7 Alternatives to Venture Capital Funding
For nearly a decade, venture capital funding has been the go-to financing option for millions of startups. Justifiably, most of the top startups today got a foothold in the market with the support of venture capitalists. According to Crunchbase, new businesses got a whopping total of $445 billion from global venture funding in 2022 alone!
However, financing a business through venture capital has its downsides. The most notable is that because of the VC feeding frenzy, as many as 90% of businesses that deserve the funding never get it.
Luckily, there are many other great alternative financing options that you can consider. This post covers seven viable financing options that can help you get the funds you need.
1. Structured Equity Products
Structured equity financing is a non-dilutive and flexible form of investment designed for individuals looking to invest in SMEs to maximize their returns while minimizing risk. It is one of the most creative forms of investment because it allows entrepreneurs to secure funding to grow the business without further diluting their equity stake in the business.
Here is how structured equity products work: an investor typically buys into multiple businesses, often startups, by purchasing pieces of assets, bonds, or debts from multiple companies, but they do not 'own' them outright. These assets are derived from currencies, stocks, commodities, derivatives, or some other indexes. The investor's returns are based on the value of the underlying asset they buy, which has a predetermined feature such as a maturity date or capital protection.
A structured equity product has the best features of equity and debt financing. As a result, most investors today choose this option to fund existing businesses as a part of their minimal-risk investment strategy.
A grant is a non-repayable type of financing that institutions such as government bodies give to organizations or individuals to develop their businesses. Unlike venture capital and most other types of traditional finance sources, grants are free money that you can use to expand and run your business without worrying about repayments or terms. There are many grants available for businesses that fit specific criteria.
While getting a grant for your business would be wonderful, the main issue is that opportunities appear and disappear fast. The criteria a business or entrepreneur must meet can also be quite difficult. If you or your business meets the set criteria, you would still need to have a business plan at the center of the negotiation for a grant.
To get started with grants, search for potential past or upcoming grants you qualify for as an entrepreneur or business. Understand the criteria, rules, requirements, timelines, and minimum and maximum amounts the grants offer then consult a legal and financial expert for guidance on how to increase your chances of getting the funding.
Microfinancing is a form of lending designed for businesses and entrepreneurs that cannot access traditional funding sources. Many small businesses and startups with little to no collateral find it challenging to seek debt financing. Microfinancing allows them to borrow microloans of as little as $10,000 and up to $50,000 to support their businesses.
Microfinancing is an excellent solution for upcoming businesses started by low-income entrepreneurs. Most of these types of financing are provided by non-profit organizations, credit unions, and traditional banks. In the United States, the Small Business Administration (SBA) often acts as a third party that connects microfinancing lenders with eligible borrowers.
If you do not have access to any other form of financing, you may be eligible for microfinancing. Go to the SBA's microloans page to learn more about this type of financing, whether you qualify, and how to apply for a loan.
4. Revenue Lending
Is your company already generating revenue? If it is, and you can leverage that option to seek funds to expand or grow, then you can opt for a revenue-based financing option.
As the name suggests, revenue financing is a way to raise money from investors who will receive a percentage of the business's gross revenue in return. With this financing option, investors make a lump sum investment to receive a regular share of the business income until they have earned a predetermined amount.
Note that revenue-based financing is different from debt financing in many ways. The most notable difference is that investors are not paid interest on the outstanding balance, and there are no fixed payments. The amount paid to investors depends on the business's gross revenues and may vary from month to month.
5. Angel Investors
Much like venture capitalists, angel investors are high-net individuals who back small businesses and startups in exchange for equity in their companies. Angel investors are also known as private or seed investors. However, they differ from venture capitalists in that they invest their own money based on their risk assessment, unlike venture capitalists who often employ a risk capital company to invest their money.
While most angel investors typically seek equity stakes and even control over decisions in the business for their investment, most offer favorable terms because their primary focus is to help the business prosper rather than reap its profits.
While some angel investors can agree to seed a startup early, some professionals may demand you to have an exit strategy or unique demands for an acquisition or during an IPO.
6. Private Equity
Like venture capital financing, private equity financing may require a significant amount of business equity in exchange for financing. Unfortunately, some private equity financiers have given this type of funding a lousy name for their habit of gutting the businesses, making their profits off the good pieces, and abandoning the rest of the business.
There are many types of private equity financing. For this reason, it can be a better alternative to venture capital financing for a promising startup or business. It can be the ideal source of capital for businesses with a clear restructuring plan and plans for rapid growth.
Because private equity firms often drive a hard bargain to take control of the businesses they fund, this type of financing is not ideal for you if you have long-term prospects for your business. However, if you are looking for a big and immediate change with a large investment, this may be a sure way to get all the money you need to let an investor's money work for you.
7. Mezzanine Financing
Mezzanine financing is a type of small business loan with the features of debt and equity financing. When you secure mezzanine financing, a lender gives you a business loan with repayment terms that adapt to the business's cash flow. This type of financing is similar to debt financing, except that the lender may convert their debt to equity should you default on repayment.
Mezzanine financing is one of the best ways for small to medium-sized businesses to raise funds for specific projects or expansion plans. The funds can be raised through debt and equity financing or mezzanine funds. These are pooled investments similar to mutual funds that offer mezzanine benefits to qualifying businesses.
Most businesses seek mezzanine funds during their expansion phase and rarely during the startup seeding phases. Investors also consider this type of financing favorably because it has a high return rate of between 12% and 20% annually but lower risks than unsecured debts.
Advantages of Using VC Alternative Financing Sources
Here are the most notable advantages of the venture capital financing alternatives we have covered.
Structured equity products
- It allows a business to borrow capital using its cash flow as security.
- Structured financing is less burdensome to a business owner since you will not have a loan to repay.
- The rate of repayment of a grant is often much lower than that of a commercial loan. Some grants do not require any repayment at all.
- Securing a grant once may open the doors to getting additional financing from other sources, such as banks.
- It is easy to maintain grant funding as long as the business meets the set conditions.
- With a microfinance loan, you can run and upscale your business simultaneously.
- There is a high chance of consideration for a loan if you do not qualify for traditional small business loans.
- You do not need collateral to qualify for a microfinancing loan.
- You do not need tangible assets or equity collateral to secure a revenue-based loan.
- Quicker access to financing with flexible repayment terms.
- You can secure financing while retaining control of your business.
- Most angel investors also provide strategic and operational expertise for new ventures in addition to capital funding.
- You do not need collateral to have an angel investor invest in your business.
- To protect their investment, private equity providers charge low management fees for risk management benefits. These may include carrying out due diligence for the business's investments, managing the business's portfolio, and helping with diversification.
- Private equity firms can create value for a business by accelerating its value proposition in the market. This leads to improved cash conversion and diminished risks for the business.
- Mezzanine financing is an excellent source of low-cost capital for a growing business.
- Mezzanine financing includes an option to convert loan debt to equity, which grants the business greater freedom to invest for higher yields.
Unlock the Power of Alternative Financing Sources
There are many alternatives to venture capital financing. From structured equity products to micro-financing, there are options for those with little to no collateral, as well as for those with established revenue. It is important to carefully consider each option and understand the criteria, rules, requirements, and terms associated with them.
Gynger is a unique financing alternative, offering non-dilutive capital to fund software expenses through flexible payment plans. With Gynger, companies can secure quick funding and negotiate the best value without sacrificing operating capital. By spreading the cost of annual software expenses over a manageable schedule, businesses can better allocate their resources and achieve their goals. Find out how much capital you can be approved for today.