8 Ways to Get Funded Without VC Cash (and Why It Might Be a Great Idea) | NetSuite (2024)

In short:

• Venture capital has dominated headlines in the business press, yet very few companiespursue that financing route
• Are you all-in on aggressive scaling? If a “grow at all costs” mentalitydoesn’t workfor your business, an angel investor may be a better bet
• Here are 8 financing routes along with their advantages and disadvantages to help yourbusiness make an informed decision

A New York Times article titled “More Start-Ups Have an Unfamiliar Message for VentureCapitalists: Get Lost” profiled a diverse group of entrepreneurs with one thing incommon —all of them shunned the trendy VC funding route.

“The tool of venture capital is so specific to a tiny, tiny fraction ofcompanies,” MaraZepeda, co-founder and CEO of Switchboard, a company that provides development andtechnology services to nonprofits and educational institutions, told The Times. “Wecan’tlet ourselves be fooled into thinking that’s the story of the future of Americanentrepreneurship.”

Zepeda is right. While VCs tend to monopolize headlines in the startup world, that routeisn’t right for everyone. Yes, it’s an effective fundraising method. But as withanyfinancing, there are pros and cons to venture capital — and alternatives you may nothaveconsidered.

An overview of ways to get funded without VC cash, which we’ll cover in detailbelow:

Venture Capital: A Fit for Your Company?

Venture capital is the most well-publicized way to raise funding, for good reason: The VCindustry deployed $136 billion to almost 11,000 U.S. companies in 2019, up from $27.4million spread across 4,500 firms in 2009, according to the Pitchbook-NVCA Venture Monitor.Aggregate annual VC deal value grew roughly fivefold over the past decade.

For companies ready to scale rapidly, VC can be a great choice — if you’rewilling to give upequity and play by their rules.

VC investors benefit when your company succeeds, which means they’re incentivized todelivermore than just money; in that sense, they’re one of the most supportive financingoptions.Investors provide sales and marketing advice, insights for running an effective business,industry connections and access to valuable networking opportunities. The exposure ofscoring a big deal can help young companies attract top talent and cultivate demand fortheir products.

Still, while explosive growth and a prominent role in some of the biggest launches of thedecade have made “VC” synonymous with “early business financing,”the reality is that VCfunding is the exception, not the norm.

Much of that fivefold growth we mentioned is due to the size of the deals, not the number ofcompanies receiving investments. In reality, according to a 2018 survey by Lendio , only about 3% ofsurveyed U.S. small business owners raised funding from VCs. This can be attributed tomultiple factors, with a big consideration being that most VC firms have specific“types”and expectations. For instance, Sequoia Capital focuses on energy, financial, enterprise,healthcare, internet and mobile startups.

Tools such as Crunchbase and CB Insights are valuable for identifying VC firms in yourvertical.

However, it’s not just market segment. Investors look for startups that they believewillprovide big returns on their investments. In seeking these hot prospects, some evidenceshows instances of pattern recognition, where VC firms favor startups with thecharacteristics of companies and founders that have succeeded before.

As long as VCs continue to focus on very specific features and profiles, the resulting biasmakes it difficult for companies outside the mold to get funding.

This emphasis on growth brings up the next point: Many VC firms have a “grow at allcosts”mentality. They want companies that are willing — and, ideally, able — to growexponentially, sometimes at the expense of profitability and sustainability.

This is a high-risk approach that has resulted in the demise of promising businesses likeBrandless and Tink Labs. Premature scaling is one of the leading causes of startup failure.Some businesses are simply not ready for hypergrowth, others are not suited for a“blitzscaling” approach. Given the “go big or go home” VC culture,if you’re erring toward“go home,” it’s best to pursue other sources of funding.

Angel Investors

In many respects, angel investors are similar to venture capitalists. They invest a moderatesum of money — $200,000 or less for individual angels, $200,000 to $350,000 for syndicates — into acompany inexchange for convertible debt or equity. Like VCs, only 3%of surveyed U.S. business owners tapped into angel investors for their funding needs.However, there are several crucial differences:

• Angels are individuals who invest their own money, whereas venture capitalists investothers’ money from a fund maintained for that purpose.
• Angels tend to have full-time jobs outside of investing. Venture capitalists areemployees of VC firms who invest for a living.

