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Whether you want to change the world or just be your own boss, the entrepreneurial virus is spreading fast. Bootstrapping is a noble goal, but an injection of capital into any business venture will help a company scale, gain credibility, and even tap resources beyond money. It’s no secret that startups and small businesses struggle to access venture capital financing. While venture capital financing is viewed as an early stage investment opportunity for small businesses, it is generally not recommended as an option, as the expectations of venture capital firms do not naturally match those of the startup founders – because of the “brand and spin” model I will discuss later. In this article, we are going to explore other avenues that any startup company can use when starting their business venture.
Related: Why Small Businesses Should Look For Alternative Capital Financing
Why the VC Mentality Doesn’t Work for New Businesses
I want to start by saying that I am not against venture capital financing. For the right company, a VC involves a huge amount of resources through finance, marketing, and sometimes a support team. The problem lies in the difference between the mindset, which creates challenges that most startup entrepreneurs don’t take up.
VC investments come with many challenges that revolve around the idea that your company has not yet proven its business concept. The VC ideology is “burn nine companies to win with the tenth.” They tend to buy companies with little to no concern about how they grow them and take a lot of equity while abusing the founders. Even with all the benefits that a venture capital organization brings, because of its ideology, you most likely fall into the group of nine. This is how venture capital funds look at it. If they put in $1 and take out $1,000, they get excited. Their expectations are not aligned well with those of their founders as you have to be conservative with your growth.
Venture capital financing is a traditional method of financing new businesses, but there are many alternative ways to raise capital for your business. Here are three options for raising venture capital funding:
1. Friends and family
An alternative to venture capital is through friends and family. We call this the triple F: ‘friends, family and foolish money’. It is the most basic form of crowdsourcing. Friends and family bring money with a degree of care, and in most cases they give you the independence to grow your business. They do not expect to be involved in business operations. They generally want to support your business because they have a vested interest in your success.
You also don’t have to go through any kind of review process or due diligence like you would with other funding sources. However, there is a small caveat to getting rewarded for entrusting their money to you.
2. Debt financing
The second option is debt, debt financing or debt partners. You can have different debt financing scenarios, including secured or unsecured debt. There are many options here and each has its own advantages. Whether it is a credit card or structured debt, this option generally becomes available when you have some income as the loan and interest are expected to be repaid directly through the company’s income stream.
The advantage of debt financing is that you retain ownership of your business and remain the decision maker when it comes to running the business. Once the debt is paid off, the business owner is released from all obligations to the lender. Another advantage is that the interest payments are considered business depreciation and are therefore considered tax deductible.
The most common option is a bank loan. It is quite easy to understand. As with a mortgage loan, the higher the loan amount and the longer the payback period, the higher the interest you have to pay. Banks assess your company’s financial situation and issue loan amounts accordingly.
3. Financing through customers
The third option is to fund your business through your customers. Be profitable by identifying your founding clients who will fund your business. It’s a bit more conservative, but you have the most control this way. You can always organize your capital differently in the future. You can go to Series A and find an investor with favorable terms when you have income. You can negotiate better terms if you have some income.
Related: You Can’t Get VC Funding for Your Startup. What now?
The reality is this: If you want to get your business off the ground, there are better alternatives to VC financing. Most companies do not initially require venture capital to succeed. Now that lean startup concepts have taken hold, many entrepreneurs and startups are finding ways to do just fine without them. So, before you spend time researching venture capitalists or writing your business plan, consider these alternative funding sources.