Grow your subscription business with revenue based loans

Revenue-based loans for early-stage companies have burst into the mainstream in 2022. Whether you are a subscription commerce business or a SaaS company, this could be a powerful new way to fund your expansion. In this guide I’ll explain what I’ve learnt as a founder from many days of conversations about the different flavours of debt funding, and when they’re appropriate for your business. What is a revenue-based loan (RBL)? An RBL is a business loan secured against a company’s future recurring revenue stream rather than the company’s assets. Most growth-phase companies can’t borrow from traditional banks because they are not profitable, are asset-light, and don’t have big enough revenue streams. Alternative debt providers, including RBLs, have stepped in to fill that need. This is different to invoice factoring. Factoring companies take over the billing relationship with your customers to repay the debt, which doesn’t work for companies like Littledata where most of the revenue is from Stripe cards or payouts from an app store. How do RBLs compare with traditional loans? RBLs are typically covenant-lite and without personal guarantees. This means if your revenue drops and you are unable to repay the loans the lender has no right to take control of the business or pursue you personally for the debt. That said, all debt needs to be repaid in full — even if your revenue drops unexpectedly. How do RBLs compare with selling equity (VC funding)? Firstly, they are much less dilutive - sometimes non dilutive. This means the current shareholders keep their same hard-earned share of the business. Some lenders may ask for warrants (share options) to share in the upside if your growth takes off, but these are still a lot less dilutive than VC funds. Secondly, RBL providers won’t interfere or distract you. They don’t want a say in how you run your business; they only want visibility on how your revenue is progressing. On the flip side, debt providers won’t be able to advise you — they are very transactional. Yet, in my experience, VC investors exaggerate the benefit of their advice, which can be just as distracting as helpful.  Since the outcome for most VC-based companies is very binary, VC funds inevitably focus their attention on the biggest winners in their portfolio — meaning you may not always get their advice in times of need anyway. In many cases RBLs are not a complete alternative to equity funding — they just reduce your dilution by match funding other equity investments. Are RBLs the same as venture debt? The terms are often used interchangeably, but traditionally venture debt was taken on alongside a big injection of cash for equity (e.g. alongside a Series A investment). This boosts the size of an already large funding round but doesn’t help companies trying to grow up to this level. RBLs can be used independent of any equity funding round. Will taking on a loan reduce my funding options in the future? As this kind of debt funding becomes more mainstream most VC investors see them as a useful bridge to ever-larger Series A rounds. In my experience, having a loan on your books will not block an equity investment. In fact, since debt funders are agnostic about the exit route or valuation, they keep open exit options that a VC might block. So for example, If your growth stalls and you want to switch to run your company for profit, once you’ve repaid the debt the income is all yours. If you can use debt funding to achieve a certain scale ($5M+ ARR), you’ll be able to access much cheaper term loans from lenders like Silicon Valley Bank. Is my business suitable for an RBL? If you haven’t yet generated $100k annual recurring revenue (ARR), or you are investing in a new and unproven market, then equity funding is a better option. To get confident in the stability of your future revenue streams the debt provider will want to see: 1. Majority recurring revenue 2. High net year-on-year revenue growth (at least 50%+) 3. Low customer value churn (less than 50% per year) 4. Low customer concentration (any one customer churning has low impact) My company Littledata qualifies on all fronts with 100% recurring revenue, 100% year-over-year growth, less than 40% gross value churn, and our largest customer is less than 2% of our revenue. How much can I borrow? Loan values are usually expressed as a multiple of run rate ARR, and the maximum will be between 20% (2 months revenue) and 50% (6 months revenue) of your ARR. This maximum depends on revenue stability, term length, and other factors. I think I can raise a VC. Are RBLs still relevant? I think so, yes. It helps boost your valuation and gives you time to wait for the right investor. Investors value subscription-based companies as a multiple of their ARR, depending on growth and churn. If you’re growing at a predictable rate month-over-month, why would you sell out a bigger share now when you could hold off for a higher valuation in the future. Unfortunately, short-term RBLs won’t increase your runway much. The extra revenue you gain from bringing forward hiring or marketing spending will likely be offset by the debt repayments. But VC funding will also reduce your runway AND limit your exit options. It’s a necessary evil in some cases, but don’t believe it’s the only way. (Image credit: Founder Collective) What are the options for funding a sub-$2M ARR business? At this level, you are limited to finance over a maximum 12-month term. This means you’ll need to repay the loan monthly over a year, so if you borrow $200k you’ll repay around $18k per month including a fee. This fee is typically expressed as a discount rate — equivalent to the discount you might offer a customer for paying annually rather than monthly. Discount rates on 12-month loans currently range from 5% to 11% depending on the underwriting risk. This translates to an APR of 10% to 18% since half of the money is repaid within half the loan term. Some lenders will structure the repayments as a percent of your monthly revenue (i.e. you repay over a minimum of 12 months), which limits the cash out if your revenue sinks. But, in practice for a growing company, the repayments will be fixed. You could also borrow for 6 months for half the cost. This doesn’t work for us, but it could work for you if you can quickly translate marketing dollars into more recurring revenue. Some of the lenders in this space are: ClearCo (previously Clearbanc) Uncapped Forward Advances Capchas Vitt Founderpath Pipe Littledata’s Story: Littledata started exploring revenue based loans back in 2020, and took out our first 3 month loan from Forward Advances. However, with our marketing mix and 30 day free trial it’s impossible to get a return on investment within 3 months. So in 2021 we took on a 12 month loan from ClearCo, and then in 2022 another 12 month facility from Capchase. Together these loans have helped us continue accelerating and postpone any major equity raise. Full disclosure: we’ve taken loans from Forward Advances, ClearCo, Capchase, and Element Finance. Since the process is usually fully automated — with data feeds from common accounting and banking platforms — these lenders are very quick, with offers in 24 hours and loans within 10 days.

