13 Alternatives to Venture Capital For Startup Funding

Venture capital is great… for some companies.

But for many like myself, we’ve learned that VC is NOT a great fit.

Growth at all costs, high failure rates, and playing “the game” can get old.

Luckily, there are alternatives.

Here are my 13 favorite alternatives to fund your business.

List of Alternatives to Venture Capital

Let’s start with the equity-options on the table. If you’re okay with giving up equity in your business these can be a good first step.

Although they are giving capital in exchange for stock in your venture, they walk to a different drum beat than the traditional VCs we’ve all come to know.

#1 Sell Minority Stakes Of Your Business

Smash.vc equity financing for small businesses

 

SMB investors at Smash.vc

Selling minority stakes in a business is a fundraising method that involves offering a portion of a company’s equity to investors in exchange for capital. It may sound much like traditional VC, but the model and expectations are quite different.

Unlike the traditional venture-model, most of the investors interested in this type of investing are NOT looking for a “growth at all costs” type of company.

They usually like cash flow, sanity, and are attracted to businesses with positive unit economics.

This method is attractive to investors who are interested in the potential growth and profitability of the business, do not wish to be involved in the day-to-day operations, and are not aiming for “moonshots” that have a risk/reward ratio. I can say that out of all the options here, this one is my personal favorite.

There are plenty of investors who specialize in investing in small businesses.

Smash.vc – Ran by Travis Jamison

  • Smash mainly invests with entrepreneurs who are looking to acquire an SMB (search funds, or entrepreneurship-through-acquisition scenarios).
  • Smash will also do minority equity shares where the founder of a company can take some chips off the table to a stable long-term partner.

TinySeed – Ran by Rob Walling

  • A B2B SaaS accelerator. Their program lasts one year, provides funding, community, and mentorship on how “solo” founders can scale out profitable SaaS companies.

Calm Fund – Ran by Tyler Tringas

  • Calm invests early in profitable businesses that want to maximize their chances of success and build for the long-term. Calm values a calm lifestyle and profitable businesses.

Indie.vc – Founded by Bryce Roberts

  • IndieVC is still focused on large outcomes, but they do it in a way that where they try and avoid the “VC funding game”, where more and more funding is desired until some massive exit. Indie realizes that there are lots of scenarios outside of this that makes sense for founders.

 

#2 Equity Crowdfunding

Elio Motors, an equity crowdfunded electric vehicle company

Another alternative to venture capital is equity crowdfunding. Through crowdfunding platforms, founders can raise capital from a substantial number of investors, allowing everyday people to contribute to your startup in exchange for a small portion of ownership. This form of funding democratizes startup investments and offers a more inclusive model for raising capital.

Benefits:

  • Substantial number of investors
  • Diverse investor base
  • Increased visibility
  • Backers have a personal interest in your company’s success

Remember that raising funds through equity crowdfunding come with its own set of challenges. For instance, managing a large number of investors can be time-consuming, and you might face increased regulatory scrutiny.

Companies founded with equity crowdfunding:

  1. Elio Motors: This American company aimed to produce a fuel-efficient, three-wheeled vehicle. They raised funds on StartEngine.
  2. Revolut: Before becoming a financial giant, this UK-based fintech startup used Crowdcube to raise some of its early funds.
  3. Monzo: Another UK-based digital bank, Monzo, raised funds using Crowdcube in its early days.

Angel Investing

Angel investors are experienced individuals who invest their own capital in early stage startups. As a founder, partnering with an angel investor can be beneficial in several ways. They can provide:

  • Funding
  • Industry insights
  • Valuable contacts
  • Experience and expertise

Typically, angel investors receive a percentage of ownership in your startup, giving them a vested interest in your success. These investors often have successful entrepreneurial backgrounds and might be deeply involved in specific industries. For example, here is a list of the best indie SaaS investors.

Since angel investors invest their own money, they might be more flexible than venture capital funding firms. However, this also means the amounts invested are usually smaller compared to VC firms and may only support your initial growth.

Examples of angel investors:

  1. Ron Conway: Founder of SV Angel, he’s been a significant angel investor in numerous high-profile tech companies, including Google, Facebook, and Twitter.
  2. Fabrice Grinda: He has over 200 investments in various companies including Alibaba Group, Airbnb, Beepi, FanDuel, and Palantir.

