Securing venture capital always seems like the holy grail. VC funding can pump a significant amount of capital into a business but comes with many strings attached – loss of control and equity dilution being major ones. On the positive side, there are many ways to secure funds that do not require you to sell ownership.
Here are alternative funding methods tech startups can look into, with real-life examples of who used these routes successfully.
Bootstrapping is the process of financing a startup from personal savings or reinvesting the profits back into the business. Most entrepreneurs bootstrap during the early stages so that they maintain full control over their company without giving away equity.
Bootstrapping may slow down growth because it involves limited resources, but it has enabled numerous startups to lay strong foundations.
Basecamp is one of the classic examples of how bootstrapped companies really work. It started up in 1999, and the company, for quite a number of years, operated as a bootstrapped company. It operated relying just on the revenue being made to fuel its expansion, and it was without investor pressures and was a hundred percent controlled by its owners.
Crowdfunding sites such as Kickstarter, Indiegogo, and Crowdcube help startups raise funds directly with their target customers. They can opt for reward crowdfunding, where donors receive rewards in the form of a product or perks, or equity crowdfunding, where investors get an equity share in the company as a reward for their contribution.
Crowdfunding brings in capital; it also does an enormous job of market validation, showing whether your product or service really has demand in the market.
Scottish craft beer company BrewDog raised millions through equity crowdfunding with its ‘Equity for Punks’ campaign. By offering shares to its customers, BrewDog generated capital and fostered brand loyalty among its investors.
Government grants and startup competitions are the other means of raising the required capital without dilution. Innovate UK and Horizon 2020 are the other sources that give grants and non-dilutive funding to innovative startups in the UK. The application remains competitive, but successful applicants benefit from a sizeable financial injection.
Pavegen is a UK-based startup in energy-generating floor tiles. The company secured over £2 million through grants and competitions, mainly significant funding through Innovate UK. That helped the company scale up its operations and spread all around the globe.
Revenue-based financing is another type, where businesses receive funding based on future revenue levels instead of equity. There are several providers, Clearbanc and Uncapped, which offer such financing, where startups can grow without giving away equity.
While there is no equity dilution, revenue-based financing can be more expensive to repay depending on the performance of the business’s revenue. The upside is that repayment terms are flexible and tied to revenue.
Floom is an online marketplace for independent florists. The company used revenue-based financing from Uncapped. This enabled the company to scale without giving away equity, and repayments were made as a percentage of revenue rather than fixed payments.
Business loans happen to be one of the most traditional methods of capital raising. For startups, the choices include loans provided by banks, online lending services, and the British Business Bank. These loans typically give startups full ownership control while at the same time usually carrying lower capital costs than other alternatives available.
The loan, however, will bring along debt obligations that might prove challenging for qualification, especially in early-stage startups.
Before Monzo became a household name in the fintech industry, the company was able to raise a £1 million loan for early funding rounds. This loan provided enough funds to go around developing its technology platform before later raising equity funding.
An angel investor is generally referred to as an individual with a high net worth. This kind of funding helps provide equity in terms of convertible debt instead, unlike venture capital companies, which would mostly focus on their usual venture capital deals.
The challenge often lies in finding the right investor, and there is still the potential for equity dilution. However, the involvement of a seasoned angel investor can provide support beyond just financial backing.
TransferWise (now Wise) is another international money transfer service that raised its first £1m from a pool of angel investors, led by one of the world’s finest angel investors – Taavet Hinrikus, the first employee of the world-famous Skype, helped it grow into being the multi-billion-pound organisation it is today.
Suppliers may offer vendor financing, shipping their wares with payables past due. That can often ease severe cash flow constraints and put less pressure on the immediate finances of a startup.
Vendor financing is also generally industry-specific and can put supplier relationships under undue stress when overly relied upon.
In its early years, Dell Computers made use of vendor financing by its suppliers to delay payment until after the company sold the products to its customers. This helped Dell grow fast without much capital expenditure.
The UK government offers R&D tax credits for companies investing in innovation. This is tax relief; it can significantly unlock cash for reinvestment. Because of this, many tech startups are attracted by their interest in being more developed.
The procedure might be complicated, along with strict eligibility criteria. Financial rewards, however, make up for the hassle created during the process; therefore, mostly for the startups, it works out.
A London-based tech startup, Improbable, could use R&D tax credits to fund its virtual world simulation software development in developing its technology and then reinvest such credits without drawing further external equity funding.
For tech startups, venture capital is just one of the ways you can scale up. There are alternatives like bootstrapping, crowdfunding, revenue-based financing, and governmental grants, all offering aid for raising capital while maintaining control and ownership.
Acknowledging the unique obstacles that stand between tech startups and capital, Nucleus has developed specific solutions for the industry. Through Nucleus Business Loans (NBL) and Revenue-based Loans (RBL), SMEs can scale their growth without compromising on equity or control.
Let’s help you take that next step in your startup journey with flexible financing tailored to your needs. Reach out to us today and see how we can fuel the growth of your business.