April 25, 2013 | 6-minute read (1064 words)
Bootstrapping is a great startup strategy, as I discussed in my previous post 8 Great Reasons to Bootstrap. But, for some companies, bootstrapping isn’t the right answer—or maybe it was the right answer, in the early-stages, but you’ve outgrown that phase and are now in need of greater capital.
Many entrepreneurs are black and white when it comes to capital: it’s either bootstrap or pursue VC funding. But this is a close-minded view. Sure, these are both great options, but they are not your only options.
Depending on your industry, your goals, your savings, your stomach for risk—and countless other factors—you might decide to go in one direction or another. In between, there are countless other options on the funding spectrum.
When you’re ready for additional capital, before you jump to VC, first consider the downside. There are risks to taking venture capital: your company may not see a significant return for many years (especially for certain industries and/or products) and your VC firm could fail before you achieve your goal return. Fundraising takes up a lot of time—time spent away from developing your products, chasing leads, and growing your customer base. And of course there are also the very obvious risks of dilution and loss of company control.
If VC is still the best choice for your company...great! Go for it! But for those companies who don’t want VC funding, for whatever reason, there are many alternatives for capital:
1. Friends and Family. Tapping into your close support system is an obvious first step for fundraising. While this is a very common—and effective—first step, beware of some of the issues associated with a friends and family round. First, it’s unlikely that your friends and family have pockets as deep as a VC firm so the amount of funds you are going to be able to raise are limited. You may need to raise small amounts of capital from a large number of people which can be somewhat hard to manage. Also, it can be a bit uncomfortable borrowing money from friends and family who are, generally speaking, unsophisticated investors. To avoid unnecessary awkwardness, be upfront and completely transparent about the risks of investment—and don’t accept any money that your friends and family can’t afford to lose. For more tips for managing this relationship, check out 12 Tips for Successfully Borrowing Startup Money from Family Members.
2. Angel Money. There are other sources for seed money outside of your friends and family. There are countless professional angel firms that can be viable options for early-stage companies. Read my previous post, Angel Investors vs Venture Capitalists: Targeting Funding Sources, for more information on the pros and cons of professional angels.
3. Loans. If your company is already generating some revenue, you may qualify for a loan. This can be a good option...if you qualify. Unfortunately banks aren’t into taking great risks with their funds so if you don’t yet have steady revenue, you may not qualify. But banks aren’t the only place to get a loan; you may also qualify for a loan from a venture debt fund or other finance company.
Contact Early Growth Financial Services if you need help finding a bank for your startup or require any other financial support.
4. Credit. Using your credit line to get the capital your company needs is pretty easily done...simply charge away! The downside is that your personal credit can take a hit if your company doesn’t perform as expected and you can’t pay back the funds on time. If you can stomach it, the low returns demanded by your credit card can be pretty tempting. And know that you’re in good company: you certainly won’t be the first company to use credit to grow your company.
5. Crowdfunding. While you may never be a crazy Kickstarter success story, the growing trend of crowdfunding can still work for you. What’s great about crowdfunding is that it forces you to build your brand and, subsequently, builds your customer base, right from the get go. As your funds are growing, so too is your exposure. Crowdfunding isn’t the answer for everyone, but it is an interesting road to explore. Check out my previous post Crowdfunding 101: The Social Media Craze for more insight into this phenomenon.
6. Strategic Partners. It might be worth your time to seek out businesses with which you could create a strong partnership—they may even be interested in a potential future M&A option. This might be a business that sells a complementary product or service to your offerings or in other ways offers something that could be considered added value to your business. Additional capital can be found in this synergy.
7. Government grants. Granted this is only a real funding option for non-profit organizations, but it’s a great option. There are many grants available for entrepreneurs. The SBA site can be a good place to start your search for available government funds.
I offer this list of funding alternatives not to say that these are your only options, but to give you a clearer perspective on funding. In other words: VC is only one of many funding options available to you. There’s nothing wrong with VC, of course, but pursuing other funding options can be a strategic move for both growing your business and strengthening your negotiating position if and when you decide that VC is what you do need. Start by clarifying your company goals and your capital needs. From here you can decide what road to go down to achieve your goals.
Are you considering alternate funding or had success with alternate funding? Let us know in comments below or contact Early Growth Financial Services for finance support.
David Ehrenberg is the founder and CEO of Early Growth Financial Services, a financial services firm providing a complete suite of financial and accounting services to companies at every stage of the development process. He's a financial expert and startup mentor, whose passion is helping businesses focus on what they do best. Follow David @EarlyGrowthFS.