Debt Financing Alternatives to Venture Capital

Netflix, the entertainment company, used debt to finance its growth

Then there’s debt financing options.

Business owners have polarized views on debt and debt financing, but the fact is that many huge companies use debt to finance their operations.

  1. Disney: For its acquisition of 21st Century Fox, Disney took on a significant amount of debt.
  2. Netflix: To finance its original content, Netflix has, in various instances, raised billions through debt offerings.
  3. Tesla: Elon Musk’s company has used debt financing, including convertible notes, to fund its ambitious projects.
  4. Airlines: Major airlines often finance the purchase of new aircraft using debt. This helps them manage cash flow and keep up with the demands of their fleets.

Bank Loans

Bank loans are one of the most common solutions to debt financing. Traditional banks provide entrepreneurs with various types of loans, including secured and unsecured debt. Secured debt requires collateral, while unsecured debt does not. Depending on your project, lenders may assess interest rates based on your perceived risk.

Remember that your cash flow will be committed to loan repayment, so consider the terms and rates carefully before choosing this route.

SBA Loans

Another option for debt financing is Small Business Administration (SBA) loans.

These loans are partially backed by the U.S. government, which allows participating financial institutions to extend credit under more favorable terms compared to traditional bank loans. They typically offer lower interest rates and longer repayment schedules, making them attractive for entrepreneurs looking to minimize the risk.

Explore various SBA loan programs, as some cater specifically to different industries or sizes of businesses.

Sometimes the SBA backed loan itself isn’t quite enough. Maybe you weren’t approved the required amount or you lack cashflow. In those cases, it may be a good idea to look for SBA loan investors, like Travis Jamison, to fill the remaining funding gap.

Venture Debt

If you’re a venture-backed firm or have strong financial performance, you may consider venture debt. This alternative financing option provides a flexible form of debt, often including a combination of loans and warrants.

Unlike traditional bank loans, venture debt focuses on growth potential and often involves less strict terms and repayment schedules.

Although confidence in your business’s future is paramount when considering venture debt, it can be a useful tool to minimize dilution while maximizing funding.

Mezzanine Financing

Mezzanine financing is a unique form of debt financing, providing a hybrid of debt and equity.

It’s typically characterized by higher interest rates than traditional bank loans, but with the option to convert the debt into ownership shares. This aspect can be attractive to entrepreneurs who want to preserve their equity positions while acquiring necessary funding.

However, be prepared for the prospect of increased risk as the lender might take an ownership stake in your business if you cannot repay the loan.

Line of Credit

Finally, a line of credit can be a valuable resource for entrepreneurs who need flexible access to cash.

Unlike loans with fixed repayment terms, a line of credit allows you to borrow and repay funds as needed, only charging interest on the amount borrowed. Financial institutions offer lines of credit as either secured or unsecured debt.

A line of credit may work well for your business if you have a strong credit rating and are confident in managing debt.

Non-dilutive Financing Alternatives to Venture Capital

Lambda School, an online coding school with an income sharing agreement

As you explore financing alternatives, it’s worth considering non-dilutive options that allow you to retain full ownership of your company. Two popular alternatives are Revenue Share Agreements and Shared Earnings Agreements.

Revenue Share Agreements

Revenue Share Agreements (RSAs) have become an attractive alternative financing model for businesses, particularly startups and SMEs (small and medium sized entreprises). With an RSA, investors provide capital in exchange for a percentage of future revenue until a predetermined amount or cap is repaid. This method avoids diluting ownership and is often seen as a bridge between traditional equity financing and loans.

Here are a few examples of industries commonly utilizing RSAs, in addition to startups:

Shared Earnings Agreements

Shared Earnings Agreements (SEAs) are similar to Revenue Share Agreements, but the return is based on earnings rather than revenue. This makes it a more suitable option for businesses with higher operating costs.

A prominent advocate of this model is the Calm Company Fund, which has been offering Shared Earnings Agreements as an alternative to traditional venture capital. Calm Company Fund’s approach with SEAs is aimed at bootstrappers, or founders who aim to grow their companies without relying on massive outside capital or aiming for the traditional VC-backed hyper-growth trajectory.

Here’s how it works:

  1. You receive an upfront investment from an investor.
  2. As your business generates earnings, you pay the investor a percentage of those earnings.

The benefits of this type of financing include:

  • You maintain full ownership of your company.
  • Payments to investors are tied to your company’s profitability, providing a more transparent return on investment.

