Alternatives to VC Funding That All Founders Should Know About

Lolita Taub
Apr 1, 2019 · 5 min read

Venture capital funding is not a great fit for every founder or for every business. And it is up to a founder to decipher what funding will best suit the business she is creating. The answer will shape the kind of equity and control she’s willing to give up for it and what kind of options she has. If VC funding is ultimately not the right path forward, that’s where VC alternatives come in handy.

Below are 5 alternatives to venture capital fundraising: debt, investors, crowdfunding, grants, and bootstrapping. Each has its advantages and disadvantages. There’s no right or wrong choice. It all boils down to your startup, the options you have available to you, and what you characterize as the best path to your businesses next milestone.

1. Debt

  • Advantages: relationship with lender ends after you repay your loan.
  • Disadvantages: if you cannot make payments, the lender can force you into bankruptcy.

Caveats: you will likely not qualify for a loan without a guarantee or security like a lien on your house.

2. Investors

Here are a few types of investor loans.

Convertible Debt

  • Advantages: it’s easier to secure, you delay valuation of your company.
  • Disadvantages: you give up some form of economics and control.

Factoring

  • Advantages: it works like a payday loan.
  • Disadvantages: more expensive than a loan from a bank.

Small Business Administration (SBA) Loans

  • Advantages: good for small businesses that has been turned down by traditional banks, has less than 500 employees, and has a credit history or revenue.

Microfinance

Where to find them: online, community centers, and libraries.

Friends and Family (FF)

  • Advantages: they are Friends, Family, and Fools.
  • Disadvantages: they are Friends, Family, and Fools.

Advice: make sure they are accredited investors, investors who own $1M in assets (not including their home), or they made $200K two years in a row ($300K if married). Beware of emotional baggage. Discuss terms and agreements: use debt, not equity, provide non-voting, common stock, tie payments to cash flow. Put agreement in writing: work with a securities attorney, general lawyers will not suffice. Limit number of investors. Less is better.

Angels

  • Advantages: they fill the gap between FF and VC funding.
  • Disadvantages: there are a lot of unsophisticated angels out there.

Advice: make sure your angel investors provide value outside of money (e.g., resources, connections, domain expertise). Limit the number of investors. Less is better.

Where to find them: online, angelcapitalassociation.org, gust.co, angel.co

3. Crowdfunding

  • Advantages: raise money from current or future customers customers and leverage crowdfunding as a marketing campaign.
  • Disadvantage: crowded cap tables are unattractive to investors and make negotiation impossible.

Where to find them:

Advice: develop a marketing campaign that drives your community to your campaign page. Hold a launch event.

4. Grants

  • Advantages: you don’t have to pay anything back.
  • Disadvantage: grant writing takes a long time (e.g. 3–6 months).

Where to find them: government agencies, foundation, and commercial entities, such as Small Business Innovation Research (SBIR).

5. Bootstrapping

  • Advantages: you keep control and economics, you focus on running your business and not fundraising (which is time and resource intensive), and you can build up traction for better terms in future fundraising campaigns.
  • Disadvantages: you may hinder growth.

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About Lolita Taub
Lolita Taub is the Co-Founder and General Partner at The Community Fund and acting interim Head of Sales at Catalyte. She is a first-generation Latinx operator and investor pushing for diversity in tech. With 15 years working within the Silicon Valley ecosystem, she has accomplished +$50 million in sales and made 38 investments as an angel investor and VC at Backstage Capital. Lolita is also a Co-Founder of the Startup-Investor Matching Tool, a scout at Indie.vc, Venture Partner at NextGen Venture Partners, and an LP at Operators Collective. Forbes, Inc, and Entrepreneur have featured her as a women in tech promoting diversity. She has a BA from the University of Southern California and an MBA from the IE Business School. Most importantly, she is a dog mom to the cutest Dachshund mix, Choco.

Green Room

Welcome to the Green Room blog.

Lolita Taub

Written by

About investing in community-driven cos + supporting our underestimated founder/investor fam. GP @thecommunityvc Scout @lightspeedvp Frmly @backstage

Green Room

Welcome to the Green Room blog. Go behind the scenes at Backstage Capital, where we're betting big on underrepresented tech startup founders.

Lolita Taub

Written by

About investing in community-driven cos + supporting our underestimated founder/investor fam. GP @thecommunityvc Scout @lightspeedvp Frmly @backstage

Green Room

Welcome to the Green Room blog. Go behind the scenes at Backstage Capital, where we're betting big on underrepresented tech startup founders.

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