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.
A lender lends you money.
- 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.
A person that lends you money, and likely charges a principal and interest or equity in your business.
Here are a few types of investor loans.
A normal loan with an interest rate attached to it, where the debt can convert into equity in the future.
- Advantages: it’s easier to secure, you delay valuation of your company.
- Disadvantages: you give up some form of economics and control.
A person or entity that buys your accounts receivable at a discount of face value. This is best for companies with 30 to 90 days of customer payback periods.
- Advantages: it works like a payday loan.
- Disadvantages: more expensive than a loan from a bank.
Small Business Administration (SBA) Loans
An organization that helps small businesses get loans from private banks.
- 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.
A microfinance organization will support you with a loan and, usually, other resources.
Where to find them: online, community centers, and libraries.
Friends and Family (FF)
Investors and individuals willing to write smaller checks, between $10-150K, of their own personal money because they like the founder or the startup concept.
- 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.
People who invest a portion of their wealth in companies instead of stocks, real estate, etc. They typically write $10-200K checks.
- 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.
A group of people “backing” your company via a platform. Typically the cap on each fundraise is $1M.
- 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:
- Non-equity crowdfunding: online, Kickstarter, indiegogo.com
- Equity crowdfunding: online, republic.co, netcapital.com
Advice: develop a marketing campaign that drives your community to your campaign page. Hold a launch event.
Non-dilutive capital — money you do not have to pay back.
- 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).
You work hard on your business and do not take outside capital. Instead, you use your own cash flow to run the business.
- 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.
- 3 Best Alternatives to Raising Venture Capital
- 7 Non-Bank Business Financing Methods for Startups
- Three Viable Alternatives To Venture Capital Funding That All Entrepreneurs Should Know
- Alternative Funding Options For Startups Besides Venture Capital
- 15 fundraising ideas and strategies: raise money for your business (video)
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About Lolita Taub
Lolita is a Principal at Backstage Capital. Her prior early-stage tech investing experience includes Portfolia and K Fund. Before joining the VC world, Lolita spent nearly a decade in B2B enterprise tech, consulting, and selling solutions to Fortune 500 companies at IBM, Cisco Systems, and Silicon Valley and NYC startups. Lolita holds a BA from the University of Southern California and an MBA from the IE Business School. 🦄 Find Lolita on Twitter, on Linkedin, or on the web.