Headlines out of Silicon Valley make it sound like the only way to grow a business is to raise millions — or even billions — from venture capital.
VC funding is one answer for startups looking to raise money for growth, but it isn’t the only answer. And for many startups, it doesn’t make sense to go this route.
Not every business venture wants — or needs — to scale exponentially to be successful. Taking on VC money often requires giving up a considerable portion of ownership in your company, in exchange for intense pressure to deliver the return on investment venture capitalists expect. Plus, seeking venture capital funding often means raising millions of dollars, and not every startup needs that much funding.
In the first quarter of 2022, the median Series A round raised $10.3 million, according to data from equity management platform Carta. Meanwhile, a November 2022 survey from e-commerce software Shopify found business owners with one to four employees spent $60,000 in their first year.
In this piece, we’ll cover these funding options:
- Angel investors
- Friends and family
- Investment firms for bootstrappers
Funding for bootstrappers: What are your options?
In 2020, college admissions counselor-turned-entrepreneur Will Geiger found his business in that funding gap.
He and his brother Brian had launched Scholarships360 as a side project in 2010. By the height of the pandemic, the company, which offers a scholarship database and advice for college applicants, was earning enough revenue to warrant the brothers taking it on full time.
They had gotten to the point of hiring freelancers and seeing revenue growth, but money was still an obstacle. “I felt like we were making a lot of decisions just to influence month-over-month revenue rather than building for the long term,” Geiger said.
While Scholarships360 had revenue and some traction, Geiger acknowledged it wasn’t a true tech product that would catch the eye of would-be investors. “We didn’t have the type of business that was necessarily VC backable. It was a blog at that point,” he said.
He and Brian worked through what it would cost to build the features they wanted to add to Scholarships360 and came to $500,000. Then they took another look and got their target down to $250,000.
Why not seek more? They knew how efficient they had been in the early days of the business when cash was tight, and they didn’t want to risk taking on more funding than they truly needed. “I can envision money fueling bloat and fueling distractions,” Geiger said. Plus, if they asked for more money, Geiger knew they’d be giving up more equity.
They found a solution via one of the options we’re about to explain. If you’re in a similar position, hoping to grow your startup without taking on the demands of venture capital, consider these funding alternatives.
7 business financing alternatives to venture capital
1. Angel investors
Pro: Significant cash influx
Con: Can be time-consuming and difficult to secure
Give up equity? Yes
Angel investors usually provide funding in the early stages of a startup, sometimes supplying the cash a business needs to manufacture products or get off the ground. Angel funding can also be called seed investing.
More than 17,000 startups worldwide raised angel or seed funding in 2021, for a total of $29.4 billion, according to Crunchbase.
An angel investor may contribute to a startup in exchange for equity, sales royalties or both. Equity of more than 25% is uncommon for angel investors, even if a group of investors (called a syndicate) comes together to offer funding. Angel investors are often entrepreneurs themselves or are well-established in their industry, and sometimes they’ll offer their expertise or network as an asset to the startup in addition to funds.
“Raising money through angel investors is normally in the $50,000-$500,000 range, but that will depend on the number of angel investors and the type of investment,” said Jason Cherubini, a startup financing consultant and lecturer in business administration at Stevenson University in Maryland. Seed rounds — which often include angel investment — can get up to the $2 million range, but beyond that, a venture capital raise is more likely to be required, he said.
After determining the amount they wanted to raise, Will and Brian Geiger of Scholarships360 wound up meeting members of an angel investing syndicate through Will’s graduate program at the University of Pennsylvania.
The due diligence process took several months, Geiger said, but it was an easy decision to go with their group of interested angels versus courting funding from scratch by reaching out to potential investors. Scholarships360 finalized its $250,000 raise in October 2021.
“It was an opportunity to bring some other people into our corner,” Geiger said. “That money allowed us to take our business to the next level.” The website now has a team of eight, along with three advisors; since the raise, it has converted from an LLC to a C corp.
Pro: Relatively easy to access
Con: Interest rates can be high
Give up equity? No
While “debt” can feel like a dirty word for entrepreneurs, it can be an effective way to access capital that doesn’t require giving up equity in your business — so long as you use it responsibly. And not all debt is created equal.
About 17% of entrepreneurs used business loans from banks or other financial institutions to launch their companies, while 9% used credit cards, according to 2016 data from the U.S. Census Bureau shared by the Consumer Financial Protection Bureau.
