When entrepreneurs are ready to scale their company, a lack of cash can become a major obstacle. Traditional methods of accessing capital...
A hedge is an investment made to reduce the risk of adverse price movements in an asset. In other words, it is a financial instrument used to protect against fluctuations in the market value of a portfolio. Hedge investments would thus either consist of an offsetting or opposite position in a related security, providing a counterbalance to the portfolio exposure.
There are many different hedge investment opportunities, such as options, contracts of difference, real estate or even simply diversification. While each has its strengths, it also has its weaknesses. Hedging instruments, however, tend to have a lower risk and low reward. They are designed to be both stable and long-term.
Revenue Based Financing
The basic idea of Revenue Based Financing is that as an investor, you can buy the future recurring revenue of a company at a discount (e.g. 10%, for example) for a fixed period and then receive its total value back at the end of the period. In other words, investors can invest in an asset with a fixed income and period.
Why Companies Want to Sell their Future Recurring Revenue
The Revenue Based Financing model we use at Levenue focuses on subscription-based SaaS companies. These companies would usually have a subscription model with different payment time frames — monthly and yearly — where the monthly would be the total price and the year would be offered at a discount. The yearly is provided at a discount because these companies want to incentivise customers to pay them upfront to reinvest the capital in the company’s growth. Revenue Based Financing is an alternative to that. It enables subscription-based companies to receive upfront capital for monthly subscriptions and reinvest that money into their business.
How does Levenue Work?
In essence, Levenue serves as a marketplace between investors and subscription-based companies. We connect investors with subscription-based companies seeking funding and facilitate the transaction, also known as a sale of future cash flows. Investors can log onto our platform and commit to a specific investment strategy. When a subscription-based company that fits the strategy metrics requests funding, we will match it with the investor. All the investors that match can then bid for the contract by offering discount rates, and the lowest discount rate wins the contract. At Levenue, these discount rates can range between 5–11%.
This is particularly interesting because it enables companies to get funded at the current market optimum. The contract would consist of selling a fixed number of subscriptions for a year. So once the subscription payment is due, the investor would receive the total value.
What if Subscriptions are cancelled? Doesn’t this model bear many risks?
As there is an existing risk of cancelling subscriptions, Levenue has several built-in de-risk mechanisms, which reduce the investor (buy-side) risk to a bare minimum. In particular, companies are only allowed to trade between 30 and 45% of their ARR because when a contract for a fixed number of subscriptions is concluded, Levenue blocks the equal amount of additional subscriptions for potential cancellation replacements. Herewith Levenue can guarantee that investors will receive the total value of their investment back at the end of the period. This being said, the only existing risk to investors is the risk of bankruptcy of the contracted company.
Why is Levenue a great Hedging instrument?
Essentially Levenue has created the subscription into an asset class for investors, which can be used as an investment hedge. As described above, investments can be considered relatively low-risk, short term and high-yield, as they guarantee a fixed yield of 5–11% profit with an average IRR of over 14%. While Levenue is not a primary investment tool, it is designed for investors looking to diversify their portfolios and hedge against their current positions in the capital market. Investments through Levenue are independent of economic upturns and downturns and serve as a perfect counterbalance to any risks and reduce market exposure.
If you are interested in learning more about Levenue as a potential hedge to your portfolio, feel free to book a call with us at: https://calendly.com/levenue-com.