“Money makes the world go round.” And in the startup world, more is always more: Nothing feels better than being able to say you raised millions of dollars in venture capital.
Landing a meeting with a venture capital firm is an awesome accomplishment. It means your business endeavor is intriguing enough that some folks with deep pockets have taken notice—and they may even be willing to back you financially.
However, there are downsides to raising venture capital that many new business owners fail to consider. For one thing, it can be extremely competitive. Even if you have the most innovative idea in all of Silicon Valley, there are dozens (if not thousands) of innovative tech ideas being born every day. Yours may be the best, but if it’s not flashy or memorable, it might not be seen as a good investment.
Additionally, some small businesses are simply slower-going than others when it comes to being profitable. There is absolutely nothing wrong with starting a business with a sustainable growth model that will build over time rather than burning bright and fast. But VC firms aren’t typically interested in sustainable, and if you want to build a business that’s around for the long haul, you might want to go a different route when it comes to funding.
There are plenty of other reasons why your business may not be an attractive investment for VC firms. Maybe your business idea is seasonal, in a “declining” industry, or frankly, you don’t fit the arguably limiting mold that venture capitalists seem to love so much.
Seriously: Do not be discouraged. If you have a good head on your shoulders and a more-than-solid business idea, there are plenty of alternatives to raising venture capital in order to fund your small business. The following are just a few examples.
There’s one thing you can’t deny when it comes to raising venture capital: It comes with strings attached. Venture capitalists tend to value growth above anything else, even if it’s not sustainable in the long run. And raising VC money means you have higher-ups to report to—your investors will want to see the numbers, and if their investments are in danger, so is your company.
Now, part of the reason you wanted to become a small business owner was so you could be your own boss, correct? If you have a VC firm to report back to constantly, it likely won’t feel like you’re the one in charge.
One of the more sustainable routes is applying for a small business loan. Unlike venture capital, term loans like these are typically reserved for more established businesses and not necessarily startups. It’s easier to qualify for a small business loan once you’ve established a solid history in business, including a few years of proven revenue.
But also unlike venture capital, funding through a small business loan means you still stay in charge of the direction of your business. You can apply for a small business loan for virtually any reason that has to do with your business. And, while lenders don’t typically give out multi-million dollar business loans, they do fall in the range of $25,000 to $500,000—hardly amounts to sneeze at.
You will have to pay your small business loan back, of course, but often these repayment schedules are more than manageable. And, with the influx of cash up-front to take on a project that will help expand your business, your ROI could be substantial, to say the least.
Say you’re thinking of launching a new product that’s going to help people all over the place—why not put more of the power in the hands of those consumers?
If your business idea is good and fills an in-demand need, reward-based crowdfunding may be a great route for you. Instead of relying on just one venture capitalist or VC firm to back your endeavor, crowdfunding involves raising small amounts of capital from a large number of people. Even tiny contributions can add up to substantial capital when it comes to crowdfunding, because the more that word gets around, the more people will contribute.
Additionally, crowdfunding means you maintain all creative and practical control of your company, without having to repay any funds raised. Rewards-based crowdfunding means your backers will receive something (or things) in return for their contributions, depending on how much they were able to give.
One popular example of crowdfunding that worked was the Veronica Mars Kickstarter movie back in 2013-14. The movie raised over $5 million from a record-breaking number of backers, each of whom received various rewards based on how much they contributed. The rewards ranged from a digital download of the completed film to a voicemail message recorded by their favorite cast member.
Of course, you don’t need to produce a movie with a sincere cult following in order to run a successful Kickstarter or other crowdfunding campaign. But beware that it is quite a time suck—if you want regular consumers to actually put money behind your business, they need to have a good reason to do so. And even more than that, you need to be able to put in the time and marketing efforts to make sure the right people hear about it.
Finally, one of the biggest appeals of venture capital is the fact that you don’t have to pay it back. While your company may be on the line if things go awry, you yourself likely won’t hold liability for investor capital lost.
A grant works much the same way. Unlike a loan, you don’t have to pay the money you receive back. And like venture capital, grants—and large ones in particular—can be extremely competitive. Plus, you have to use the grant money you receive for its intended purpose.
Despite the fact that they are competitive, there are a lot of small business grants out there if you’re willing to look hard enough. Some are awarded by the government and others by private institutions, and many award small business owners of a certain demographic, such as women and/or racial minorities.
Choosing to find an alternative to venture capital is brave. It means eschewing the “easy” way of starting a business (i.e. with lots of “free” money up front) to work towards building something more sustainable in the long run. Hopefully, one of these alternatives will help you get there.