PSA: Venture Capital is NOT your only option
In our last blog, we discussed why investors might be telling you that you are “too early” to receive funding for your company. This week, we’re myth busting. VC investments are not the only way to fund a business. The media has created the impression that “a successful startup” has secured millions in venture capital, came perilously close to failing at several points, and then somehow managed to exit as a unicorn. But this is simply not the reality of most businesses in the United States.
Let’s put a few things into perspective. Here are a few interesting statistics about the entrepreneurial and investment markets in 2021.
According to NPR, 5.4 million new companies were filed with the US Census Bureau.
The National Venture Capital Association reports that 17,054 VC deals were conducted, resulting in a total of $329.9B.
CrunchBase reports that $12.8B was invested in pre-seed or seed-stage companies.
While there is no exact way to tell how many of those 5.4 million new companies applied for VC funding in 2021, there is no hiding from the fact that the vast majority of them did not receive venture capital. Only 3% of VC investment dollars went to pre-seed and seed companies. Does that mean that only 3% of the companies that were created in 2021 are profitable businesses? Absolutely not - myth busted.
✨✨ Venture capital is not the only sign of success for an entrepreneur. ✨✨
Not every company fits the “venture” mold. In fact, most do not. However, we fully recognize that it takes capital to create capital. Starting a business is a luxury that many cannot afford, causing many founders to seek out VC investments and repeatedly hear things like: “No,” “You’re too early,” “This is a lifestyle business,” and “How will you scale?” So what is an entrepreneur to do?
Step 1: Figure out if VC is right for you
Venture-backed companies have specific requirements, and many successful companies do not fit this mold. Let’s break down some common aspects of a VC-backed company.
A major solution to a major problem
Rapid growth
Consistent revenue
A massive market
An impeccable team
An exit strategy
Companies that don’t check off most boxes above are unlikely to thrive in the VC space. In particular, companies that don’t plan for an exit strategy are a big no-no in the space. The other factors, market size, scale, revenue, etc. all contribute to the likelihood of your exit being a success. Remember, VCs are investing in your company and only see returns on those investments when you undergo a major liquidity event.
It’s also important to remember that even if your company does fit the mold, VC dollars don’t come free for founders. With each investment received, you are giving up a slice of the pie you have worked hard to build. VC dollars are exchanged for equity in your company and, often, a loss of control over your company’s trajectory. Each investor is unique in terms of their interactions with your company, but most become major stakeholders in your company. While many founders feel that it’s better to have a small slice of the pie than no pie at all, there are many that would rather maintain their autonomy and pursue alternative sources of funding.
Step 2: If VC isn’t right for you, get creative with your fundraising.
If you’re a company that isn't VC-backable or you prefer to retain a larger percentage of ownership and autonomy, there are many ways to obtain funding. Alternative funding can take a bit longer to secure and may require more effort than a VC pitch, but it has given many early companies the capital they need to develop.
Accelerators
Accelerators are startup boot camps and come in many forms. Some accelerators take a small portion of equity and provide investment, much like a typical VC; others do not. If you’re not sure if you should seek VC funding, an accelerator is also a great way to determine if your company is a good fit for the process. As an added perk, an indirect way accelerators add to your fundraising potential is by growing your network. Getting to know Angel investors, other founders, grant programs, etc. all increase your chances of meeting someone that could help you fund your venture in the future.
Friends and Family
Friends and family may be able to give you small loans or investments to get your company up and running. While convenient for some, this is not a solution for many underrepresented founders or entrepreneurs that don’t have expansive networks. If you can raise funds this way, that’s great – if not, don’t fret! Keep building your network as you explore some of these other options.
Angel Investors
Angel investors are similar to VCs but tend to invest much earlier. Angel investors can be individuals or syndicates, which resemble a traditional fund in many ways, so do your research before reaching out. Angel investing is quite a diverse world and each group/individual have specific traction expectations and theses. Be warned, however, that angels typically take a chunk of equity, so they might not be a strong fit for founders that do not have an exit strategy,
Grants
Grants are free and offer capital to founders and companies that meet specific needs. Many family offices, government institutions, and even universities offer grant programs for entrepreneurs that fit particular criteria. Grants tend to be smaller checks than other forms of investment, but our philosophy is that $1000 in the bank is still more than $0.
Crowdfunding
There are many platforms that allow entrepreneurs to seek funding from potential customers or interested parties. GoFundMe is an excellent example of how crowdfunding can work on a personal level, but many organizations have spun off platforms focusing specifically on product and company launches. To succeed, you need to have an idea that adds value to your customers, a strong network ability, and some patience - crowdfunding can take a while. An added perk of crowdfunding is that you can engage an early audience!
SBA Loans
Government-sponsored SBA Loans can benefit early-stage entrepreneurs by offering more favorable lending conditions than personal loans. Several types of loans are available, often requiring less collateral and lower interest rates than traditional lending processes.
While this is not an exhaustive list of alternative funding sources for startups, we hope it puts you on a path toward finding your early capital infusions. This list can also be used by startups on the venture path as well, should you struggle to get early funding.
Regardless of the investment path you choose, don’t forget securing funding is just the beginning. Without spending time on your business strategy, customer development, and validating the market’s readiness for your concept, even $1M won’t get you very far. Not sure where to start? Come work with us at The Scientific Startup.
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