Factors for Startups to Consider When Seeking Alternative Funding (2024)

Most people have heard of equity crowdfunding and the process where small to medium-sized businesses seeking investment can raise capital from accredited investors. Much is also written about describing the opportunities opened up by the democratization of investment via Title III of the JOBS Act that came into effect in 2016. These changes helped to shift focus to supporting startups in the uncontested market space away from the traditional powerhouse of Silicon Valley. However, the untold story is of the challenges faced by locally-based entrepreneurs and startups, particularly minorities, when accessing startup capital.

When entrepreneurs from all walks of life are able to find low-cost ways to access and secure funding for new businesses, and people can build wealth through a diverse investment strategy, local economies and the U.S. economy can thrive. Connecting small business entrepreneurs with people looking to invest in their local neighborhood businesses is what’s powering the reemergence of hyper local communities and economies. This is our mission here at MainVest, an alternative small business investment marketplace that was founded in 2018 with the sole aim of revitalizing the American dream through hyper local investment.

You might ask how MainVest understands the plight of entrepreneurs compared with the other 30 or so regulated equity crowdfunding portals available in the marketplace. It’s the only alternative investment platform focused solely on small businesses as there are no seed rounds or seed funds required. And banks typically require demonstrations of one to two years of capital or leveraging loans against assets for small business loan applications. This places some businesses in a tricky position if they are unable to fulfil a bank’s requirements.

Amplifying the Uber Model

As an early employee at Uber launching the brand in the Boston market, I helped to build one of the fastest growing companies of all time, and obtained a unique perspective into the small towns and businesses of the greater Boston area including former mill towns like Worcester and Lawrence, Massachusetts, noting the income disparities in these once thriving heavily-populated places. Once centers of economic prosperity, these suburbs have become overlooked by traditional investors, and are now struggling economically. This reality prompted deeper thought into ways in which these communities could help themselves by providing alternative routes to accessing small business funding and wealth generation, similar to how Uber provided opportunities for people to generate additional income around their day job.

Time spent working for Uber in Washington, DC right around the time that Title III of the JOBS Act came into effect was introduced by Congress was particularly formative. While the legislation was largely aimed at opening up investment for early-stage tech companies there was also the opportunity to empower non-tech founders to access the capital they so often struggle to find.

In particular, minority entrepreneurs have traditionally faced challenges in accessing startup capital. The most recent report by the U.S. Office for Advocacy in 2018 focused on Financing Patterns and Credit Market Experiences: A Comparison by Race and Ethnicity for U.S. Employer Firms. It showed that there was still a gap in unmet funding needs, as many minorities said they didn’t apply for small business loans because they didn’t think they would be approved by the lender. While this is a perception issue, the report also cited that this demographic was more averse to accruing large sums of debt therefore, are more likely to seek alternative funding.

Retrofitting the New Financial Regulations

While private investment typically focuses on west coast and Silicon Valley startups, this gap in the market for providing pathways to capital in communities completely disconnected to traditional funding options is a huge opportunity. The change in financial regulations means that entrepreneurs and small business owners can become connected with potential investors who may not normally invest in a startup, but are looking for alternative investment opportunities, creating financial opportunities for everyone.

MainVest utilizes the revenue sharing note as the main investment vehicle on its platform. Investors purchase revenue sharing notes, usually with a minimum of $100, which entitle them to a set percentage of revenue on a quarterly basis until a target return is hit. This aligns incentives between issuers and investors, as investors are paid back faster the quicker that the business generates revenue. Therefore, investors are incentivized to frequent the businesses in which they’re invested and act as evangelists, allowing businesses to rely on strong community support, revenue, and loyalty as they grow. The tax revenue, jobs, and financial returns created by the business flows directly back into the community of investors that supported its launch. At this time, 100 percent of businesses that have raised investment through MainVest are on track —or ahead of – their repayment schedule.

A Growing Local Movement Restoring Main Street America

This new movement of community-led positive transformation to impact the longevity and vibrancy of local towns is supporting the reemergence of strong local communities and economies. Encouraging people to invest in their communities ultimately creates healthier towns with thriving economies, valuable real estate, strong school systems and more. And with the relaxation of restrictions around how individual investors – regardless of their income or net worth – can invest in private, early-stage companies, neighbors, friends and family can now directly impact and shape the communities they live in.

Investors are able to generate passive income from an entirely novel asset class that rewards them for the risk taken without being overly complex or time-inclusive. While accredited investors have long been able to build wealth through private investment and pursue both financially and emotionally rewarding opportunities, MainVest aims to open up investment to non-accredited investors who are typically limited to their employer-sponsored 401k or online investment portals for investment opportunities.

Win-Win for Startups and Investors

Startup and small business founders can utilize the revenue sharing model to grow their business flexibly when private equity or traditional lending are not options. Traditional lending is out of the question for any founder with a less-than-ideal credit score, or more importantly, collateral. Younger generations are buying houses later in life and paying off unprecedented student loan debt, meaning that a once-reliable source of collateral is out of reach for otherwise qualified business owners. Because capital raised through MainVest lives lower on the capital stack than other debt, it is an appealing solution for founders with a solid business plan that cannot secure a loan otherwise. Given that private equity is heavily concentrated in Silicon Valley and often reserved for high-growth opportunities, startup founders that don’t fit into the traditional mold (including female and minority entrepreneurs, who still receive far less funding than other groups) can tap into their community for startup funding. Using MainVest as a first step can unlock other forms of capital later on as founders can build out initial locations, purchase inventory, and grow their brand. There are 9,000 investors signed up on the platform and in the last six months of operation, 30 businesses in the New England areas have been successfully funded.

Seeking Investment for the Most Instagrammable Restaurant in America

Teatotaller is an example of a business that utilized community investment via the MainVest platform for their expansion. Despite having a solid financial track record for their cafe and meeting space in Somersworth, New Hampshire, the founder did not feel confident that a traditional bank or term loan would be the best choice for his business. With the knowledge that food ventures are seen as extremely risky by traditional lenders, and that the timing of build outs can be variable, the founder sought a more flexible option. Adept at brand building and named one of the “Most Instagrammable Restaurant in America” by Food Network Magazine in 2019, Teatotaller already had generated interest within its community, but still needed to raise $60,000 of flexible capital, which it did and will be repaid once the new location is fully built out and operational. A local startup that secured investment from their neighborhood that continues to thrive.

Five Factors for Startups to Consider When Seeking Alternative Funding

• How much capital will get the job done without creating too much debt, or a shortfall for key projects?
• Alternative funding options typically require grassroots efforts to market your business, investment offering, or pitch. Are you prepared to spend more time on this?
• Is the business plan easily understood by investors of all experience levels? Consider creating multiple pitch decks for VC-level investors and first-time community investors.
• Is it simple to inform and educate target audiences about alternative funding methods? Will potential investors and supporters fully understand this approach?
• How does any alternative funding secured fit into your overall capital stack? What are future implications?