However, consider the following points:

  • Shared Earnings Agreements may be more complex to structure than Revenue Share Agreements, as they involve calculating earnings rather than revenue.
  • Similar to Revenue Share Agreements, you’ll need a strong marketing plan and predictable earnings stream to attract investors.

Crowdfunding Alternatives to Venture Capital

Flower Station, a UK based crowdfunded online florist

In your search for alternative financing options, you might consider looking into crowdfunding. Crowdfunding allows you to raise funds from a large number of people, usually through an internet platform. This method offers various alternative funding sources, such as debt crowdfunding and popular platforms like Indiegogo.

Debt Crowdfunding or Peer-2-Peer Lending

Debt crowdfunding involves borrowing money from investors in return for a promise to repay that debt with interest. This approach is often considered less risky for the entrepreneur as you don’t have to give up any equity in your company. To explore debt crowdfunding, you can research platforms like LendingClub or Prosper.

You should be aware that this method might require thorough due diligence, as the terms and interest rates can vary significantly. When using this funding source, remember to:

  • Understand the interest rates and repayment terms: Make sure you’re comfortable with the interest rates and can accommodate the repayment schedule.
  • Consider the impact on your finances: Debt crowdfunding can impact your credit score and your company’s financial health, so proceed with caution.
  • Communicate with your investors: Keep your backers informed about your business’s progress, as it’s essential for maintaining a positive relationship with them.

UK based Flower Station, a florist specializing in hand-crafted flower bouquets, was funded using Funding Circle. Founder David Cohen used the P2P business loan to expand the brand and grow the business.

Indiegogo

Indiegogo is a popular crowdfunding platform that allows you to raise funds for creative projects, startups, and social causes. The platform offers two primary funding models: fixed funding, where you only receive the funds if you reach your goal, and flexible funding, where you get the funds regardless of whether you meet your goal or not.

When using Indiegogo as an alternative financing option, consider the following tips:

  • Select the right funding model: Fixed funding works best when you need a specific amount to complete the project, while flexible funding is suited for projects with adjustable goals.
  • Create a compelling campaign: Share your story, use engaging visuals, and provide a clear explanation of how the funds will be used.
  • Offer attractive perks: Incentivize your backers by offering rewards, such as early access to your product or unique experiences related to your project.

Famous projects backed by Indiegogo:

  1. Flow Hive: A revolutionary beehive invention that allows you to harvest honey without disturbing the bees. It raised over $12 million and is one of the most successful campaigns in crowdfunding history.
  2. An Hour of Code for Every Student: Code.org’s initiative to introduce over 100 million students worldwide to computer science with a one-hour introductory course. The campaign was a huge success.

Other Financing Options

If nothing else works, you gotta look outside the box a bit.

Credit Card Funding

Funding your business using credit cards can sound unreasonably risky, but can be a viable solution as a last resort option. Here’s how to make it work:

  • Apply for multiple credit cards with favorable terms (if you have a good credit score)
  • Stay up-to-date on your monthly payments
  • Be extremely cautious with your spending
  • Utilize credit card rewards to aid in scaling and reaching profitability

However, remember that credit card funding has its risks.

  • High interest rates
  • Potential impacts on your personal credit
  • Venture’s growth potential doesn’t match accumulating debt

Friends and Family Funding

Another alternative to VC funding is to seek support from friends and family.

This route offers several advantages, including maintaining control over your business venture and having a network of close supporters who are invested in your success.

Friends and family funding may also come with the expertise and resources to help your business grow.

To make this financing option work:

  • Have open conversations about your business plan and action steps.
  • Make sure that everyone involved is aware of the risks and potential outcomes related to their investment.
  • Separate business decisions from personal relationships.
  • Establish clear boundaries and expectations to prevent conflict and maintain professionalism.
  • Create a formal agreement that outlines repayment terms and decision-making responsibilities.

Your Turn

Getting funding is never easy, but at least now you have some alternatives to venture capital funding.

You don’t need to bootstrap to avoid venture capital funding and retain control of your company. There’s alternative ways to gain leverage, as you saw in this article.

Take a look at the methods in this article. What’s your action plan to raise money? Remember to follow prominent investors for inspiration and guidance.

If you still feel like taking a shot at venture capital funding, check out these VC blogs for inspiration.

Updated April 11, 2024

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