Loans can range in amount from a few thousand dollars to more than a million. The average small business loan amount is $663,000, according to Federal Reserve data cited by Bankrate.
Getting a loan or a line of credit may not require formal meetings at the bank. Online loan options that cater to startups make it easier to get funding for your project, but be aware they may have restrictions. For example, you may need to keep a certain level of cash on hand at all times for the life of the loan.
Of course, the downside to debt is having to pay it back with interest. And interest rates for certain types of loans, like credit cards, can be high. Credit card interest rates tend to be around 20%, while banks charge around 3 to 12% interest for a small business loan.
Angel and seed rounds can also be structured as debt to reduce risk for investors. Convertible debt can be traded for equity when the startup later raises more money. The benefit to a founder is you don’t need to determine a valuation to issue convertible notes, which can help you access capital in the early days of your company.
Pro: Can rally your user base
Con: Must bring strong group of backers
Give up equity? Maybe
Crowdfunding allows anyone — even those who aren’t in the startup world — to contribute to a company’s funding, often in exchange for a reward such as the first chance to own a certain product. The founders don’t give up any equity, but must deliver the designated reward(s).
Equity crowdfunding, meanwhile, allows people to contribute to startup campaigns in exchange for a stake in the business. The SEC’s Regulation CF allows companies to raise up to $5 million in a 12-month period.
One benefit of crowdfunding is that anyone can contribute to your startup, not just wealthy investors. The people who are willing to contribute to your campaign likely overlap with your current or potential customer base, allowing you to foster brand loyalty through a crowdfunding raise.
But it can be hard to garner attention for your crowdfunding campaign, and you’ll need a strong base of supporters to show up on your behalf. Only about 40% of projects launched on rewards-based crowdfunding platform Kickstarter succeed. Crowdfunding campaigns typically don’t have an all-or-nothing approach, but you’ll still need to find ways to stand out from the crowd to reach your goals.
Pro: It’s “free” money
Con: Can be arduous to find and apply, and cash amounts might be relatively small
Give up equity? No
Grants for startups can help you grow a business without diluting ownership or taking on debt. Grants may be offered by state and local governments, community organizations or private entities.
Cherubini said local and state grant and incentive programs may allow you to reduce your business costs early on, for example, by offering incubator space or training programs, and connect you to investors who might offer funding later.
Pay equity startup 81cents raised $75,000 from five grants, including the three University of California system entrepreneurship programs. The company was acquired by salary negotiation firm Rora in 2022.
Kat Weaver, founder of e-commerce company Locker Lifestyle, raised more than $100,000 in equity-free grants, including one from the FedEx Small Business Grant program. She sold the business for a 6-figure sum in 2022.
5. Friends and family
Pro: Can be relatively easy to secure if you have a wealthy network
Con: Not everyone has a wealthy network
Give up equity? Maybe
Many entrepreneurs start looking for funding from people they already know. A friends-and-family raise can take many forms, such as loans, equity or even a simple cash gift.
Not every founder has access to a network of wealthy investors, and your friends and family may not be able to contribute as much to your business as established startup investors. But they probably want to see you succeed and believe in your business almost as much as you do.
If you’re nervous about asking your family for help or know they’re not in a position to do so, consider friends of friends or other loose connections. The key is to leverage the closest circles of your network before seeking help from true outsiders.
But before you ask for funding from those closest to you, make sure to do your research. A friends-and-family round requires startup founders to prepare their finances, talking points and ask amount — just as they would prepare to pitch any other potential investor.
Friends-and-family deals tend to be the smallest startup investments: they’re often between $10,000 and $50,000, according to the Securities and Exchange Commission (SEC). But this modest level of fundraising may go a long way in the early stages of your startup.
6. Investment firms for bootstrappers
Pros: Often includes mentorship
Cons: Can be competitive
Give up equity? Yes
While investment firms have long been options for startups, a new crop has popped up recently that’s friendlier to the bootstrapper mentality. They’re not expecting you to go on to raise millions of dollars and quickly scale, so their terms are set up in a way that makes it a win for them and for you if you decide to stay small.
Many of these firms use models where the startup pays back some or all of the investment using revenue as the business grows. Most focus on early-stage companies that already have traction and revenue.
