Alternatives to Venture Capital for Business Startup Funding
There are many alternatives to venture capital and angel investors for those that are seeking finance to get their business started up. Venture capital funding is not always the best way to get startup cash. If you pitch your company too early, it might cost you too big a slice of your business.
The earlier in its life, the more risk there is in investing in a new company. If you can get started using another source of funds, you might get the venture capital you need at a lower cost. Before seeking any form of finance, you should first compile a good presentation of what you have to offer. A good video would not hurt, and evidence that you have figured the potential income and profit over the first few years will also be of benefit.
Having done that, you will be in the position to make a great pitch for funding. You don't need much to put together a viable product to get your business started. So what are your alternatives to venture capital or angel funding?
Accelerator Funding: A good option is to apply for inclusion in an accelerator program, such as 501 Startups, AlphaLab and Techstars. You can find a good list of accelerators and incubators here: webbmediagroup.com/list-of-incubators-and-accelerators
These offer mentoring, business support and also startup funding to get your business going. It is not free of course, and will cost you a small stake in your company: expect around 5% for $20,000 startup investment. Most accelerator programs focus on one type of business: energy, health, technology or even geographically based businesses. Thus, Amplify is open to LA businesses and Astia only for women-led startups. What are some other options?
Startup Weekends: These involve entrepreneurs and those aspiring to be entrepreneurs getting together for a weekend. Attendees try to inspire others to become part of their team, and then teams work to build a viable product and figure out the leanest startup methodology and how to develop a customer base.
At the end of the weekend, each team presents their products and ideas and gets feedback from the experts attending. Over 36% of businesses that start up during these weekends are still going three months later. 3-D printing makes it easy to create prototype products to display.
Crowdfunding: This involves friends and others investing small amounts in advance for specific benefits. For example, if you are making a music video, you could offer a signed copy of the video plus a t-shirt for a nominal investment. You might ask for $40 from each investor, who in turns gets some free product. Your state must approve interstate crowdfunding if you want to extend this outside your own state.
This works for some but not for others. The vast majority of success stories you hear about involve people who are already recording artists, or who have already built a large fan base. Even if only 5% of their fans pay the $40 they can still raise several thousand needed for their new video. So be careful – this is not really for beginners with no track record. You will be unlikely to get sufficient response.
Kickstarter is a good example of a crowdfunding service – but keep in mind that not is all what it seems. Most success comes from people who have been trying for a long time and have finally built up enough following to make the concept work.
Startup Business Loans: If you are seeking growth capital, then there are sites that specifically offer this type of investment. Lending Club will offer you loans at low rates to enable to get yourself started. Taking such loans will help you prevent venture capitalists owning a percentage of your business. However, you must have a good credit score and must maintain your payments – even if your business is doing badly. Funding Circle is another such loan company that focuses on startup businesses.
Selling Securities: Another option is to do it yourself via Rule 506 of Regulation D of the Securities Act. This enables you to raise an unlimited amount of money by selling securities in your business without registering these securities or filing reports with the SEC. You could also make a direct public offering if you have an accountant who can lead you safely through the legal minefield.
Title II of the Jumpstart Our Business Startups (JOBS) Act now enables entrepreneurs to advertise that they are raising capital. If you can raise enough capital to get a viable product working, you can get out into the market to assess feedback and start to grow a proper business. Once you have established a quantifiable market, you can then seek seed and development funding from venture capitalists or angels.
Try not to give away too much of your business before you start. By seeking startup funds using any of the above methods, you may be able to raise enough to get started. This then makes your business a much better proposition to angels and venture capitalist, which in turn reduces the stake they will want in return for their investment.