2023-01-30

Get the DTC guide to subscription analytics

The subscription ecommerce industry has soared in recent years, allowing customers to routinely receive the products they love and opening up possibilities for merchants to build predictable, recurring revenue streams. Once a small subset of the ecommerce industry, the global subscription ecommerce market is set to be worth $478 billion by 2025. Subscription offerings we see winning today have changed over the past few years, from innovative, new recurring revenue engines to legacy brands like BMW offering exclusive auto features by subscription. But there's one area where ecommerce subscription brands fall short time and time again — their analytics. Thanks to today’s plug-and-play subscription solutions, DTC merchants can start selling by subscription in just a few clicks. When it comes to optimizing their subscription model, though, many merchants run into a bit of trouble. While ecommerce subscription platforms have made strides in recent years, their native analytics are sub-par, making it difficult to understand product performance, measure customer lifetime value, and attribute subscribers’ sales to marketing campaigns. The DTC Guide to Subscription Analytics If you’re already running an ecommerce store, chances are you have already noticed some major data discrepancies between Shopify or BigCommerce and Google Analytics. From missing sales data to undifferentiated subscription vs. one-off orders, subscription tracking adds another layer to the madness. We sampled a set of larger DTC stores, processing over 50,000 orders a month through a standard Shopify checkout, and found that, on average, only 88% of Shopify orders were tracked in Google Analytics. Looking at a set of stores with non-standard checkouts, including subscription checkouts, we found that between 9% and 70% of orders were tracked in Google Analytics. Data mismatches that big lead to unattributed marketing spend and failed retargeting campaigns that doom your future decision-making. So, what causes data mismatches? How can you solve it? And how can you master subscription analytics? In The DTC Guide to Subscription Analytics, we uncover: The state of subscription ecommerce How to fix your subscription tracking Metrics to grow your recurring revenue Tools to fuel your ecommerce subscriptions Download The DTC Guide to Subscription Analytics >>>

