Revenue-Based Financing and Entrepreneurship

Abstract

This dissertation examines an innovative financing model—Revenue-Based Financing (RBF)—and its implications for entrepreneurship. RBF is a form of growth capital offered by entrepreneurial financiers to small businesses and startups, in which financiers provide upfront capital in exchange for a share of the firm’s future revenue. Although revenue-sharing arrangements have long existed, their application to entrepreneurship has only recently gained traction, particularly in the digital era. This dissertation provides one of the first systematic attempts to rigorously analyze this emerging model and examine its effectiveness and implications. The dissertation studies RBF through three complementary perspectives: information, incentives, and the allocation and design of RBF. Chapter 1 studies how improvements in the informational quality of firm revenue enable RBF contracts and expand access to financing for firms that may otherwise be excluded from traditional sources. Chapter 2 examines incentive misalignments between entrepreneurs and RBF investors, highlighting potential moral hazard in revenue sharing contracts. Chapter 3 analyzes the feasibility, selection and contract design of RBF, identifying when RBF creates value across heterogeneous firms. The first two chapters draw on evidence from a leading RBF provider and digitized consumer-sector SMEs in China, while the third chapter extends beyond this setting to study feasibility and suitability in the broader entrepreneurial finance space. Together, the chapters examine the value creation and value capture of this novel financing model and provide an initial framework for understanding how RBF reshapes entrepreneurial financing and firm growth, while highlighting important directions for future research.