3 Substitutes For Startup Venture Capital Funding
The entrepreneurial bug is catching on quickly, whether you want to make a difference in the world or are content to be your own boss. Bootstrapping is a noble endeavor, but any business venture that receives additional funding will be able to grow, establish credibility, and even access resources that go beyond cash. It is no secret that small businesses and startups find it challenging to obtain venture capital funding. Despite the fact that venture capital financing is regarded as an early-stage investment opportunity for small businesses, it isn’t typically advised as a choice because the expectations of venture capital firms don’t naturally align with those of the startup’s founders — due to the “burn and turn” model I’ll discuss later.
This article will explore additional options that a startup business can take advantage of when starting its enterprise.
The idea that your company hasn’t yet validated its business concept is one of the many challenges that come with VC investments. The VC philosophy is “burn nine companies to win with the tenth,” and they frequently purchase businesses with little to no thought given to how they will grow them, taking a sizable equity stake in the process while abusing the founders. Even with all the advantages a venture capital organization offers, you’ll probably fit into the first nine due to its ideology. That is how venture capitalists view it. They enjoy the thrill of investing $1 and getting $1,000 in return. Their expectations differ from those of their founders because slow growth is required.
Although venture capital funding is a common way to finance start-up businesses, there are many other ways to raise capital for your business. Here are three methods for obtaining funding for venture capital:
1. Family and Friends
Getting funding from friends and family is one option for venture capital. This is the most basic type of crowdsourcing, which we refer to as “friends, family, and foolish money,” or the triple F. In most cases, friends and family will give you the independence you need to expand your business while also contributing money with a certain level of care. They don’t anticipate taking part in business activities. They typically want to assist your company because they have a stake in its success.
In addition, unlike with other sources of funding, there is no need for any kind of review or due diligence. The small catch is that you will be compensated for their confidence in you with their money.
2. Debt financing
Debt, debt financing, or debt partners are the second choice. Different debt financing options are available, including secured and unsecured debt. There are numerous options available, and each has a unique set of advantages. As the loan and interest are anticipated to be paid back directly through the business’s revenue stream, this option, whether it be a credit card or structured debt, typically becomes available when you have some revenue.
The benefit of debt financing is that you keep ownership of your business and retain operational decision-making authority. The business owner has no further obligations to the lender once the debt has been settled. The fact that the interest payments are regarded as business write-offs and are therefore deductible from taxes is an additional benefit.
A bank loan is the most typical choice. It’s not too difficult to comprehend. Similar to a mortgage loan, you will have to pay a higher interest rate the more you borrow and the longer the payback period. Banks will evaluate the financial state of your company and offer loan amounts in accordance.
3. Financing through clients
The third choice is to use your customers to finance your company. Be successful by identifying the customers who will provide the initial funding for your company. Although it is a little more traditional, this method gives you the most power. In the future, you can always restructure your capital. When you have revenue, you can move up to series A and find an investor with good terms. When you have some money coming in, you can bargain for better terms.
The truth is that there are superior alternatives to VC funding if you want to launch your business. The majority of businesses can succeed without initial venture capital funding. Many entrepreneurs and startups are finding ways to succeed without the lean startup methodology now that it has gained traction. Therefore, think about these alternative funding sources first before spending any time looking up venture capitalists or writing your business plan.