Round2 Capital, the Austrian investment fund for growth financing and a European pioneer in the field of revenue-based financing, has closed the first quarter with seven new investments. The existing portfolio of 13 companies is expanded by tech scale-ups from Germany, the UK, Austria, France and Sweden. Christian Czernich, Round2 Capital founder and CEO, explains why the alternative financing form of revenue-based financing is so popular right now.
The first quarter has ended successfully for Round2 Capital: the Viennese investment fund welcomed 7 new companies into their family of portfolio companies, which brings the total number of investments to 20. The investments were made far beyond national borders in Germany, Sweden, Great Britain and France but of course also in Austria. The new additions include:
- Logsta (AT), next generation software supported logistics company with warehouse locations in Austria, Germany, UK, France and the US.
- Projekteins (DE), B2B software platform for integrating various E-commerce applications.
- Hamilton Apps (FR), a leading provider of workplace technology, offering a wide range of solutions within a single integrated platform.
- Sales Impact Academy (UK), an e-learning platform for B2B sales representatives.
- Dracoon (DE), cyber security business cloud with the highest encryption standards.
- Subscription-based sports community (UK)
- Internet Yield (SE), actively acquires, owns and operates income producing websites with currently 40 million ad impressions sold per month.
Round2 Capital focuses on young Software-as-a-Service (SaaS) companies that are in their growth phase, having 20 to 100 employees and usually already having reached operational break-even. The majority of the portfolio companies were able to reach this level without external financing and are now pursuing a growth strategy that enables growth without high burn rates. The Round2 portfolio includes, for example, the German cyber security company Myra Security, the Swiss EduTech scale-up Avallain or the Finnish, multiple award-winning scale-up Vainu, all of which have managed to grow to a sales volume of 5 to 15 million euros without external equity financing.
Revenue-based financing is a relatively new financing instrument in Europe but it has now been successfully established, not least through the establishment of Round2 Capital and its work. The attraction: instead of taking company shares, the fund participates in the company’s turnover until a pre-defined limit, the “cap”, is reached. The need for long negotiations on company valuations is avoided and it makes thefinancing form a quick and efficient way to raise capital. Capital is used primarily for the expansion of sales, marketing and for geographic expansion. In other words, for measures that lead to accelerated sales growth.
Christian Czernich, CEO, Partner & Founder of Round2 Capital: “We have started to develop revenue-based financing for the European market in 2016. We identified a big gap in the financing market for young digital companies as banks neither had asuitable structure nor the right financing instruments for them. Venture capital was and still is one of the few alternatives to raise external funding that is available. During my studies at Stanford, I realised that due to a lack of alternatives, venture capital was often used for companies even if it was not the best solution and that revenue-based financing would be exactly the instrument that could close the market gap between banks and venture capital. When we started, the founders were still a little reserved, but in the meantime, this form of financing has become better known in Europe, not least due to the significant increase of digitalisation. We are in the middle of a transformation of the financing market and our track record makes it clear that revenue-based financing is taking on an more and more important role as an alternative form of funding.”
Round2 Capital manages around EUR 30m from mainly entrepreneurs and family offices from Sweden, Germany, and Austria. Plans to significantly increase the capital and open the fund to institutional investors are already underway.
How revenue-based financing works
Revenue-based financing is provided in the form of a subordinated loan, the repayment of which is linked to the sales turnover of the borrower. This share is between 2-6%, depending on the investment size and the turnover, and consists of a repayment and an interest component. The revenue share is paid until a certain multiple is reached, which is between 1.35x – 2.15x. When it is reached, usually after 4-6 years, the funding expires automatically. The volume is initially between 500,000 and 2 million euros and can be gradually increased to over 10 million euros, also by supplementing it with equity. In some cases, for example to avoid dilution, the funding can be combined with an equity investment and, depending on the needs and the situation, Round2 Capital selectively offers a combination of these two funding models.
The advantage of revenue-based financing compared to other venture debt financing is the linking of repayments to sales and thus to the cash flow of the company. This means that the company cannot get into troubles due to repayment obligations. In case of an exit before the loan repayments have been completed, the return to investors can be increased as the outstanding amount is repaid plus a variable exit fee which is payable when the company is sold.
Picture: © Marcella Ruiz Cruz