as an RBF. Not a cookie-cutter formula for everyone, but it’s working well in that case.

      • Giuseppe says:

        Thanks for your answer. I am searching for data from startups adopted RBF at the aim of better assessing the legal implications that RBF entails (it is for my LL.M. thesis), but I have to admit it is very difficult to find such informations, unless I start to pick them up from the single startups: a job extremely tough! Do you have any suggestion? Any database I can rely on?

  3. Mike says:

    Your chart says that Google makes trillions….

    • rlucas says:

      Really? $25,000,000, the highest labeled point on the Y axis, is $25 million. The title indicates values are in thousands. $25 thousand million is $25 billion. Or am I missing something here?

  4. tthurston says:

    Sorry that’s my bad. Mike did a helpful job of spotting a decimal mistake that I went in and corrected just about 10 min ago. It’s correct now. Thanks for the help Mike!

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