In line with public markets, valuations are coming down too and VC funds are marking down their portfolios and spending much longer in diligence with companies as the industry comes under pressure.

While pressures from the macro environment are limiting access to traditional forms of capital, it does present the opportunity for disruptors to enter the space and present startups with alternative sources of finance. For those startups that do have cash on the balance sheet, and a healthy pipeline of annual recurring revenue (ARR) going forward, these alternative sources of funding, such as revenue-based finance (RBF), are now a much more accessible, and immediate, way to raise capital.

What does restricted access to capital mean for startups in the next 12 months?

When it comes to access to capital, less supply and more demand means a higher bar for borrowing and equity investments, which translates to a higher cost of capital for startups.

2021 saw some astronomical sums of money invested on revenue multiples that spanned 40-100x but, as public markets correct and multiples diminish to closer to ~10x, private markets are following too, which means access to venture capital cash is more expensive as funds batten down the hatches and wait for the storm to subside.

With his greater conservatism we’re going to see an increasing number of companies becoming distressed as a result – which means we can anticipate that demand for alternative sources of funding (like revenue-based financing) will increase.

How are interest rates affecting the lending sector?

Rising interest rates mean that there will be a general tightening of capital markets and credit will become increasingly difficult to access. For RBF specifically, the increased demand will translate into the need to be more conservative too with funding criteria as the best providers double down on their investing methodologies and ensure they use detailed data models to assess a company's likelihood of defaulting.

Revenue-based finance during a recession

With an increasing number of distressed companies, startups that were previously lent funds on generous terms against uncertain revenues will begin to default on loans, meaning that only the RBF providers with watertight lending protocols will be able to benefit from this increased demand.

As those weaker businesses become distressed and potentially fail, RBF players in the space with a relaxed approach to underwriting will inevitably suffer from higher loss rates. Only by nurturing a strong internal data science function that underpins a conservative, considered approach to credit decisioning will allow RBF providers to emerge from the ashes, stronger than ever – and with fewer competitors.

How and when should startups access RBF?

Typically, at Outfund, we see customers combine RBF with venture capital, often using RBF to reduce the dilution of equity and bridge the gap between funding rounds. Startups with strong, consistent ARR that need funds to spend on growth rather than accruing working capital are the best fit – we’re here to fuel the growth of disruptors.