Angel investors can either be accredited or non-accredited. In order to be an accreditedangel, a person must have made an overall individual income of at least $200,000 for thepast two years or have a net worth over $1 million, excluding the value of one’s home.Otherwise, a person would be considered a non-accredited investor.

A non-accredited investor can be a good partner, but mind the restrictions. Non-accreditedinvestors are protected, and thereby regulated, by the SEC through Regulation D. Under thatruling, a company seeking funding must either be registered with the SEC or meet anexemption. The first of those exemptions allows a startup to work with as many as 35non-accredited investors. However, the company must have a pre-existing relationship withthe investor and provide certain disclosure documents, and the investor must havesignificant knowledge of the field. This means you can’t use a general solicitation toattract investors.

Because of these substantial restrictions and disclosure requirements, using non-accreditedinvestors is seldom a realistic way to finance growth. That’s part of the reasoncrowdfunding (which we’ll cover later) has become so popular.

Angel investors also differ from VCs in some key ways: They’re willing to financeearlier-stage companies and are more likely to invest across a broader range of businesses,including those that don’t fit the typical mold or embrace the “grow at allcosts” mindset.

Like VCs, angels are likely to provide business expertise, connections and mentorship.Companies like Amazon, Starbucks and Apple all got their starts with angel funding, andthese investors often fill the gap between friends and family and more formal venturecapital funds.

The disadvantages of angel investments are similar to those of venture capital. Like VCs,angels are taking a risk by financing a young company and will need to realize a high returnon investment. Before engaging with angel investors, are you willing to give up some controlin your company — usually around 20% or 30%? Will the diluted equity be worth theneededcapital?

For those ready to give this investing approach a shot, angels can be found through multipleavenues. Sites like AngelList, Angel Investment Network, Gust and the Angel CapitalAssociation are all great places to start your search.

Crowdfunding

The method that raised over $54,000 for a man to make potato salad has been the startingpoint of many successful businesses. Online crowdfunding platforms have allowedentrepreneurs to raise both money and awareness. Thanks to the passage of the 2015 JOBS Act,both non-accredited and accredited investors can participate — though there are somelimitsbased on salary.

There are non-tuber success stories: Oculus, which was purchased by Facebook in 2014 for $2billion, got its initial financing in 2012 through a highly effective crowdfunding campaign.In fact, 2% of surveyed business owners in 2018 cited crowdfunding as a source of cash, andgiven the method’s explosive growth, that number has likely grown significantly.

Crowdfunding can take a multitude of forms; however, four are most prevalent:

• Donation-based: Perhaps most commonly seen on the GoFundMe platform,the donation-based approach marked the birth of crowdfunding. Business campaigns usingthis model tend to be more impact-focused in nature — say, an entrepreneur with asympathetic story, or a business looking to make a difference in a community.
• Rewards-based: This is one of the most well-known options forbusinesses and is provided by crowdfunding platforms like Kickstarter and Indiegogo. Itentails an individual giving money to a campaign in exchange for a non-financialincentive. Rewards include pre-orders of the product or service, swag or some form ofrecognition. Rewards tend to be tiered to encourage big-money donors.
• Equity crowdfunding: Provided by platforms like Crowdfunder andFundable, this option allows businesses to raise capital by selling securities.
• Debt crowdfunding: A debt crowdfunding arrangement is a form ofpeer-to-peer lending. Made possible by sites like Prosper, Kiva and Lending Club, thisinvolves investors granting you a loan that will be paid back with interest. To get aloan from a bank, you likely need a lot of collateral, three years of businessfinancials to support your case and an ongoing relationship with the bank. Debtcrowdfunding can be an attractive option for companies that cannot meet thoserequirements. However, it does require quite a bit of time and effort, without aguaranteed reward.

