First, there was the initial idea. Then you ran it past multiple family members and friends. You decided that the idea was ready to release to the world. Then, as a newly minted entrepreneur, you sat back and realized the inevitable: You somehow needed to fund your startup.
Face it: When push comes to shove, a good idea, even a great one, is nothing without the practical back end. And it’s at this point that young entrepreneurs who can’t self-fund their startups or obtain money from friends and family traditionally realize their limited choices: angel investor, crowdfunding or venture capitalists.
The problem is that angel investors are hard to find and even harder to lock down; and crowdfunding not only includes platform fees but is not very effective for non-consumer/B2C services.
The logical choice, therefore, becomes VC funding. To go this route, startups must partake in a tedious and long process that doesn’t guarantee success. And at the end of the process, most startups are still rejected by VC investors: According to Fundable, only .05 percent of startups are funded this way, compared to the 57 percent that are self-funded and the 38 percent who receive funding from family and friends (interestingly, though, at .05 percent, VC funding is still the third most popular funding technique).
When you limit “startups” to seed and early-stage startups, the numbers get even worse. The Q2 PwC / CB Insights MoneyTree report, found that for the seed-stage and early stage companies researchers examined, VC funding remained flat and declined, for both categories from Q1 to Q2.
So, what to do? Entrepreneurs may feel helpless and unsure of the other alternatives they have, but they should take heart because there are other paths to take to launch a company, some very popular, and others virtually unknown. Here are a few options they, and perhaps you, may not have thought of that offer a good alternative to VC funding.
An incubator is a great option to help launch your new business, as incubators typically provide not just office space but business coaching and mentoring. Using an incubator, startups can worry less about practical business technicalities. However, they must be mindful of the fact that these facilities rarely provide capital and that their tenure there will usually be limited to three to six months.
This method is more helpful, then, for initial guidance and mentorship, but has been used by many companies–and some such as Reddit turned out to be incredibly successful.
Corporate venture capital funding differs from regular VC funding in that larger corporations help fund your startup, as opposed to limited partners/investors or venture capital firms.
CVC funding is an opportunity for startups, particularly tech startups, to get a head start. An example is tech analytics company Hivery, which obtained CVC funding from Coca-Cola, in 2015. This method is popular because individual startups are generally granted greater independence, compared to what occurs with standard VC funding; but entrepreneurs must be mindful that it may limit their own decision-making flexibility on strategic options.
Becoming part of a “bigger thing”
My own company, The Glimpse Group, offers seed and early-stage companies another — relatively unusual — alternative, which is to acquire them and then provide them with an environment in which they can grow.
This model takes the best elements from accelerators and incubators, as well as from holding companies. It gives companies the same upside in their own venture they would have had after dilution in the regular angel/VC model; and, in addition, they receive equity in our company, as well.
Founders continue to manage their businesses but focus only on building their products and taking them to market without needing to spend time raising capital and attending to back office functions. They also have access to our peer network, a diversification of risk, access to mentors and a salary and benefits.
Many private companies and non-profits offer small loans that range between $500 and $50,000, with the average around $13,000. Examples of microloans include SBA and small office/home office loans, known by the acronym SOHO.
Small loans can go a long way. Just ask The XP Agency, an experiential marketing agency which used this method to raise the $60,000 it needed to cover the up-front costs of producing its first event.
Peer-to-peer (P2P) lending offers another solution for small businesses. With this model, borrowers and lenders are connected via various online platforms. Loans here usually range from about $1,000 to about $35,000, and there is about 5 percent in additional closing costs.
The average annual rate of return for most P2P loans is 5 percent to 7 percent for borrowers, and investors pay a 1 percent transaction fee on all payments received. Popular P2P lending platforms include Zopa and Upstart. Common categories of P2P loans include student loans, real estate loans and payday loans.
This method allows startups to accept large, new orders in return for getting the money right away. With purchase-order financing, companies give the money directly to the supplier, allowing profit to flow to the startup.
Purchase-order financing often covers a large portion of the requisite supplies, and sometimes even all of them. This process is often much easier than bank financing. Purchase-order financing can be beneficial to small businesses because it relies mostly on the company that has placed the order with the startup, and not the startup itself. Platforms created to assist this process include PurchaseOrderFinancing.com and others.
The upshot? To young and hungry entrepreneurs, I would say, yes, VC funding is an alternative to self-funding, which may not be possible or even ideal, given the lack of mentorship that comes with it.
However, there are other options to consider, either because you could not attain VC funding or just didn’t want to deal with the loss of control or the possibility of misaligned goals between you and your investors. I noticed this problem when I started my first company back in the 1990s and created a model that felt right, and more importantly worked for entrepreneurs.
Every startup is unique and, after careful research and consideration, entrepreneurs will find a solution that works for them.