In the ever-evolving world of business, the ability to adapt and pivot is not just a luxury—it’s a necessity. The global economic landscape has undergone seismic shifts, reshaping the way businesses operate and strategize for the future. And with that has come new ways of financing small businesses and startups outside of traditional banks and grants.
Alternative financing options fall within two primary groups: dilutive and non-dilutive financing. Dilutive financing involves giving up a portion of ownership in your business, typically in the form of equity, to investors. This might be suitable for startups in their early stages, looking for significant capital to scale rapidly and willing to share future profits and control with investors. Dilutive financing ranges from angel investments and venture capital to equity crowdfunding.
On the other hand, non-dilutive financing doesn’t require giving up equity. It’s more about borrowing funds or capitalizing on anticipated revenues. It’s a go-to for small businesses keen on maintaining full autonomy, those with consistent revenue streams or those seeking a financial boost without long-term strings attached. Non-dilutive options range from merchant cash advances and online business loans to debt crowdfunding and recurring-revenue financing options.
Dilutive Financing Options
For high-growth startups, dilutive options have carved a significant niche, offering businesses the capital they need in exchange for a piece of the ownership pie. Startups often gravitate towards dilutive options, especially in their early stages, as they come with mentorship, industry connections and strategic guidance from seasoned investors.
Equity Crowdfunding
Gone are the days when startups had to rely solely on a handful of wealthy investors or institutions to get their big break. With equity crowdfunding, startups can now tap into the power of the crowd, offering shares or equity directly to the public for as little as $100 per investment.
Unlike rewards crowdfunding on platforms such as Kickstarter or Indiegogo—where backers might just get a product or a T-shirt—equity crowdfunding on platforms like StartEngine, Wefunder and Republic allows startups to offer actual equity to the general public for a stake in their future success.
Since it launched in 2016, equity crowdfunding has helped startups and small businesses raise more than $2 billion total online. This continues to democratize access to the startup asset class for the everyday American investor, while also increasing access to capital for startups and underrepresented founders that may have been ignored by the traditional venture capital ecosystem.
Ideal for: Early-stage startups looking to validate their business model, create buzz, turn their customers into brand ambassadors and raise capital from a broad audience without the stringent requirements of traditional VC funding. May work especially well for startups with large and engaged communities and existing audiences.
Accelerators and Incubators
Accelerators and incubators provide fledgling businesses with a potent mix of capital, mentorship and resources. In return, they often ask for equity, betting on the startup’s future growth. Organizations like Y Combinator and Techstars have been instrumental in nurturing startups, propelling them from obscurity to industry leaders. And since COVID forced a change to remote work, there have been several new remote accelerators and support networks for founders that can provide both professional and financial support.
Ideal for: Early-stage startups seeking intensive mentorship, resources and a structured program to accelerate their growth, especially those open to collaboration and networking opportunities.
Angel Investors
Unlike smaller equity crowdfunding investors—who might write average checks in the $100 to $2,000 range—angel investors are the high-net-worth (accredited) individuals who see potential in early-stage startups and are willing to invest their personal funds—typically writing checks in the $10,000 to $100,000 range—in exchange for equity. Their investment is not just monetary; many angel investors also offer their expertise, mentorship and networks to help startups navigate the challenging early days.
Ideal for: Startups in their early to mid-stages, looking for not just capital but also guidance, mentorship and access to an investor’s network.
Venture Capitalists (VCs)
As companies mature and seek larger funding sources, they may turn to venture capital (VC). The typical VC operates on a larger scale than an angel investor. They’re professional groups that manage pooled funds from many investors to invest in startups on behalf of their limited partners. VCs don’t just bring capital to the table; they also provide strategic guidance, helping startups scale and achieve their market potential.
There are also corporate venture capitalists (CVCs). Think of CVCs as the venture arms of established corporations. Companies like Google and Intel have CVC divisions that invest in startups, often with an eye on strategic partnerships or integrations that can benefit both parties. Due to the presence of prominent tech firms here in NH, there are several CVCs that may be an option for the right startup.
Ideal for: More established startups with a proven business model, seeking significant capital to scale and expand, and open to strategic guidance from seasoned professionals.
Non-dilutive Financing Options
While dilutive financing offers a wealth of resources and mentorship, non-dilutive financing has its own set of advantages, primarily allowing founders to retain full ownership of their venture.
Rewards Crowdfunding
Unlike its equity-based counterpart, rewards crowdfunding allows startups to raise capital by offering products, services or other rewards to backers instead of equity. Platforms like Kickstarter and Indiegogo have popularized this method, enabling businesses to validate product-market fit, engage with a passionate community and secure funds without parting with company shares.
Ideal for: Product-based companies with a large, engaged audience, looking to create a buzz or pre-sell their product to finance manufacturing.
Debt Crowdfunding
Also known as peer-to-peer lending, this method involves borrowing money from a group of individual investors rather than a traditional financial institution. Platforms like Prosper, Mainvest and Honeycomb facilitate these loans, often with more flexible terms and potentially lower interest rates than traditional banks.
Ideal for: Businesses seeking flexible loan terms and those who might not meet traditional bank lending criteria.
Revenue Share Agreements
These are contracts where startups agree to share a percentage of future revenues with investors in exchange for upfront capital. It’s a win-win: businesses get the funds they need without giving up equity, and investors receive a portion of the company’s future earnings, sometimes earning up to two or three times the original investment on platforms like Mainvest and Honeycomb.
Ideal for: Growing businesses with predictable revenue streams looking for capital without the constraints of fixed monthly loan payments. Also great for local businesses like coffee shops, restaurants and breweries looking to turn their local patrons into backers and offer other potential perks and rewards.
Merchant Cash Advances
Platforms like Stripe Capital offer this unique financing solution, where businesses receive an upfront sum of cash in exchange for a portion of their future sales. It’s a flexible option, especially for businesses with fluctuating revenues, as repayments adjust based on daily sales.
Ideal for: Retail or e-commerce businesses with daily credit card transactions, seeking quick access to capital. Also, potentially for recurring revenue subscription businesses where you want to get an up-front loan that will be paid back over time.
Online Business Loans
Beyond traditional banks, online platforms like OnDeck, Fundbox and Uplyft Capital offer business loans with a streamlined application process and rapid approval times. These platforms leverage data analytics to assess creditworthiness, often providing funds to businesses that might struggle to secure a traditional bank loan.
Ideal for: Small and midsize businesses in need of quick capital for operational expenses, expansion or inventory, especially those with strong online sales or invoicing.
Selling Future Revenue Streams
Some newer FinTech companies like Pipe allow businesses with recurring revenue models, such as a subscription as a service (SaaS) company, to get immediate access to their annual or multi-year subscriptions’ cash value. It’s a way to accelerate cash flow without taking on debt or giving up equity.
Ideal for: SaaS or subscription-based businesses looking to accelerate cash flow without waiting for monthly or annual payments.
Remaining Flexible and Adaptive
At the risk of sounding trite, it’s true that in the dynamic world of business, the only constant is change. Entrepreneurs are akin to sailors navigating unpredictable seas, where calm waters can suddenly turn stormy (and vice versa). The key to weathering these storms lies not in seeking a one-size-fits-all solution for funding, but in possessing the flexibility to adapt and the wisdom to choose the right financial vessel for the journey.
Brian Belley is an aerospace engineer turned tech entrepreneur. He founded Crowdwise and VentureWallet, which were acquired by KingsCrowd in 2021, and now serves as their vice president of product. He has more than 200 personal angel investments under his belt and is a board member for the Crowdfunding Professional Association.
Current Issue - May 2024