Alternatives to Venture Capital
The fact is, 99.99% of entrepreneurs will not get VC money for their startup.
That can sting a little bit. The good news? If you have the great fortune to obtain Venture Capital, you’re likely to get additional investment from these folks. VCs are typically successful because they focus on making larger investments ($>5M) in proven, later stage technologies (i.e. early revenues) in specific industry sectors.
Typically investors will shy away from investing in a “science experiment” without a well-defined product and customer, and a team that is capable of executing a commercial venture. This is where expectations tend to go array. It is assumed by many that it’s the role of private capital investor to determine whether there exists a viable market and fundable company. In actuality, this is the role of the entrepreneur. In addition, the investor wants to see validation as well as the process utilized to determine the technology/solution/ product as being viable. Just as much or more, VCs are interested in the strength and track record of the management team, demonstrated customer traction, and revenues than they are with technology. Therefore, for every Venture backed innovation, chances are, there is an even stronger team moving it forward. Say that isn’t your situation, that’s normal, 99.9% of entrepreneurs do not receive VC money.
SO, is that THAT? Nope.
What can you do to finance the development of your business? Here are my top suggestions.
- Bootstrap and Hustle. Not everyone is in a position to spend the funds required to build a prototype and test product market fit. That said, spending your own money (or that of your friends and family) sharpens the focus of an entrepreneur more than just about anything else. How could it not? Success is critical when bootstrapping and the margin for error is slim.You’ll spend more time validating your idea and you will be more creative in solving the problems involved in early stage development.
- Demonstrate customer traction & trajectory. Hit the pavement. Nothing gets investor attention like revenues and increasing sales. Revenue is empowering. Profits are even better. In addition to keeping the lights on, early revenue can help with customer development by providing feedback from real customers. Know your customer, ask questions, and listen. Get a combination of quantitative (surveys) and qualitative feedback. These early customers tend to stick around turn into repeat customers if cultivated correctly. If and when you release a new product or line, you’ll have a loyal audience to market to.
- Customer financing. Early traction may also land you “Customer Investors” and perhaps the least understood and yet most impactful investors in start-up companies. If you are solving real customer pain, at a price they will adopt you may find customers are willing to invest in equity, early orders, or other structures. They bring both money and validation PLUS they might just be your first real orders. We can speak first hand for it here at Cognitive. We’ve successfully funded several companies using customer equity and/or discounted up front orders. As a value add, working through implementation issues and discovering best practices, helped us to understand the market dynamics that drive adoption.
- “America’s Seed Fund”. The Small Business Innovation Research (SBIR) program Phase I grant may not get you VC money, but it will give you enough money to build a prototype and evaluate customer reaction to your product. And, if you have a Phase I SBIR Grant, you should work extra hard to ensure you win a Phase II Award, which can provide as much as $1.5M in non-dilutive funding. Many Universities have resources like I-Corps programs or Accelerators that can help improve your chances of winning an SBIR by helping you work through the commercial potential of your idea. The Small Business Administration (SBA) also has many programs to help financing small businesses ranging from their SBIR grant programs to loan programs like the Small Business Investment Company (SBIC).
- Equity based crowd funding. Accredited investor crowd funding is an exciting new(ish)platform that has yet to provide an efficient way to combine money from a lot of different angel investors — saving a lot of time and increasing your access to investors. I’ve heard good stories of AngelList being used for this purpose, as well as CrowdfundX (for technology companies), CircleUp (for Food Brands), HealthFundr(for Life Sciences), and Seed Equity, (“The Investment Bank for Start Ups”) More broadly recognized, I have witnessed great results from WeFunder personally. Pursuing equity based crowd funding can sometimes scare away future investors and make your lawyers fire you. (Kidding) Be sure you only do this on platforms that require “accredited” investors, which I do believe is all of them due to recent changes in security laws.
- Consumer Crowd Funding. We’ve all seen those successful Kickstarter and/or Indiegogo campaigns that raise >100% of goal and money to fund our design stage. Congrats to them! Really, that’s amazing. Often these campaigns aren’t being pushed out by a true start-up, but more so are companies who have been around the block a few times, have an audience, and have other product lines earning revenue. Don’t be discouraged…. Crowd funding can work well for physical products that have wide consumer appeal and some clever marketing. Hey, that sounds like you! Although some “Looky Lous” and loyal Kickstarter Surfers may buy your gadget, You need to be prepared to drive traffic to your campaign. It will require some cash. I would recommend hiring a marketing agency or individual skilled at Social Media to ensure your product gets the needed exposure to blow the doors of your goal.
If you have any additional ideas not listed please let me know! Also- if you’d like to collaborate further or discuss securing capital in excess of $5M, email me at Tara@CognitiveSLC.com.