TinySeed is an example for SaaS founders that operates as an accelerator, offering funding, a community and mentorship. It invests $120,000-$220,000 for 10%-12% equity, and once the company becomes profitable, shares in the dividends. If the company sells, TinySeed receives either their ownership share or their investment minus dividends, whichever is greater.
Another creative option is Calm Company Fund, an investment firm that offers community and mentorship opportunities. It invests in SaaS or software-enabled businesses via what it calls a Shared Earnings Agreement that aligns “the interests of investors and founders in a wide variety of outcomes, while giving founders full control of their business and keeping as much optionality as possible open for the business.”
Investors receive a share of founder earnings once they hit a certain threshold, and over time, that decreases investor equity. Once the cap is repaid, the founder no longer has to make those payments, and investors hold a smaller equity piece that benefits them should the founder ever choose to sell.
Masters.vc, an investment firm that focuses on female founders, allows founders to pay back their investment in full via a multiple using a percentage of revenues. Or, founders can pay back part of their investment while investors maintain a smaller piece of equity for the long term.
A few other firms to check out if you’re interested in this route include Purpose Ventures, Coralus and Lighter Capital.
Pro: No equity dilution
Con: Eats up energy and resources
Give up equity? No
Here’s an option that’s often overlooked: Is it possible to fund your growth through your own revenue?
This isn’t easy, and for some startups — for example, those building a product that requires a lot of up-front investment — it might be impossible. But before you look for outside funding, especially funding that dilutes your equity or requires you to take a big personal risk, explore whether it’s possible to front-load revenue generation.
Doing so might not result in as big of a cash influx as raising funds, and you might have to grow slower than you prefer as a result. But sometimes it can be enough to fund your operations.
Some entrepreneurs do this by offering a consulting or services arm to the business. Depending on your industry, services can be lucrative and you might only need a small number of clients to bring in a meaningful amount of money. That cash can then help fund the growth of other parts of the business that require a slower ramp-up.
The main downside of taking this route — and what makes it prohibitive for some entrepreneurs — is it requires energy, time and resources to offer services. To make this work, you have to structure the consulting business so you have resources left over to dedicate to the part of the business you truly want to grow in the long term. Because of that, it doesn’t make sense for everyone.
How to choose an alternative funding route
While funding fell into place for Geiger and Scholarships360, Alexandra Suchman is still debating which funding route is right for her startup, Barometer XP. The company, founded in 2019, creates games to promote communication and team-building in professional settings.
Suchman made plans in early 2022 to run a crowdfunding campaign, but put it on hold to build more revenue to show potential investors. She hasn’t returned to the idea because later in the year, the company was accepted into Conscious Venture Lab, a Baltimore accelerator focusing on purpose-driven startups (her company became a public benefit corporation in November 2022).
The accelerator follows a popular model whereby they fund some participating startups at the end of the program. Unlike other accelerators, they don’t charge a program fee to founders that don’t get funded.
The structure of the accelerator program has given her space to learn about various ways to grow the business and seek funding, Suchman said. “So much of entrepreneurship is figuring it out for yourself, but it’s so exhausting,” she said. “It’s nice to be in an organized learning environment with other startups.”
She’s learned how to refine her business model with market research and is practicing how to pitch to investors. But while Suchman would love to get investment from outsiders, she worries about the fast growth and profitability VCs may want to see. Instead, she thinks an angel round could help her connect with investors with cause-driven portfolios. If revenue continues to grow, business loans to self-finance could be an option. Crowdfunding is also still on the table.
The one thing Suchman knows for sure: she wants to maintain control. “I’m concerned about somebody else coming in who has different values and a high stake in the company and shifting the priorities,” she said. She’s heard horror stories from fellow entrepreneurs, some of whom are in her accelerator program.
“We can absolutely see, if we can get access to even $500,000 or a million, that we could do so much so quickly” to scale up. She wants to use the eventual funding for product development and to bring on a technical cofounder who can focus on improving Barometer XP’s online platform. “But we have to be really careful about where to get that, to do it the way we envisioned, that feels right.”
Before deciding on a funding method, you’ll need to figure out your goals for your startup, your plans for reaching those goals, and what’s truly necessary to execute them.
Only then will you be able to determine which VC funding alternative works for you, Geiger said. “That was the hardest thing: figuring out what we actually wanted and needed.”