Dan Demsky, co-founder of Unbound Merino, opted for the crowdfunding route in financing hisapparel brand.

“We made the conscious decision to forego VC funding in order to remain fully incontrol ofthe businesses and remain our own bosses indefinitely,” he said. “We launchedsolely viaIndiegogo and were able to raise over $350,000 in pre-orders alone for our compact travelhoodie.”

Despite the popularity, there are issues to consider. As of this writing, Kickstarter’scompany website lists 476,717 launched projects. Of those, 177,440 have been successfullyfunded. This 37% success rate underscores the need for a business to be eye-catching andprovide a product or service that investors believe anticipates and meets market demand.

Simply put, a project must connect with and interest people. A stroke of social media luckdoesn’t hurt, either.

For businesses that feel they have what it takes, setting up a successful crowdfundingcampaign is a time-consuming process with no promise of success. You must be sureyou’reready to put in the time and effort to have a campaign succeed in an accelerated timeframe.And, make sure you can deliver to funders what you promised.

Also consider the site’s terms. For instance, if your campaign is successful,Kickstartercollects a 5% cut plus a 3% to 5% payment processing fee from your funding total. If it isnot successful, all money is returned to backers. It is a true “all or nothing”situation.

Accelerating and Incubating

In a speech at the New York Times DealBook Conference in New York, Elon Musk said,“Creatinga company is a very difficult thing. A friend of mine has a saying: ‘Starting acompany islike eating glass and staring into the abyss.’”

That’s a rather intense simile that is also inherently true: Starting a business ishard anduncomfortable at times. Which brings us to accelerators and incubators. Startup acceleratorsand incubators are designed to ease some of the difficulties behind launching a company byproviding a support ecosystem. In addition to business development opportunities, they canalso be sources of capital.

Accelerators have been part of some of the most well-known launches in the past decade. Thelargest accelerator in the market, Y Combinator, was behind Airbnb, DoorDash, Dropbox,Reddit and GitLab.

Companies that become part of an accelerator cadre can access educational programs,mentorships, networking opportunities, connections and recognition among investors. Theyalso get a pre-seed or seed investment ranging from $10,000 to over $120,000. Uponcompletion of the fixed-term cohort program — typically three to six months in length—accelerators host a “demo day” where businesses pitch their ideas to hundreds ofinvestorsto jumpstart the fundraising process.

The terms “incubator” and “accelerator” are often usedinterchangeably, which is why it’simportant to discuss incubators as well. While they are similar in intent, the two conceptshave several major differences worth noting.

First, incubators are more open ended; memberships usually last between one and five years.Like an accelerator, an incubator provides support in the form of education, mentorship,events, connections and networking. Incubators also emphasize giving young businesses accessto co-working space, which is not always the case with accelerators.

However, it is very rare that an incubator will provide funding. Instead, they are usuallyrun by universities, foundations and economic development programs.

If your focus is on financing, an accelerator will likely be a better bet versus anincubator. However, there is a catch: Accelerators aren’t free. In exchange for theirmoneyand efforts, accelerators usually request 7% to 10% equity in your company.

Outside of the equity, accelerators require another valuable thing from you: time. At leastthree months will be spent following the accelerator’s schedule, including meetingswithmentors, attendance at events and networking. All are wonderful opportunities — but isyourleadership in a place to embrace them? If not, you could be throwing away valuable time inyour company’s early lifecycle.

Last note: Top-tier accelerators are quite competitive; Y Combinator and Techstars acceptaround 1% to 3% of applicants. Applying for a less-popular program could be a good idea, butkeep in mind that not all accelerators are created equal. The startup development space hasflourished over the past several years. Some accelerators will be institutions at thispoint, with the recognition, connections and successful programming that comes withexperience. Others won’t have developed a reputation for success, which meansthey’ll havetrouble attracting investors, and their programming may not be “tried and true.”

Do your due diligence to ensure a lesser-known program is worth your time and equity.

Grants

Nothing in life is free, but grants come pretty close. Federal, state, local and privategroups give sums of money to growing businesses. These funds are intended to stimulateinnovation, entrepreneurship and economic activity.

