There’s more to early stage funding than VC money — use it well
Written with Homan Yuen, Partner at NewGen
Good companies will always get funded. If that’s your company, it’s important to make sure you have the resources to keep it alive long enough to get to the next stage of fundraising.
Recent murmurs of a looming downturn in venture capital is pressuring more companies to pre-emptively begin fundraising, whether or not they have gained sufficient traction to justify their stated valuations. In the race to store dry powder before the checks dry up, too many companies are attempting to raise too much, too early, and at too high of a valuation. Unfortunately for these founders, many investors are well aware of market sentiment and are pulling back, waiting for valuations to fall. That is creating a vicious cycle for entrepreneurs that will force many of them to increase dilution, and possibly face the dreaded down round, from which few startups have recovered.
Prior years of relatively easy VC money seem to have led to an ecosystem-wide amnesia about the purpose of VC investment. VCs want to see their money to go toward accelerated product and technology growth and value-add milestones. VC money is not for early proof of concept — leave that to angel investors, friends, and family. As the global economy cools down, it will take an increasingly long time to complete a round.
Fortunately, there are a number of sources of non-dilutive capital entrepreneurs can leverage to keep their companies afloat — if you know where to look. Keep in mind, these sources require planning and foresight and often are not obtained at the moment’s notice. Below are some options to consider:
Government and Institutional Grants
Government agencies such as DARPA, ARPA-E, NIH and NSF are well known sources of funding for academic research but provide startup grants as well. Many of these funds are earmarked specifically for clinical trials or prototyping and product development and can provide critical funding to build significant traction and hit major technology and product milestones before seeking the next round of VC money. Other grants will fund the setup of manufacturing processes and reliability testing. Many government grants will also come with fringe benefits: when my company Solar Junction received funding from the DOE, we were able to access national laboratory resources as part of the program..
If your company has licensed technology from a university or laboratory, check to see if the entity has any programs or processes to provide start-up grants (as cash or in-kind services) — after all, they want the IP to succeed in going to market.
Before accepting grants, be careful about when and where additional technology development occurs. Make sure that your IP has already been filed or disclosed, or use the funds for just engineering and product scale up to avoid competing ownership claims.
Pitch/Business Plan Competitions
For seed-stage companies, consider applying to pitch or business plan competitions. These programs offer prizes ranging from from $5k to as high as $250k. Many of them are targeted to promote entrepreneurship in a specific group, whether it’s a university, minority group, emerging sector, or geographic region. A small proportion of these competitions also serve as applications to accelerator programs — make sure to read the fine print to see whether the prize money being offered is actual cash and does not take equity: that’s an investment, despite what the marketing states.
Regional Economic Development Grants and Tax Breaks
As the economy continues to slow, federal, regional, and local government entities will increase support for job creation activity and allocate increased support for small businesses. Many cities will provide grants to startups that bring jobs to a specific sector. Some of these grants come with requirements that you hire a certain quota of local residents for a set period of time; in many cases, that number is closely aligned with your existing hiring plan.
In some cases, this support comes in the form of tax breaks. While it’s not money up front, sometimes that tax return break can end up making a huge difference to your bottom line.
Small Business Loans
Although not free money, small business loans can also sometimes be preferable to giving up more equity in the short term. If protecting your team from early dilution wins out over future burn, consider the following options.
The Small Business Administration offers startup loans up to $250,000 at some of the lowest interest on the market. Special loans exist for minority entrepreneurs as well. Aciom is another nonprofit lender, providing microloans up to $30k.
“Peer-to-peer” lending platforms have recently emerged as another financing option for small business. Sites like Prosper and Lending Club will allow you to borrow up to $35k from complete strangers, at the cost of a small origination fee and interest.
Whichever source you choose to pursue, start this outreach and research early, long before you need it. I speak from hard-won experience as a co-founder of Solar Junction, which we led through two cleantech boom and bust cycles before exiting in 2014. While the check sizes might seem small in comparison to the seven-digit-plus rounds that have closed in the last eighteen months, it can be a godsend when your team is facing an unexpected cash flow crunch. It’s always easier to get more money when you already have plenty in the bank.
Homan is a Partner at NewGen Venture Partners. He joined after selling Solar Junction, a solar PV company he founded and led through two cleantech boom and bust cycles.
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