Opinions expressed by Contractor the contributors are their own.
Whether you want to change the world or just be your own boss, the entrepreneurial bug spreads quickly. Bootstrapping is a noble cause, but an infusion of capital in any business venture will help a company scale, gain credibility, and even leverage resources beyond money. It’s no secret that startups and small businesses have trouble accessing venture capital funding. Although venture capital funding is seen as an early investment opportunity for small businesses, it is generally not recommended as an option, as the expectations of venture capital firms do not naturally align with the startup’s founders – due to the “burn-in” and turn-around” model I’ll get into later.In this article we are going to explore other avenues any startup can use when starting their business venture.
Related: Why Small Businesses Should Look to Alternative Capital Financing
Why the VC mindset doesn’t work for startups
I want to start by stating that I am not against venture capital funding. For the right business, a VC brings a huge amount of resources through finance, marketing and sometimes a support team. The problem lies in the difference in mindset, which creates challenges that most startup entrepreneurs are not prepared to face.
VC investment comes with many challenges that revolve around the idea that your company has yet to prove its business concept. The VC ideology is “burn nine companies to win with the tenth.” They tend to buy companies with little or no care about how they grow them and take a lot of equity while abusing the founders. Even with all the benefits a venture capital organization provides, because of its ideology, you will most likely fall into the group of nine. That’s how venture funds see it. Depositing $1 and getting $1,000 out of it excites them. Their expectations are misaligned with the founders because you have to be conservative with your growth.
Venture capital funding is a traditional method of financing new companies, but there are many alternative ways you can raise capital for your business. Here are three options for obtaining venture capital funding:
1. Friends and family
An alternative for venture funds is through friends and family. We call this the triple F: “friends, family and stupid money”. It is the most basic form of crowdsourcing. Friends and family bring money with a level of care and in most cases they give you the independence to grow your business. They do not expect to be involved in business operations. They usually want to support your business because they have a vested interest in your success.
You also don’t have to go through any kind of review process or due diligence as you would with other funding sources. However, there is the small caveat of being rewarded for trusting you with their money.
2. Debt financing
The other option is debt, debt financing or debt partners. You can have different debt financing scenarios, including secured or unsecured debt. There are many options here, each with its own set of benefits. Whether a credit card or structured debt, this option generally becomes available when you have some income, as the loan and interest are expected to be paid back directly through the business’ income stream.
The advantage of debt financing is that you retain your company’s ownership and continue to be the decision maker when it comes to operations. When the debt is paid off, the business owner is released from any obligations to the lender. Another advantage is that the interest payments are considered business depreciation and are therefore considered deductible.
The most common option is a bank loan. It is quite easy to understand. Similar to a mortgage, the higher the amount you borrow and the longer the repayment period, the higher the interest you will have to pay. The banks will assess the company’s financial situation and grant loan amounts accordingly.
3. Financing through customers
The third option is to finance your business through your customers. Be profitable by identifying your core customers who will fund your business. It’s a little more conservative, but you have the most control this way. You can always structure your capital differently in the future. You can go to series A and find an investor with favorable terms when you have income. You can negotiate better terms when you have some income.
Related: You Can’t Get VC Funding for Your Startup. What now?
The reality is this: If you want to get your business off the ground, there are better alternatives to VC funding. Most businesses initially do not need venture capital funding to succeed. Now that lean startup concepts have taken hold, many entrepreneurs and startups are finding ways to get by just fine without it. So before you spend time researching venture capitalists or writing your business plan, consider these alternative funding sources first.