2022-09-06

4 ways to future-proof your business by using the right subscription tools

No one can predict the future. But as economic uncertainty and major data tracking changes loom, now is an important time for brands to prioritize future-proofing their businesses by developing strategies to minimize the effects of any potential downturns. Recurring revenue from subscription models can be a great way to generate predictable, long-term income. As a best practice, focusing on maintaining solid relationships with customers and ensuring a superior customer experience will help retain them in the long run. During hard times, it will be the most loyal customers who stay committed to your brand. Plus, with acquisition costs rising, focusing on retaining current customers is a much more sustainable option. In this post, we’ll share how you can future-proof your business by building a strong subscription model that attracts subscribers and show you the tools you need to do it. 1. Focus on Subscribers First, rely on subscribers, as they are the most loyal and valuable customers who chose your brand over numerous competitors. Keeping these customers is critical for brands, as it is much less resource-intensive than acquiring new customers. Build your growth strategy around gaining subscribers’ trust, delighting them with exclusive membership perks, and allowing them to advocate for your brand. Throughout the subscription experience, provide flexibility and transparency to establish trust with customers. Specifically, demonstrate transparency by displaying details of what the subscription program entails, emphasizing that customers have the authority to change, skip, or cancel their subscription at any time. You can offer the most relevant subscription options by analyzing customer buying behavior data; for instance, monitor your customer’s average frequency selection when deciding which subscription option should be defaulted on the product page. Offer flexibility from the beginning by allowing customers to adjust the cadence in which they would like to receive the product and how much of it. Letting customers choose the quantity and frequency of their subscriptions solidifies this trust. Your customer won’t feel like they have to fully unsubscribe because they can mold the subscription program to their specific lifestyle, ultimately increasing your retention. That way, you’ll avoid losing valuable customers just because they needed fewer products during a certain month. [tip]See how brick-and-mortar staple Grind scaled DTC sales 50x in 3 months through subscription selling.[/tip] 2. Create a Brand Engagement Hub Transform your brand’s customer account portal into an engagement hub to increase retention and lifetime value for subscribers. Providing access to a consistent, branded customer portal helps develop strong relationships with customers which plays a critical role in retaining them long-term. Customize your customer’s account portal to adhere to your brand guidelines and craft an experience that aligns with the products that you are selling. Intuitive, straightforward tools built directly into the portal empower customers to serve themselves independently and make them more likely to continue doing business with you rather than switching to a competitor. Frictionless account management gives customers the opportunity to manage their subscription journey the way they see fit with intuitive options to gift, skip, swap, or send now. Having an easy customer support function within the customer account portal is mutually beneficial for your brand and your customers, as it saves your Customer Service team’s time and leaves customers satisfied. Typically, customers would rather solve an issue on their own without needing to contact a customer service representative. So saving them time and avoiding any frustrations further decreases the likelihood of them churning. 3. Build Brand Champions Take your subscriber’s loyalty and expand on it as much as possible with customer loyalty features that give customers a reason to come back. This includes subscriber-only promotions and discounts, exclusive gifts, early access to new products, and one-time add-ons. As a best practice, use retention data to create a strategic subscription program. For example, use a retention cohort analysis to determine if you are offering too high of a discount on first subscription orders. Merchants may find customers canceling their subscriptions after the first order when the subscriber discount is too high. By keeping a pulse on these metrics, merchants are able to course correct by getting rid of large, upfront discounts and instead, reward subscribers based on loyalty. Help improve average order value by placing strategic upsells based on data that identified top-performing products or products commonly purchased together. Then recommend these products for a tailored customer experience. Offer early releases of new products and allow loyal subscribers to give feedback, making them feel even more special and valued as customers. Try giving subscribers “X% off of their X order,” free products with orders, or birthday gifts. Create brand awareness with referrals and gifting features built directly within the account portal. Aim to get loyal customers to continue to buy your products, buy more products, and gift products so that your brand awareness extends to friends and family. Many brands take advantage of referrals like “Give X, Get X,” where if you refer a friend, you each receive a discount. Not only does this ensure that subscribers directly benefit from their referrals, but also that friend now has the ability to try your product and later on subscribe themselves. This creates champions of your brand who continue to spread the word and love to friends and family. 4. Littledata and Smartrr Having subscription management software that fits with your main data reporting tool is critical in subscriptions. Google Analytics and server-side tracking give you the first-party tracking you need to understand your buyers and make data-driven decisions that benefit your store. You can use a subscription tracking service to see complete sales data, including one-off purchases, subscriptions, and refunds. Using Littledata and Smartrr as your subscription management and analytics stack allows you to: Calculate marketing attribution for all transactions, including recurring orders Set up custom dimensions to calculate LTV Use information to strategically use upsells, gifting, add-ons, and more Send Smartrr subscriptions data to Facebook Ads via the Facebook Conversions API Conclusion Each of these strategies helps to build a solid foundation to retain customers and ultimately, future-proof your business. Make strategic business decisions by tracking the key performance indicators that drive your business, such as average order value, sales by specific product, churn over time, lifetime value, and subscription revenue growth. Retain customers by crafting a seamless experience through a consumer-focused subscription program with an intuitive account portal that includes features to engage subscribers and build brand champions. Retaining your highest lifetime value customers will help solidify recurring revenue from subscription models and ensure predictable, long-term income. This is a guest post from Anna Jacobson, Marketing Associate at Smartrr—the premium subscription app for DTC Shopify brands. Built with your end consumer in mind, Smarter increases brand engagement and LTV with a variety of out-of-the-box subscription models, a beautifully branded subscriber account experience, member-only benefits, and more.

2022-08-30

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