7 Fundraising Options When Your Startup is Not VC Backable
Building a successful startup can be an exciting and liberating endeavour but it can also be a very challenging experience. One major challenge entrepreneurs face is raising funds to take the business through the early stages. As a founder, you may have invested some cash to get things going, but you know that this may only take you so far. If you truly want to scale, you require financial backing from external sources. Many startups turn to venture capital to provide this financial backing, but it is not every startup that is venture backable.
For many founders, fundraising from venture capital can be complicated, stressful and time-consuming. It also comes with long-term implications including equity dilution and a decrease in ownership percentage for the founder(s). VCs write checks for startups when they see compelling ideas, presented by visionary founders focused on exploiting huge, sometimes global, market opportunities but who can also demonstrate traction.
Traction is a measure of the initial progress of your business that clearly demonstrates the value of the idea and the risks associated with investing in it. Not many startups succeed in demonstrating these to attract venture capital. Among those who can, there are some who may not survive the due diligence that comes before investors’ money hits their bank account.
Some startups are simply not VC or venture-backable and therefore risk stranding in the valley of death between a promising idea and a successful business. This is where non-dilutive funding, one which does not require any equity stakes or ownership in your company, becomes important. If you are finding it hard to access or persuade investors, or you are looking to avoid dilution, here are a few non-dilutive funding options to consider:
1 – Bootstrapping
Bootstrapping involves building a viable and successful business without financial backing from investors. The business basically relies on the founder’s talent, dedication and personal cash or there can even be no starting capital at all. TechCrunch, the technology website founded in 2005 by Mike Arrington and Keith Teare was bootstrapped by the co-founders, grew enormously to include CrunchBase, the startup database, and was eventually acquired by AOL in 2010. You can bootstrap your startup from personal savings, personal debt, your own expertise, and sometimes cash from sales but the odds are higher if you really want to scale.
2 – Friends and Family
If venture capital is not an option for your new startup and you do not have any savings or income to cover the needs of the business, your next option might be people around you who believe in your idea enough to invest in it. These include your friends, family and business acquaintances, and investments would typically range from $10,000 to as much as $150,000. According to a survey by the Kauffman Foundation, roughly 40% of startups are financed with non-dilutive capital from friends, family and associates.
3 – Small Business Loans
Banks and credit unions offer funding that must be repaid with interest, and this would usually come either in form of a personal loan or business loan. Although you do not need to give up equity in your business, you must show proof to the bank of your ability to repay the loan and interest. While some banks require collateral, others like to see that your business is already generating revenue. The Business Development Bank of Canada (BDC) supports small businesses with up to $250,000 in debt financing. To be eligible your startup must be based in Canada, have been in operation for at least 12 consecutive months and be generating revenue.
4 – Prize Money from Business and Pitch Competitions
Unfortunately, it’s not every startup or founder with a business idea who can make it to Dragons’ Den, excite the Dragons with a great pitch and come away with the promise of investment. Fortunately, here are hundreds of local pitch competitions that are less competitive that you should consider. For the most part, a business only needs to be in a particular geographic area to enter. Apart from additional capital raised from the prize money, these contests are a great way to practise your pitch to investors, promote your brand and make useful connections. For example, in July 2022, two Atlantic Canadian startups Hollo Medical and PragmaClin Research raised additional funding by winning $50,000 and $25,000 respectively in the Global Student Entrepreneur Awards Canadian National Championship in Halifax.
5 – Incubators and Accelerators
Part communal workspace and part mentorship development centers, incubators and accelerators are also sources of funding for startups. Incubators normally do not provide capital to startups and do not usually acquire equity when they do. Some accelerators invest in startups in exchange for equity stake. However, there are accelerators that support startups with both funding and resources without requiring equity in the company. An example is the Innovacorp Accelerate, a five-month program where participating Nova Scotian startups each receive up to $40,000 in non-dilutive, non-repayable funding to address key technical and business milestones.
6 – Grants and Subsidies
Grants and subsidies from government agencies and government-funded economic development organizations are very popular sources of non-dilutive financing available for your startup. There are grants for research and development, hiring, training, business travel and some capital expenses, while subsidies mostly cover employee wages. Most grants are non-repayable but there are a few that are repayable although interest-free and with very relaxed terms. Generally, most grants and subsidies require you to match the funds you will receive or have proof that you have injected a predetermined amount of funding from other sources. For example, a research grant from Mitacs requires startups to contribute 50% of the total cost of the project for which funding is sought while ACOA requires you to have received up to $100,000 in investment or sales revenue to access a matching grant.
7 – Tax Credits
Canada has one of the largest government funding programs for research and innovation in the world and federal and provincial governments offer different tax incentives to stimulate economic growth through research and development (R&D). The most popular one of these is the Scientific Research and Experimental Development tax incentives otherwise known as SR&ED. Depending on the size and type of your business, SR&ED incentives are a deduction against income and an investment tax credit (ITC) that can be refunded, up to 35% of your eligible expenditures. It could also be non-refundable, meaning that you can use the ITCs to reduce your income tax payable for the year. To access this source of funding for your startup, it is important to have all activities and expenses related to your claim well documented right from the onset, for example, formal employment contracts, a record of your research hypothesis, and the outcomes of your R&D work.
These are just some of the non-dilutive funding sources that you may consider if your startup is hard-pressed for funding and venture capital is not accessible or an option. These options are by no means exhaustive. If you would like to learn more about bridging the deep divide between your market-disrupting idea and the massive market opportunity you envision, feel free to reach out.2 –Tags: funding, fundraising, venture capital