This post originally appeared on startupnation.com/start-your-business
News, television and other media have pushed venture capital from specialized financing vehicle to the mainstream. It would be easy to assume, then, that venture capital is a good fit for every startup, but that’s not the case at all. In particular, venture capital is often not a good fit for startups.
Taking venture capital money requires giving up a big chunk of your company. It can require a crazy growth rate that you and your startup simply aren’t ready for. And that wad of VC cash inevitably comes with an investor who will continually look over your shoulder and ask questions as you make decisions on a regular basis.
For women founders, the venture capital picture is even darker: women-led startups received just 2.2 percent of venture capital funding in 2018.
So, instead of jumping directly to a venture capital conversation, when I come across promising women entrepreneurs, I ask them to consider these alternative funding options.
Bootstrapping is exactly what it sounds like: funding your company through your own resources and the cash you make while running it. Bootstrapping isn’t glamorous, but it’s often the best answer, particularly in the very early stages of a company.
Naturally, self-funding on what you make will almost always limit how fast you can grow, which is a huge disadvantage of bootstrapping.
On the flip side, however, doing it all on your own, without outside investment, gives you the most flexibility and control in running your business; that’s a big advantage. Effectively, you’re betting on yourself, and that’s something women excel at.
Even more, if you do seek outside investment later on, bootstrapping gives you a chance to develop traction, allowing you to negotiate better terms for that investment. That can be especially important to women founders who investors may lowball in negotiations.
Friends and family
Outside funding usually starts with friends and family. The reason is simple: who else will give you money for a business that hasn’t made any money, never mind a product or prototype yet?
Your friends and family have known you your whole life and have faith in your abilities because of that. Those relationships become especially important for women founders who may come from non-traditional startup backgrounds.
Still, founders do often run into two particular issues when it comes to friends and family. First, the reality is that not everyone has friends and family who can write a five-figure check just on the basis of an idea and a dream.
Second, even if your friends and family can write those checks, you have to be comfortable with the fact that, by investing in your startup, they are taking a big risk that could cost them their entire investment. And that can make for a really awkward Thanksgiving!
I get asked about debt from time to time. Getting a loan, such as a small business loan, is a traditional funding avenue for entrepreneurs, after all.
Debt is rarely a source of funding for startups, though. Traditional loans require revenue, collateral and a favorable credit rating, all of which most startups have in short supply.
However, if you are one of those few startups that can qualify for a loan, or if you have a founder who is both in a position to take out a personal loan and willing to take the very real risks attached to it, debt can be an option, too.
Angel investors are high-net worth individuals who invest their own money in startups. Angel investors have the freedom to pick and choose the startups and founders they want to fund, and they can do it quickly, because they’re investing their own money. It’s not unknown for an angel investor to write a check on the spot for a startup they feel passionately about.
The challenge with angel investors is they run the entire gamut from sophisticated investors who may be known experts in investing in your specific industry to your brother-in-law’s dentist who happens to have some money to invest and thinks a startup is interesting.
In other words, be thoughtful in the angel investors you invest time in cultivating a relationship with. Try to develop relationships with the investors who can bring something of value to your startup (i.e. advice, connections, resources, etc.) besides just monetary value.
Grants are an example of non-dilutive funding. Unlike equity funding or debt, non-dilutive funding does not require a chunk of your company, and you do not have to pay it back. It usually takes the form of grants from government agencies and foundations, such as the Small Business Innovation Research (SBIR) program.
Sounds terrific, right?
It is not without its challenges, though. Grant-writing can be very time-consuming and finding a grant program that fits your startup can take a lot of time and research.
Still, if your startup is a good candidate for a grant, this type of funding can be a good way to go.
By now everyone has heard of crowdfunding, but it’s important to understand the difference between rewards-based crowdfunding and equity crowdfunding:
Rewards-based crowdfunding is what we all remember from the early days of Kickstarter. Supporters were usually promised a product in return for their financial support.
For example, think back to the early Coolest Cooler campaign on Kickstarter. These entrepreneurs raised $13 million on the promise that they would deliver their combined blender-cooler product to supporters when it was ready.
In rewards-based crowdfunding, supporters get no equity in the company. Also, the promise of the product is only a promise, not a guarantee. (Which means five years later, some supporters are still waiting for their Coolest Cooler to arrive).
So as with grants, rewards-based crowdfunding can be a non-dilutive source of money for startups. Unfortunately, the average successful rewards-based crowdfund hovers at only a few thousand dollars, so the chances that a crowdfunding campaign can be a major source of funding is very, very small.
The crowdfunding landscape changed when the JOBS Act was signed into law in 2012. Since then, companies have been able to raise money through crowdfunding for equity. In other words, crowdfunding can now be used to raise money by selling shares in the company.
However, while it’s a terrific opportunity for startup funding, equity-based crowdfunding is much more complicated than putting your company on Kickstarter and waiting for the cash to roll in.
Equity crowdfunding can involve hefty reporting requirements, and the dozens (if not hundreds) of new shareholders can wreak havoc with your cap table (not to mention be a pain to administrate).
Before seriously considering equity crowdfunding, speak to an attorney experienced in the area who can help you navigate all the requirements safely.
Strategic partnerships form when a more established company partners with a startup that complements its products, services or strategy in some way. In return, the startup usually receives a combination of funding and strategic benefits such as support, resources and promotion.
Strategic partnerships, in my estimation, are incredibly underrated on the startup landscape. Because the investment doesn’t depend on huge rate of return, a much wider range of startups can take advantage of strategic partnerships than traditional venture capital.
For this reason, I have heard from many women founders that they have much more success raising capital from strategic partnerships than from traditional venture capital.
In addition, their companies have benefitted from the exposure and support available from working with a much larger partner.
There you have it! Seven solid alternatives to venture capital financing to consider as you position your startup for its next big chance to grow.
The post 7 Alternatives to VC Funding That Women Entrepreneurs Need to Know About appeared first on StartupNation.