Most start-ups turn to VC funding when it comes to raising capital in their early stages due to their deep pockets, in exchange for equity. However, there are instances when VC funding may not be the best fit for your start-up depending on a variety of factors:
Consider these, there are many other options that may be a better fit for you and your start-up, and Qapita has compiled a list of non-dilutive alternatives to VC funding that you can explore that may be more suitable.
Popularised by Indiegogo (2008) and Kickstarter (2009), crowdfunding is the collective effort of many individuals who network and pool their money, usually via the Internet, to support initiatives by other people or organizations. Some notable crowdfunded start-ups include Oculus (virtual reality headset) which was purchased for $2 billion by Facebook in 2014 and Tile (Bluetooth-connected device) which successfully raised more than $2.5 million. With more than 600 crowdfunding platforms globally, it is much easier nowadays to reach out to a larger audience and raise the funds needed.
In exchange for the donations, funders usually expect something in return such as a free copy of your product. Crowdfunding not just helps to raise funds for your start-up, it also works as a marketing channel for you to reach out to your target audience and to test your value proposition. The amount of donations you receive is an indication of how receptive the audience are to your business idea. This can help you to adjust the pricing of your product or service, and to ensure that there is sufficient supply to meet the demands of prospective customers.
The downside of crowdfunding is that it might take a long time to reach the amount of capital needed in the business, and you might not be able to raise sufficient funds altogether. According to the statistics on the Kickstarter website, out of the 497,809 projects launched, only 37.7% of projects were funded successfully. Out of the successfully funded projects, the majority raised below $100,000 and only 2.5% of these projects raised more than $1 million.
After all, crowdfunding’s suitability depends on the industry you are in and your goals. If you require a huge sum of capital and on a tight timeline, you might want to look elsewhere given the significant uncertainty in timing and quantum.
"The unique value of crowdfunding is not money. It’s the community." Crowdfunding is a viable option to gain acceptance and validation from customers.
While we are familiar with the term venture capital investment, the concept of venture debt is quite foreign to most founders. Nonetheless, the market for venture debt has been steadily increasing, and already makes up more than 10% of the venture market currently.
Venture debt is a type of debt financing, usually provided by specialised financial institutions or banks to venture-backed companies. It offers additional capital in the form of debt and provides companies the opportunity to scale their business quickly and reach their milestone while at the same time, reducing the need for equity dilution.
With the rise in popularity of venture debt, there is an increasing number of credible venture debt firms such as InnoVen Capital (funded by Temasek and UOB), Genesis Alternative Ventures (backed by Malaysia’s CIMB and Sassoon family), Alteria Capital India Fund, Trifecta VDF and Unicorn India Ventures Debt Fund.
The funds are better suited for start-ups that are burning a lot of capital at the moment for needs such as expensive equipment, and less suited for financing long-term growth. They are also sometimes used as a means to avoid equity down rounds. Founders use these funds to prepare for the next round of equity fund raising rounds and achieving higher valuations. Venture debt providers usually combine the loans with warrants or convertible notes to compensate for the higher risks since most start-ups do not have positive cash flows or assets to use as collateral.
The downside of venture debt is of course, the debt obligations. Although rare, defaulting on repayment terms may result in the liquidation of the company. It is also often only available to venture-backed start-ups.
Venture debt should not replace venture equity, instead it should be used to complement existing equity financing.
Oftentimes when we think about financing start-ups, grants may not be at the top of our mind when there are many options available. However, there are actually many grants and resources available at your disposal depending on the jurisdiction. There are generally four types of providers for grants - governments, regulators, start-up associations and nonprofit/charitable organizations.
Governments often provide grants to support start-ups as they play an important role in the economy and make up a significant portion of the country’s GDP. In this region, Startup India has more than 120 schemes to assist start-ups, Indonesia has a “1000 Startups” program to boost entrepreneurship across the country and Singapore has invested an additional S$150 million into start-ups amid COVID-19 shifts.
Particularly in Singapore, here is a list of grants available (not exhaustive) that may be suitable for your start-up:
Revenue-based or Receivables-based Funding
Revenue-based funding, also known as royalty-based funding, is the method of raising capital from investors in exchange for a percentage of the start-up’s gross revenue in the future. It is distinct from debt financing as the repayment schedules are relatively flexible since payments are directly proportional to how well the company is doing. It also differs from equity funding as investors do not have direct ownership in the business. Revenue- based funding is most suitable for tech start-ups (especially SaaS companies) with subscription-based models that produce steady streams of revenue. The downside is that it may take a long time to repay the loan since repayment is based on revenue, especially when revenue streams are uncertain.
Similar to revenue-based funding, receivables-based funding is a type of asset-financing where start-ups use their receivables i.e. outstanding invoices owed by customers, as collaterals to receive financing. Such funding deals are usually structured as asset sales or loans by receivable financing companies. This helps start-ups to receive easy and immediate capital and relieve their liquidity burden. However, receivables-based funding may come at higher costs than other forms of business loans due to the fees and interests.
Weigh the tradeoffs of revenue-based and receivables-based funding carefully before getting into a contract!
The choice of financing ultimately depends on the stage of growth your start-up is in, and the objectives of these funds. Non-dilutive funding might be attractive as it reduces the need for equity dilution, but it might be insufficient to meet the business needs. Hence, it is important to consider various aspects discussed thus far to reach the optimal decision.