This is the second blog post in a series about the good, bad and ugly of startup fundraising. In this post, give you the low down on alternatives to VC when raising money for your startup.
You are a founder of a start-up, your business is in its infancy or rapid growth, and you’re starting to think about the next capital injection to support your growth and development. What will you do? The first thing that might come into most founders’ minds is looking for support from VCs.
Raising VC can often seem like the common sense approach for startups looking to grow. But navigating through the obstacle of introductory meetings, pitch decks, and data rooms to finally cross the finish line and secure VC investment can be challenging for even seasoned leaders.
Especially for startup founders from under-represented backgrounds. It could even put pressure on growth. Many start-up founders could face a dilemma: between focusing on finances and focusing on their mission, business, and team building.
So what other options are there? Are there any “startup-friendly” alternatives to the traditional VC funding that can help startups to grow? Of course there are and we explore 3 of the biggest financing alternatives to help you build your business without VC.
TL;DR (in case you’re in a rush, here are the highlights):
- Fundraising options vary based on your unique situation.
- Friends & family can be a great early option for those who are well-connected. It can come with less hurdles, but more risk fr harming interpersonal relationships.
- Crowdfunding has grown in popularity. It comes with less strings than VC, but it’s own unique challenges inc. getting publicity and building trust.
- Revenue-based Finance (RBF) is a great option for those looking to grow sales and marketing. But only if you already have recurring revenues.
1. Friends & Family
You can get funding through friends and family, which could take various shapes and forms. It could be personal loans from close friends that have a strong belief in your idea or it could be capital in exchange for equity from a parent. Friends and family funding is one of the most fundamental and foundational approaches for launching or accelerating your startup business. Many founders rely on this, especially at the beginning or when developing the first MVP.
It goes without saying that not everyone’s network of family and friends is able to provide financial support for their business. If that’s the case for you, then there are other options out there.
When you should consider it
- Support could come easy(er): Getting some support from your friends and family could be the easiest to help fund your startup. You don’t need to spend days designing beautiful PowerPoint and doing pitches. You don’t need to go through a lengthy and tedious screening process. And you don’t need guarantees if you are close enough – their trust in you could be the most valuable collateral.
When you should be cautious
- Relationship management: The benefits seem obvious, but be aware of the risks of this financing approach. Intimate interpersonal relationships can be more valuable than anything, but unfortunately, disputes can also break them down.
- Getting what you need: Unless your best friend is Elon Musk or Warren Buffett, the amount you raise could be limited and may not fully meet your financial needs.
Crowdfunding is a type of collective funding effort. It typically consists of a large pool of people (mainly online through social media and crowdfunding platforms) that all put up money towards your business or business goal. Founders can often leverage their networks for wider exposure. Through crowdfunding, startups can raise large amounts of money, as this style of fundraising allows participants to commit to both small and large amounts. Anything from a few euros to hundreds of thousands (and more).
The benefits of crowdfunding are self-evident.
- Your seat is safe: Typically, people supporting startups via crowdfunding are not in it for the returns, which means that this money can come with fewer strings attached than funding growth with a VC.
- Your visibility is high: Successful crowdfunding is not only dependent on the attractiveness and recognition of your business model, it’s also largely relying on your exposure on social media The bigger your exposure, the higher your chance of getting noticed and raising more money. Thus the whole crowdfunding process is a perfect marketing tool leveraging your visibility and brand awareness.
There are also some drawbacks.
- Lower success rate than you thought: Some founders can raise enough through crowdfunding. But many don’t, especially founders without strong social influence. The success rate of fundraising varies greatly.
- More obstacles than expected: Scammers are by far the biggest issue in the field of crowdfunding. Unfortunately, some startups successfully crowdfunded an idea or product, haven’t pulled through with the execution of the projects as promised. This has led some people to lose trust in process, with fewer investors willing to invest through crowdfunding platforms.
- More work than it appears: The entire process of crowdfunding is not short and often requires more work than it first appears. The time and effort you invest in video, content, PR, social media, advertising, etc. can be the same as that of any other fundraising approach.
3. Revenue-based Financing (RBF)
Revenue-based financing (RBF) is gaining visibility, but it’s still a new concept to many founders. RBF is a simple, flexible, fast, and founder-friendly financing method, with payback 100% based on monthly revenue. The best part is that you don’t need to put up collateral, give up board seats or lose equity.
When to consider RBF
- Payments reflect revenue: One common issue that startups encounter is uncertainty. This only increased with the Covid-19 Pandemic. As RBF repayments are tied to your monthly revenue, it gives founders flexibility. During periods of booming sales, your income increases accordingly, and you have a stronger ability to repay your loan. In reverse, whenever you’re in a downturn, you can concentrate on boosting your business growth without worrying about high repayments.
- Retain control: A common drawback of traditional financing methods like VC is that they take equity in exchange for funding. With RBF, you don’t have to worry about giving up control of your business to fund your growth.
- Quick capital: Revenue-based financing usually adopts a highly data-driven approach to determine whether your startup is eligible for funding and how much. This also makes it quick to release funds once approved – at Remagine we release funds within just a few days following approval.
When RBF may not be right for you
- Revenue required: Revenue-based financing, as the name suggests, means you need to be able to demonstrate recurring revenues and positive unit economics to qualify. So if you’re at a very early stage and have no track record, RBF won’t be available to you.
Traditional VC is not the only financing channel for startups. It’s always beneficial for founders to get to know more about other fundraising alternatives. It is never a “yes or no” question and there’s no “good or bad” approach, the one that suits you best is the best way for you.
Check out the other blog posts in this series about startup fundraising.