Fundraising alternatives for early-stage startup and SME entrepreneurs
The startup world can be an exciting place where people from diverse backgrounds, ideas and ambitions meet, collide and synergize.
Since there isn’t really a set of rules or a golden playbook for these people to play by, it can be a place for people to explore and roam. Yet, for the exact same reason, it can come off as intimidating and overwhelming, especially to those new in the game.
Everyone around you seems to be busy raising funds and humble bragging on Linkedin or the bluebird app, about having their oversubscribed round with a few big name VCs onboard. People seem to be flooding them with congratulations, so you start thinking companies that have raised a significant amount of money as successful ones. The self-doubt kicks in, the FOMO is real…
Am I doing something wrong? Should I be raising money from a VC too?
The Answer ✅
The answer is simple — raise money if you want to build a product that cannot be built without raising a significant amount of capital. If you’re raising money just because you can/everybody else is doing, then you’re better off focusing on building a great product, proving your PMF and getting early traction.
The fact that they can raise VC money and pump up your valuation is great — but it also doesn’t make their path any more prestigious that startups bootstrapping through there way through profitability.
Every startup journey is different. Not every single startup needs to raise VC money — or your startup might not even be “VC compatible”.
Traditional VC Path Compatibility Checklist ✔️
The very first thing to clear out is whether the VC model fits your personal aspirations as an entrepreneur or not:
- Is your aim to build and scale a very fast growing company at the cost of giving up some control along the way?
- Or do you value more building a company which might not be as fast growing but which destiny is controlled 100% by you and your other co-founders?
- Are you sufficiently aware of what it means to work with VCs?
Characteristics of your business also play a role:
- Do you have the ability to monetize soon enough from your first users with early versions of your product?
- Do you lots of upfront capital to build your MVP? i.e. heavy tech
- Do you have a high CAC? e.g. you target the corporate segment from day one or you are penetrating a market that needs lots of product education.
- Is your product in a crowded category? If so, do you have an unfair advantage to break out at scale?
In fact, we are aware that an increasing number of amazing startups coming our way don’t necessarily fit/don’t want to walk the traditional VC funding path.
Founders must also be increasingly aware that going the traditional VC way might not be the best solution for them and that bootstrapping 100% or finding alternative ways of financing their company can be a healthier and more fitting option.
So…what are some alternatives you can consider?
- Bootstrapping ⚙️
In the early days will also train “resourcefulness muscles” and limit time spent on unproductive activities.
2. Get to Profitability Fast 📈
Some people think of profitability as an endless grind of corner-cutting. In reality, it means a laser focus on finding high-return sales channels and a high-impact product roadmap. Put simply, metrics that get your startup to the point of sustainability — profit and contribution margin — should be favored over those that will most appeal to a later-stage investor — top-line growth.
3. Venture builder 🏗
Want “smart money” without giving up your ownership? Try opting for a venture builder. Venture builders are dedicated to building and growing successful new ventures with a tried and true system. Good venture builders can often provide you with more than just a system, but business intel in the field, fundraising help and a great network.
4. Alternative Investment Methods 💰
Revenue-based venture capital is one way that founders can retain control of their business while supplanting growth by successfully navigating the ups and downs of business. Instead of giving up equity-like in a traditional venture capital deal, companies agree to repay their investors a fixed percentage of revenue until they have provided said investors with the agreed-upon fixed return on their capital.
Instead of focusing on rocketship growth — typically 500 multiple and 100 percent IRR or more for the firm involved — new VC firms are focused on revenue instead of equity, diverse founders and other founder-favorable models that split equity and dividends.
As of the time of writing, there are a couple of revenue-based VCs pioneering this model!
Us included. Ping us if this sounds like something you want to explore!
No One-size-Fits-all 👚
The bottom line?
As passionate as we are about mental health, we are not trying to turn this into a Chicken Soup for Founder’s Souls series. The truth is, every startup is as unique as the person creating it. Some startups are not compatible with the traditional VC model. (equity injection in return for ownership)
Our rule of thumb as a venture investor is to make sure our goals are aligned with the team we work with.
If the entrepreneur’s aim is to build companies which grows and scales rapidly with the help of venture money, ready for acquisition or going public in, say, 5 years — then injecting money in exchange for equity is a good alignment. But if they prefer to do so by financing their business solely with the revenue they manage to generate from their customers — that’s fantastic too!
Want someone to discuss your startup with — we are always happy to chat. Remember, you are not alone in this journey!