In March 2020, small businesses collectively faced the greatest challenge of a generation. Typically running on thin margins with inflexible and inaccessible financing solutions, some shut down permanently when news of a pandemic-driven shutdown hit; others quickly pivoted to alternative models, and even more took a hiatus. While the public and private sectors tried to quickly rescue struggling Main Street businesses, many efforts tended to be complicated, difficult to access, or too small in scale.
Alternatively, small business investment platform Mainvest has found one approach that has resulted in some promising trends that exemplify the resilience of small businesses when they are supported by capital from within their communities. Mainvest enables small businesses to raise capital through an innovative new investment vehicle called the Revenue Sharing Note.
A Revenue Sharing Note (RSN) is a debt-based investment vehicle in which a company borrows money from investors and agrees to pay back a certain Revenue Share Percent of any revenue it may generate every quarter until all principal and interest is repaid. The idea is that the more revenue a business generates in a quarter, the more money they will repay; conversely, if the business has a downturn, and generates less revenue, they will owe a lower payment for that quarter. In theory, this means that the faster businesses grow, the faster investors receive repayments. This structure aligns incentives and helps local economies become more resilient. More small businesses than ever before are utilizing RSNs because they offer more flexibility than institutional debt:
- There’s no dilution of ownership – a huge selling point for family-run businesses that want to maintain control over their brand.
- Repayment is tied to revenue, not a set interest rate.
- Businesses are able to set their own terms, controlling their cost of capital.
- Businesses obtain market validation through their fundraising campaign.
Investors, too, have taken note of the importance and ease of investing locally. Mainvest has seen 41.7% growth quarter-over-quarter (since Q1 2020) as investors find businesses into which they can deploy capital. The RSN, while less liquid than other investments, can offer competitive potential returns that may fit well into a retail investor’s portfolio. Many RSN issuers also offer additional perks and access that can add value to an investment, such as admittance into brewery mug clubs, private events, and discounted products. Investors have also noted the importance of supporting local businesses and enjoy the emotional return of seeing a local business grow and succeed in addition to tangible returns.
While it’s estimated that an additional 200,000 small businesses closed due to COVID-19 in 2020, Mainvest found that small businesses capitalized with Revenue Sharing Notes saw a much different- and typically, more positive- story on the ground.
These are the main takeaways:
- Over 95% of businesses are in good standing with repayments a year into COVID.
- 1,051 repayments were made from businesses in a city to investors in the same city.
- Total repayments tripled year over year.
Even as businesses pivoted and put expansion plans on hold, they continued to update and repay investors. Default rates remained below 5% each quarter. Because repayments are tied to revenue, businesses whose revenue took a hit during COVID simply repaid less rather than not repaying at all. Other businesses pivoted successfully and actually beat projections, so investors received larger repayments than they may have expected.
Mainvest CEO Nick Mathews shared his thoughts on recent repayment data: “These statistics show how powerful communities can be by voting with their wallets to support local entrepreneurs. Mainvest’s mission is to generate both ROI (return on investment) and ROC (return on community) and despite the most challenging year on record for the small business asset class, we’re pleased with how our ecosystem of businesses has remained resilient.”
A few case studies of how the RSN has worked for small businesses on the ground include:
- Top Shelf Cookies, Boston MA: While 80% of projected revenue from events and large orders disappeared in March 2020, their online model proved useful during COVID. This made their transition to brick and mortar easier post-COVID, and used funds raised through Mainvest to build out and open their first location in Boston.
- Ras Plant Based Ethiopian, Brooklyn NY: After raising capital on Mainvest to build out a brick and mortar, they opened just days before New York City shut down all non-essential businesses. Because they were so early in their lifecycle and had flexible working capital on hand, Ras adapted quickly to a take-out model for their vegan Ethiopian concept, and ultimately beat projections, giving investors for the first year an impressive ROI thus far.