On the surface, there aren’t many negatives to essentially free money. After all,grantsdon’t need to be repaid, and you don’t dilute your equity. However, there areseveralsignificant pain points worth noting.

First, many grants are intended to aid non-profits, community-focused businesses orentrepreneurism in a specific demographic. They also focus on innovation, technologicaladvancement or initiatives that help solve a widespread problem. If your business does notfit within one of these categories, it may be difficult to find a grant opportunity.

The application process tends to be intensive, competitive and time consuming — to thepointwhere some companies hire professional grant writers. Many have stringent requirements andrestrictions regarding eligibility. You must state what the money will fund, and oftentimesthere are strict rules around how it can be spent. Extensive reporting may be required toensure funds are being used properly.

There’s no way to pin down how much money is out there. Grants come from many differentorganizations, are often designated for very specific populations and trend up and downbased on the economy and government spending priorities. Expect to spend some timeresearching.

If you’re up for that, eligible for a grant and able to deal with a significant amountofpaperwork and compliance, go for it — just don’t structure your financing plansolely aroundthe possibility.

Pitch Competitions

How’s your public speaking? If you’re a passionate, articulate business ownerwith an ideathat you’re eager to share, pitch competitions could be your pathway to funding.

The difficulty of cutting through the noise of an increasingly competitive marketplace gaverise to pitch competitions. These events are designed to provide a platform — andperhapssome capital — for emerging companies. The prize purse can range from several thousandto amillion dollars, with many being equity-free. Notable pitch competitions include YCombinator Demo Day, MIT $100K Entrepreneurship Competition and TechCrunch Disrupt.

Pitch competitions can be intimidating, but remember: Win or lose, you still benefit. Theseevents provide an excellent opportunity to network, create strategic connections, hone yourpitch and receive feedback from judges and other participants. They also provide valuableexposure for your company through the event and its media coverage.

Sarah Tuneberg, CEO and co-founder of Geospiza, a first-of-its-kind software companydedicated to improving disaster outcomes through data, took a shot on a pitch competitionand caught the eye of an investment manager for Motorola. The result: She met hercompany’seventual CTO, with whom she won a data competition and prize money to invest in thebusiness.

Business Loans

When embarking on a commercial venture, getting a business loan is the obvious go-to forfinancing. And when you think of loans, you likely think about going to the bank. That isstill an option — if you qualify. But that’s a big “if.”

The 2008 financial crisis hit small-business lending hard, and we’re still feeling theramifications today. Because of the increased risk and decreased profit associated withthese loans, banks are far less likely to lend to small businesses. According to a survey byOnDeck, an online small-business lender, there is an 82% chance that a small-businessfinancing application will be denied. To beat those odds and qualify for a business loan orbank line of credit, you need a detailed business plan, a strong credit score and incomingrevenue and collateral. This automatically disqualifies many early-stage businesses.

To provide some relief for small businesses seeking financing, the Small BusinessAdministration (SBA) provides several types of loans, the most common being 7(a), CDC/504,microloans and disaster loans.

The SBA guarantees these loans, and they are issued by participating lenders, mostly banks.SBA loans have many attractive traits: low interest rates; a range of amounts, from $500 to$5 million; and longer repayment terms. SBA FY19 total loan volume reached over $28 billion,with more than 63,000 approved loans.

Once again, though, there’s a caveat: SBA loans are hard to get. Borrowers need to meetamultitude of eligibility requirements that are dependent on the type of loan. According to asurvey of Fundera customers, most approved applicants had over $180,000 in annual revenue,at least a 680 credit score and over four years in the business.

Additionally, applicants must provide copious amounts of time and documentation to getthrough the process.

Because of the standards and competition involved with bank and SBA loans, private businesslending has become increasingly popular. Platforms like Upstart, LendingClub and FundingCircle provide alternatives to the traditional loan process. These sites are characterizedby easier applications, less-stringent criteria and accelerated decisions. However, thatease of use and accessibility come with some drawbacks. This financial model is stillrelatively new, which means that there isn’t much regulation (read: protections) inplace.Interest rates could be high, particularly if you have a low credit score. Lastly, fees,which vary by site, could add up quickly.

