For the most part, venture funding has been robust over the last ten years, the best since the dot.com boom of the late 1990s. This latest boom was driven by the unusually high valuations for tech startups doing seed rounds and initial public offerings. Profitability was not the objective; instead, growth was king. As with any market activity, what goes up inevitably comes down. When investors realized how the pandemic would affect the long-term growth potential of tech companies, much greater attention was given to a sustainable business model with a substantial profit outlook. Also affecting speculative investing were inflation, international turmoil, and the possibility of a recession. Lastly, the AI craze (we were here 25 years ago with Dot.com) has sucked much of the investment oxygen out of the room.
Uncertainty causes investors to sit on their hands and take a wait-and-see attitude. Risk and the potential for failure are killers for those trying to raise funds. A robust venture financing market happens when greed trumps the fear of loss. Unfortunately, the fear of loss is the emotional dominant during uncertain times.
However, there are ways Entrepreneurs can still access various alternative funding options to support their startups when venture capital dries up.
If you have the resources, bootstrapping your startup is the simplest, surest way to start. First, you maintain full control of the business. Capital can be raised by using personal savings or reinvesting profits from another company while minimizing expenses to grow the business organically.
Another standard method of getting seed capital is through friends and family. Contact your network for investments or loans to fund your startup. To do this, you must be sure the business has a strong possibility of succeeding and that you have a solid strategic objective that is market focused. As you can imagine, failing can screw up many personal relationships. Also, if friends or family won’t invest, you should rethink your business proposition.
Over the last few years, crowdfunding has become a viable method of raising seed capital. The regulatory requirements are pretty light, and the technique allows small investors to get involved in the ground flow without much risk. In addition, there are several online platforms like Vested, Kickstarter, Indiegogo, and GoFundMe to raise capital from a large group of supporters.
Even though venture capital is currently on the sidelines or being attracted by so-called AI ventures, Angel investors are high-net-worth individuals who invest in startups in exchange for equity or debt. These individuals tend to be savvy and experienced investors who are always looking for great ideas backed by a competent management team and are not prone to be influenced by the current trend or economic environment.
If you have equity in real estate or other assets, small business loans are an option. Approach banks, credit unions, or government-backed programs like the Business Development Bank. This option should be considered if you have a sound business plan and a short horizon to positive cash flow.
Government grants are available to small businesses and startups, and many still need to be distributed. These often don’t require repayment or equity but can be competitive. There are so many grants available provincially or federally. Therefore, it is wise to seek the services of a certified grant writing and procurement service.
Participating in startup incubators or accelerator programs that provide funding, mentorship, resources, and networking opportunities is an excellent way to position your company for funding and support in identifying investors and making presentations.
Form alliances with established companies to provide financial support, resources, or distribution channels in exchange for equity or other benefits, including licensing.
If your startup generates revenue, consider cash-flow financing. Cash-flow financing involves selling your accounts receivable to a financing company in exchange for immediate cash and sometimes receiving advances on purchase orders. I have helped many companies grow by accelerating their cash flow.
For the right product or service, generating early revenue by offering pre-sales of your product or service to customers before it’s officially launched can be an alternative to raising debt or equity.
Convertible Debt is a popular method for some investors to invest in your company requiring minimal security. Your business secures a loan from investors with the option to convert the debt into equity later, typically during a future funding round.
As you can see, several tools are in the toolbox to fund your business. Each funding method has advantages and disadvantages, so carefully consider which option best fits your startup’s needs and goals.