Revenue-based Financing for D2C & SaaS, & more!
And can we democratise Real Estate Investing?
Welcome to the Trends Newsletter!
Each week we share business ideas, opportunities, articles and more about the latest market trends. We also bring to you some interesting and quality business content from across the web.
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This week you will find:
Capital Made Easy - Revenue Financing Model for Small Businesses
Real Estate Fractionalization
3-2-1 (3 Tweets, 2 Podcasts, 1 Article)
Book Recommendation of the Week
Before getting into this week’s topics - we have a big favour to ask.
We’re going to be creating reels every.single.day in January and will be talking about some interesting market trends and opportunities. Follow us on Instagram to make sure you get to see those reels!
Our intern set us a target to reach 1,000 followers on Instagram before 31st Dec, 2021. So, please, take the time and follow us there :)
Capital Made Easy - Revenue Financing Model for D2C & SaaS Businesses
You need capital to grow a business.
Traditionally, businesses had 2 options:
Debt - Short Term/Long Term Loans.
Equity - Angel Funds, Venture Capital, Private Equity, Public Markets & more.
But, new age small to mid-sized profitable businesses such as D2C and Micro-SaaS businesses find access to these traditional financing methods is rather difficult. Traditional banks don’t understand these modern business models and are thus averse to providing traditional financing options like working capital loans. And venture capital isn’t interested in the dreams of small scale entrepreneurs running lifestyle businesses.
Enter Revenue-based Financing - A brilliant new lending model where you get access to non-dilutive capital to fund your marketing expenses or inventory.
How does the Revenue Based Financing model work?
In this model, you can raise capital basis your business metrics. Depending on your current return on ad spend, gross margins, revenue, etc., predictions are made about future revenue generation. If the addition of capital looks significantly profitable, then the loan is financed. The lender charges a fixed fee (usually 5% to 8% of the loan amount) and takes a share of the revenue generated till they recover their principal amount.
Here’s an example of how Revenue Based Financing (RBF) works:
Apart from the fee, the lenders will take a share of the revenues generated till they get their principal (Rs. 10L in the above example) paid back. And since most of the new age businesses using electronic payment methods, its easy to automatically deduct revenue on ever transaction or at the end of the day to repay the amount.
It’s simple, and free of all the bank hassles and equity dilution troubles!
A few companies in India are already neck-deep into this business- Velocity, Klub, Vantage.
Opportunities in Revenue Based Financing
Digital marketing agencies should start Revenue Based Financing. They have tonnes of data on their clients and a great understanding of the market. Digital Marketing agencies can tie up with a bank to provide financing to their clients - the agencies can put in a tiny share to show their confidence and the bank can bear the rest of the required capital.
Start a D2C business. The infrastructure for D2C is just getting better day by day as problems such as warehousing, delivery and now financing are being solved.
Financiers should offer value added services. What if teams within the lending business are good at PR, advertising, and marketing? Upsell these services to the D2C or SaaS business. Offer discounts or slashed rates. It’s a win-win for all involved.
Build the backend to enable Revenue Based Financing. Banks and other institutions will eventually wake up and realise the benefit of this model and will want to implement this for their customers. What if you give them the tools required to evaluate, disburse and collect these loans without them having to build new systems?
Real Estate Fractionalization in India
It’s safe. It’s got minimal risk. It’s popular. It’s Real Estate.
But, investing in real estate has its own problems.
The ticket size for investing in real estate is too high for the average investor.
Even if you can afford the investment, real estate generally becomes the largest single investment in most people’s portfolios. But the mark of any good portfolio is diversity.
What if we democratize real estate somehow? Make it more accessible? And allow people to put in smaller sums instead of their entire wealth?
This is where real estate fractionalization enters the picture. It is already popular in the US, and has just started to ruffle a few feathers in India.
Fractionalization or fractional ownership allows multiple shareholders to own a single asset. They share the benefits of the asset (real estate), like income, usage rights, etc. This reduces the overall cost of purchasing a property but you still get the benefits of owning one. Not to mention the benefits of portfolio diversification.
In India, companies like Property Share, Strata, and Myre Capital are buying commercial real estate and selling it in parts to individual investors.