In the realm of private lending, don’t overlook revenue-based financing.

Revenue-based funding allows for a business to raise capital from investors without givingover any equity. Instead, investors receive a percentage of the enterprise’s futuregrossrevenues on a monthly basis until the loan is paid back. This approach allows companies tobe more flexible with repayments, since the amount is dependent on that month’srevenue. Italso doesn’t require the same asset base as a commercial loan, which makes it idealforearly-stage businesses. Revenue-based financing firms like Lighter Capital and DecathlonCapital offer this option for companies.

Of course, as with most loans, the amount paid back is more than the amount borrowed. In thecase of revenue-based financing, the cap is usually 1.3 to 2.5 times the amount financed.This often is more expensive than bank financing. Borrowers should have the revenue andstrong gross margins in place and be comfortable with a percentage of each month’sprofitsbeing taken to fulfill the repayment terms.

Friends & Family

The most common source of debt financing for startups isn't a commercial lending institution.Instead, contributions from friends, family and coworkers reportedly constitutes more than20% of startup funding. Friend and family financing can be a useful option for businessesthat lack a credit history. However, it’s a delicate situation when interpersonalrelationships are on the line. Should you choose to pursue this option, ensure that termsare clearly defined and reports are kept as clear and professional as possible.

Bootstrapping

When Sara Blakely decided to start her own business, she opted to use her own savings of$5,000 to get the company off the ground. That company? The Spanx apparel line. Now, thewell-known brand and its founder are each worth $1 billion. And, to this day, Blakely stillowns 100% of Spanx.

This entrepreneurial self-funding spirit isn’t uncommon. In fact, it’s given theratherappropriate name of “bootstrapping” in the business space. Many entrepreneurstap intopersonal savings and, if applicable, cash from the company’s initial sales — 77%of surveyedsmall-businesses owners in the U.S. cited personal savings as the way they funded theirgrowth.

When we asked company founders about the benefits of bootstrapping, most echoed the sameconclusion: It allows you to slowly and organically grow your business while ensuring thatthe model is financially viable in the process.

“We funded our first business with an accelerator, then raised about $500,000 viaangels anda venture capital firm,” said Ryan O’Donnell, co-founder of the sales platformReplyify.“The business model didn't work. We used the cash to build, test and pivot and werelockedinto a business that didn't work because we chose to take money prior to proving out theconcept.”

Proponents of bootstrapping advise against “skipping steps” and recommendfocusing onprofitability over growth. A company can then see if a business model is self-sustainablewithout forfeiting any control or direction.

Museum Hack, a museum tours company with $2.8 million in revenue, is 100% bootstrapped. Theco-founder, Michael Alexis, reinforced the benefits of staying agile and independent.“Wedon’t have to compromise with the product or mission of the company,” saidAlexis. “Theclosely held structure means that the owners are directly involved with the decision-makingand operations of the business.”

Bootstrapping does come with limitations that may make it difficult, or even impossible, forsome companies to pursue. Most notable is the need to be lean. Starting a self-fundedbusiness requires strict financial discipline, a significant time investment, a minimaliststructure, an initial cash pool and the ability to reinvest preliminary profits back intothe business.

Suitability also greatly depends on your market. For instance, startup costs associated withbeing a software provider are notably less than those of a manufacturing business.

Bootstrapping can make growth more incremental, which can be a positive, as mentionedpreviously. However, there’s a fine line between growing at a slow pace and becomingstagnant. If bootstrapping is consistently keeping you from your goals, it may be time toconsider a new strategy.

Bottom Line

Venture capital’s exponential growth and newsworthy moves over the past decade havemade itfront-and-center in the business financing realm. However, that doesn’t meanit’s the bestfit for your company. Fortunately, there are plenty of other opportunities to pursuecapital.

Use the chart, below, to evaluate your circ*mstances and desired path — and determinethebest financing fit for you.