RAC - Frequently Asked Questions (FAQ)
What investment models does Riverside Acceleration Capital offer, and what are the investment sizes?
Riverside Acceleration Capital employs two investment models: Revenue-Based Financing (RBF) with investments from $1M to $5M and growth equity with investments from $5M to $15M.
What is Revenue-Based Financing (RBF)?
RBF is a special form of debt that maximizes alignment with growth and avoids dilution. The investment is paid back over 5 years via a small revenue share, and sometimes a fixed monthly payment, until a repayment cap is reached. The repayment cap is a multiple of 1.5x - 2x of the investment amount. An RBF investment is non-dilutive which means that no shares have to be issued as part of the investment. RBF does not require share options or other forms of ‘equity kicker’ as part of the investment. Generally, there are no warrants.
Through the revenue share, the RBF investor shares a significant part of the entrepreneurial risk and equity-like alignment against growth. If the investee thrives, the investor thrives and vice versa. However, because the return is capped, and equity is not typically mandatory, the Company’s shareholders keep much of the upside at exit.
You can read more about Revenue-Based Financing in our Primer on RBF.
What are the best use cases of RBF funding by Riverside Acceleration Capital?
The best use for our capital tends to be expansion, often in sales and marketing or other parts of customer acquisition and retention. This could mean expanding the current team, adding capabilities for new geographies or verticals, or product extensions that open new channels. Non-organic growth, such as acquisitions for customers or markets, can be another great use of RBF capital, as an equity investor would typically tie valuation to the Company’s pre-merger and not pro forma for the merger.
For us, the most important consideration is that the team has proven the growth strategy and is using capital to accelerate.
What profile company is best for RBF funding by Riverside Acceleration Capital?
- Companies that are a great fit for us typically share the following characteristics:
- The business model yields mainly recurring revenues.
- Current recurring revenue run rate of $3M to $25M
- They’ve grown to this stage with a relatively small amount of institutional capital and have a cost-efficient structure.
- They’ve proven out their current product and market and now have a clear path/plan for expansion, though we often invest at the start of that expansion, when scalability is yet to be proven.
Is Riverside RBF funding capital debt or equity?
It’s easiest to think of us as a third option in the world of financing options. Our instrument is debt, but it is most often considered an alternative to traditional equity. Unlike venture debt, we do not require the backing of a large equity round to work with companies. Unlike a traditional equity investor, we do not take an ownership stake and we do not get voting rights. We also invest alone versus requiring a syndicate, which can be common in early-stage, for smaller equity investors or for strategic (or government-funded) investors.
Our return is tied to revenues, making our payback very flexible and back-end weighted. This keeps us strongly aligned with our portfolio companies and allows us to participate fully in the ups and downs of building a software company. However, our return is also capped, which makes it very predicable for companies.
For an RBF investment, we do not take a Board seat, but we do take board observer roles and are always available to support our companies in whatever way they need. This tends to make us a fit for companies that are looking for the benefit of a strategic partner but want to avoid valuation, dilution or taking on too much capital for their current growth needs. After all, as we are all aligned to growth, further development of the Company benefits both investor and investee.
How is RBF funding different from traditional venture capital?
We come from the equity and operating world, and we bring that into our investment strategy and the way in which we work with portfolio companies. We also tend to be a great fit for companies that are deciding between growing at a slower rate with the firm’s generated capital or accelerating growth with outside funding.
However, there are a number of ways in which we differ from traditional equity. A few key differences between RBF and equity include:
- The RBF model is non-dilutive, that means we don’t get any shares in return for our RBF investment. In our model, there are no warrants, though if a Company raises a round, we might convert some of our investment or invest directly.
- We find that equity rounds (especially Series A and later) are often sized to market averages and the fund size of the investor, rather than tied to Company need. Our check sizes are smaller than the amount that a typical VC at this stage will provide, allowing firms to raise the amount of capital they want and need without friction.
- Because our return is capped, we are less expensive than selling ownership through equity.
- While we ask for a board observer seat, we do not have voting rights or have any controlling interests in our portfolio companies
- With our model, there is no valuation, which leaves the door wide open in terms of next steps. With RAC, firms can go on to raise a growth equity round, they can exit shortly after our investment, or they can decide to never raise more capital and operate profitably in perpetuity.
