Alternative funding: A short guide

Less than 1% of businesses receive venture funding. 

That being said, it is still the desired path for many businesses.

Luckily, there are many other funding options.

This explainer that will cover 

• Funding in a Post Growth Business 
• The problems with VC funding.
• Review the alternative funding options

*Alternative Funding is an alternative to Venture Capital Funding (VC)

Let’s dig in.

Section 1: Funding in a Post Growth Business

Funding as a Post Growth Business is no easy task. Investment in not-for-profit, steward Ownership businesses is a relatively new and underdeveloped field. 

In an ideal world, you start the business without external capital, but it's not an ideal world.

Money is often needed to get up and running.

This resource will not cover all the principles and dilemmas of funding in a Post Growth Business. We are in the process of defining our own funding journey, and once we know more we will release a more in-depth resource with our considerations and decisions. 

This we can say. It's very difficult starting up as a not-for-profit, steward-owned business (for many reasons) so staying independent is fundamental as it gives the control to make the necessary changes to governance and ownership in the future.  

Section 2: How Venture Capital Works

VC’s invest in a large range of companies during their (typically) 10-year cycle. 

They raise capital, invest in companies, and exit. 

This means they typically spend 
1-3 years investing, 

5-7 years growing their investments 

1-3 years selling/exiting.

The nature of how VC’s work might not match the way and rate your business should grow.  Investments typically need to grow 10-50x within the 5-7 years timeframe. 

In many cases, this forces you to prioritize growth over purpose. 

Sacrificing your long-term thinking with short-term goals.  

You end up in a situation where profits and growth guide your fundamental decisions. Committing yourself to a growth journey that’s nearly impossible to get out of.

Before taking on funding start by asking; 

Why grow?

Is it to:

- Develop your product or service.

- Advertisement. 

- Money for a one-time investment, like a new employee or equipment. 

Some companies need investment to get up and running, scale, or transform. 

If you are a business in that situation, this resource will cover a range of alternatives. 

Too much money
A business might also end up with too much money, but is at a stage where it’s not ready to spend that amount of money because of internal structures, and product or market maturity.

When flooded with money the business might lose the focus on carefully considering how money is spent or how costs accumulate. 

The result:

The stage at which you become a profitable business gets pushed further and further. 

This means you need to sell more, produce more, and use more resources. 

The exact thing you are trying to solve.

• VC is a model that particularly suits how software and technology work - easy to scale, no supply chain. Does that look like your business?  
• Is your business geared to bring on capital and introduce risk? 
• Is your market, business model, and purpose suited for exponential growth? 
• Why not build a great $1-10 million business where you are in control and the purpose drives decisions rather than a $100million where investors control, and you work to maximize growth and profit?

Why did you start?

If you stay independent, you will have the freedom to prioritize the purpose. 

Bring on VC, you are not working for you or the purpose anymore you are working for the VC. 

Was that why you started the business in the first place? 

VC is not the only option.

In fact, less than 1% of businesses receive venture funding. 

7 alternative funding options

This is not a complete list of funding models but the ones we have found to be the most popular alternatives to VC funding. The first 5 are non-dilutive, although the cost varies a lot from loans to grants.  

Revenue-based financing

INTRO: A type of loan where your monthly repayments are a percentage of your revenue, as opposed to being a fixed amount. Might be a relevant solution if you are already generating revenue, but need capital for a specific activity that will grow your business in the long run. Could be an investment in equipment or personnel. 

PROS:

• You won’t dilute your equity
• Can give you a quick cash injection
• Gives you flexibility rather than standard monthly repayments. Unlike traditional debt, repayments are tied to revenue, meaning if your business slows down, your payments also slow down. Good for certain businesses where revenue may be unevenly distributed month-to-month

CONS:

• You need strong margins to make this work
• You may need stable monthly revenue 
• Unless your planned use of funds is growth-related, this may be difficult to obtain

Profit Share

Profit sharing is a flexible way for growing businesses that don't fit the traditional VC model to get money for growth. In return, investors get a share of the company's profits over time. 

Investors get payments until they reach a multiple of the original loan or a maximum limit of returns.

PROS: 

• Flexibility: If the company makes less money, the payments will be smaller. But if the profits are higher, the loan gets paid back faster.
• Non-dilutive capital option for a business that needs money to become profitable without making changes to the ownership structure.

CONS: 

• Not a good solution if you need a big upfront investment for equipment or if profitability is achieved years in the future. 
  
   

Rewards-based crowdfunding

INTRO: Instead of equity, you offer your investors non-financial rewards. Founders should view this as a tool to engage early customers.

Offer a range of rewards to incentivize different tiers of investment ( $30 is roughly the most popular donation, so consider something significant at this price bracket)

PROS:

• Get early feedback on your product. Use this to gauge interest in something you are about to launch, particularly valuable from those discerning enough to invest money in it. 
• Advantageous to businesses with no traction. These businesses might struggle to raise equity funding and so will need to offer alternative incentives
• Chance to reward and engage loyal customers. This will convert them into brand ambassadors
• You don’t dilute your equity. This is particularly important for businesses who can’t sell their equity 

CONS:

• Investors may be less interested if there’s no financial return. You’re likely to attract a different type of investor—one more vested in supporting your product as opposed to its financial success.

Crowdlending

INTRO: Startups enter information about their business, how much money they need, and how they’ll spend the money: they are then matched to suitable private lenders

Lending platforms include Funding Circle, Kiva, and Lending Club. 

PROS:

• You can apply for loans of varying sizes
• You don’t dilute your equity
• It’s a fairly simple process. Decisions are often made quickly, meaning you can borrow with little delay

CONS: 

• Often come with higher interest rates than traditional loans
• May have to repay the loan regardless of your company’s success. Being late with repayment could harm your credit rating

Redeemable Equity 

Redeemable equity is a type of revenue-based investment where the company repurchases the investors' shares gradually using money generated from revenue.s.

The buyback share price is set at a fixed multiple of the shares’ original price so the investor typically receives 2x to 5x their investment.

PROS:

• Less dilutive investment as shares are repurchased
• More control for the founders.
• A flexible payment plan. If revenue slows down the repurchase will be lower. If the company grows the shares are redeemed more quickly.

CONS:

• Gross margins need to be large enough to support the repurchase.

Crowd equity

INTRO: Crowdquity is a popular way to raise money while also engaging a community around your product. Growing the company’s community of advocates in the process of raising capital.

Equity crowdfunding

Making your community co-owners in the business. it’s often advised to have  lead investors participating in your crowdfund, often constituting over 50% of your target. 

PROS:

• You can convert existing customers into investors. By offering equity, you strengthen their relationship with the brand. Don’t underestimate the power of word of mouth.
• You can tap into broader trends to attract new investors. Someone with a personal interest in your sector will recognise the market opportunity and will therefore be drawn to invest. 

CONS:

• You need to raise 50-75% before you launch. Other investors tend to lead a crowd raise in order for it to work. Some startups raise anywhere up to 90% of their total before they launch online.
• It requires significant day-to-day management. It’s not as easy as launching and seeing the money roll in. You need resources as well as a well-coordinated, well-publicised effort from all parties to pull off a successful campaign.