There is still a tiny problem - the minimum amount to be invested remains 25 lakhs. For most people, even this is huge.
Real Estate fractionalization still exists in a grey area in terms of government regulations. There is still a lot of room for innovation in this space especially if you can find a way to reduce the minimum investment amount.
In our opinion, blockchain technology MIGHT be helpful. Take a property under blockchain, distribute tokens and fractionalize to whatever extent possible. This will give better returns and allow for lower ticket sizes as well. This might work.
Eventually, we dream of a world where the reduced ticket sizes have opened up the real estate market to a whole new population!
Bonus: We have another example of Asset Fractionalization in the Podcasts section.
Content Marketing is the key to effective organic Digital Marketing. Great thread on what’s changing in the world of Content Marketing.
An effective illustration of the VC fueled startup world in India.
Entrepreneurship is all about perseverence.
2021 Review: Best Episodes, Learnings, Life Update, Plans for 2022 by The Indian Dream - For all of those who want to know more about the process of running this Podcast & Newsletter. A very personal look into how we do things.
Lease and Inventory Finance - How does it work? by Paisa Vaisa - The Podcast is a very clear PR push by Grip Invest. Nevertheless, there are a lot of learnings in this episode about another form of crowdsourcing & fractionalisation of assets. What we found interesting is that Grip Invest creates an LLP for each asset that they finance and make the investees partners in the LLP. Why can’t this be done for real estate?
"But, who buys from Snapdeal?"
This week’s article & book recommendation have a common thread - opening your mind to new perspectives.
Written by Kunal Bahl, co-founder & CEO of Snapdeal, the article answers a question that a lot us have. Snapdeal is completely absent from our lives as wealthy, urban Indians. We have all the money in India right? If we don’t buy from Snapdeal, who can?
Kunal answers this question:
“Majority of our customers have a household income of up to Rs. 40,000/month. They mostly live in Tier 2 cities and beyond. Most of them commute using public transport or a two-wheeler. Their aspirations are no longer limited by how much they earn.
The fact that 50% of Indian households fall in the approx Rs. 2-5 lac per annum income segment is what makes the value lifestyle retail market in India at USD 88 Bn (INR 6.16 Lakh Crores) a massive opportunity. Only 17% of this is served by organised brick & mortar channels and only 8% by e-commerce channels, leaving 75% of this huge market in the unorganised space.”
By truly understanding their customers, who are a very different demographic than the founders, Snapdeal has been able to focus on a niche and still survive in a market that has been dominated by Flipkart & Amazon.
TID’s Book Recommendation of the Week
The Sex Lives of African Women: Self-Discovery, Freedom, and Healing by Nana Darkoa Sekyiamah
I’m sure people will say, “You’re just recommending this book to be provocative. This has nothing to do with Business”.
Yes, we are trying to be provocative. We’re trying to provoke you into thinking beyond the bubble of your day-to-day life. And the best way to do that is by reading & living the lives of people different from you.
You’re not going to get that brilliant, world-changing business idea if you just sit around and read about the same people as everyone else. You won’t suddenly be a business messiah if you’re the 10 millionth person who reads Elon Musk’s biography.
Pop your bubble. Read & speak to different people. Learn about life outside your own neighbourhood.
You don’t find yourself by sticking to well-trodden paths. You discover yourself by embarking on your own personal odyssey, which is experienced differently by everyone. The journey towards self-discovery may be long and winding, but it is also one filled with the infinite possibilities that come with adventure.
Sahil’s Review: ‘The Sex Lives of African Women’ is the best book I’ve read in a long time. It took me out of my comfort zone and deep into the lives of women I would’ve never met or known. From polyamorous Senegalese women in their 60’s to a sex worker in Kenya, this book covers a wide gamut of women on the African continent & in the diaspora. I’d recommend the book to anyone who wants to expand their mind beyond their daily hustle.
Leave a comment if you want to complain about our book choice this week.
That’s it from us this week! Share this with your friends, family and colleagues who want to stay on top of Market Trends and Business Ideas & Opportunities!
Until next week!
Sahil & Sid