How is RBF funding different from traditional venture debt?
Our capital is long-term growth capital, and by nature we serve a different need than venture debt. At the stage we invest, RAC is a stand-alone alternative to either venture debt or traditional equity. venture debt is often used as a way to leverage equity funding in high-growth, and highly-funded situations. Venture debt can be a helpful source of capital for highly-funded companies, but it requires that the Company have raised a large amount of venture capital. Sometimes, once a Company has grown quite large and profitable, it can be a bank-like way to fund working capital and lower growth initiatives.
Our capital is meant to be invested behind growth initiatives that may take time to develop, while venture debt may also be used to better manage cash flows, either between equity rounds or in terms of working capital.
A few key differences you may find between our RBF funding and venture debt:
- We provide strategic support around strategy, staffing, follow-on fundraising, and more.
- We provide capital outside of a traditional equity financing round.
- Our capital is long-term (five years) and is structured to align directly to revenue growth and cash cycles.
- The bulk of our return comes at the end of our term, once a company has grown, giving companies more capital in the early days when they need it to fuel growth.
- We are able to provide follow-on capital to our portfolio companies through our royalty model as well as traditional equity financing.
- Covenant-light – we only require 1 month of payroll on the balance sheet.
- Our RBF investments do not include warrants or other share options.
Riverside Acceleration Capital is part of The Riverside Company. What are the opportunities for portfolio companies that arise from this?
With 3 offices across the US and Germany, Riverside Acceleration capital has direct reach across North America and Europe. Through The Riverside Company, our reach expands to 12 offices across 4 continents, with a total portfolio of over 100 companies in a wide range of industries and geographies.
The Riverside Company is a global investment firm and is one of the leading private capital options for businesses at the smaller end of the middle market. Since its founding in 1988, Riverside has made more than 600 investments. The firm’s international private equity and structured capital portfolios include more than 120 companies.
Riverside has worked with over 600 companies to date, and fundamentally understands how to optimize both organic, and in-organic growth, through mergers and add-on acquisitions. We thus view Riverside as a value-add platform for our portfolio companies.
A few key benefits that arise from this:
- Global investment bank partnerships
- Strong VC / growth equity network
- Access to “sister” Riverside companies across the world
- M&A / add-on acquisition experience and assistance
- Preferred vendors & pooled purchasing
What is the role of Jonathan Temple, Riverside Acceleration Capital’s Operating Partner?
Our Operating Partner, Jonathan Temple, has more than three decades of experience in building and scaling software companies in Silicon Valley. He has been part of the management team or sat on board of companies such as Business Objects (acquired by SAP), Hyperion (acquired by Oracle), LiveOps, GainSight, and Heat Software, among others.
At Riverside Acceleration Capital, we took the deliberate decision to split the investor and growth advisor function in the team. Jonathan, therefore, dedicates all of his work time to advising our portfolio companies. This is a free and optional resource that most of our portfolio company cherish and make great use of.
You get access to an experienced coach that is not your board member avoiding conflicts of interest commonly found in VC board representation.
Some of the topics that our Operating Partner has supported our portfolio companies with:
- Growth: strategic planning, product pricing & positioning, marketing & sales, demand generation at scale, SEO and content optimization, sales model design, channels & strategic partnerships, customer success, executive recruitment support, driving product-led growth
- Operational Excellence: organizational planning & design, developing a KPI framework, CEO operating cadence, P&L optimization, sales forecasting models, executive recruitment support, company & employee bonus programs, board meeting outline & flow, exit planning, CEO coaching & mentoring
What is the role of the operating team across the Riverside Company?
Riverside’s operating team works closely with the investing teams and takes the lead on driving company performance for Riverside portfolio companies. Riverside has 14 operating partners across its different funds and another 52 if you include contractors working with specific Riverside portfolio companies. Jon Temple, who we talk about above, is one of the operating partners. Although operating partners are assigned to specific Riverside fund families, each fund may work with Operators from other fund families where specific functional or sector expertise is needed, including to assist with due diligence, work on specific projects, obtain industry expertise or assist with international growth. This is another way, in which our portfolio companies can benefit: by being part of the global Riverside family, they can get access to experts across different industries and geographies.
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