TRC 024: Alternatives to VC funding and their pros and cons

Read time: 5 mins

It’s definitely true that most early stage businesses shouldn’t raise money from VCs - the growth and revenue expectations for a VC to make a return are often just to high.

But where does that leave you as a founder if you have decided that VC isn’t the right path for you.

What are the other options.

This is our guide to the key options and their respective pros and cons:

1. Bootstrapping

This is self-funding your startup through personal savings or revenue generated by the business and typically involves getting started with sales as early as possible to support the costs of the business.

Pros:

• Full control: You don’t sell any shares to investors ****so retain complete ownership and decision-making power.
• Focus on growth: It encourages lean operations and customer-focused growth.

Cons:

• Limited resources: Much harder to achieve if you have large upfront costs before you can get to sales. It tends to be much easier if you can start with just your own skills and those of any co-founders.
• Slow growth: Growth is typically slower when you have to rely on the sales you generate to fund growth.

2. Angel Investors

Angels are typically wealthy (at least relatively) individuals who provide capital for a business start-up, usually in exchange for convertible debt or ownership equity.

Pros:

• Mentorship: Many angel investors bring valuable experience and networks.
• Flexible agreements: Often more less stringent terms than traditional VC and are unlikely to seek control (run a mile if they do try for control)

Cons:

• Limited funds: Typically offer less funding compared to VCs.
• Dilution of equity: Like VCs, they require you giving up a share of ownership

3. Crowdfunding

Raising small amounts of money from a large number of people, typically via crowdfunding sites such as Crowdcube, Seedrs, Kickstarter etc.

Pros:

• Market validation: Provides a platform to validate the product with the target audience.
• No equity loss: Some don’t require you giving up equity (eg Kickstarter).

Cons:

• Success not guaranteed: Campaigns can fail to meet funding goals - these days you typically have to have at 50%+ raised before you launch your campaign for it to be a success .
• Resource intensive: Requires a lot of marketing effort.

4. Government Grants and Subsidies

Funds provided by government institutions for specific projects or purposes.

Pros:

• Non-dilutive: Grants don’t require equity or repayment.
• Support for R&D: Often available for innovation and research projects.

Cons:

• Highly competitive: Application processes can be competitive and time-consuming - success is far from guaranteed.
• Usage restrictions: Funds typically have strict usage guidelines.

5. Debt Financing

Borrowing money that must be repaid with interest, usually from banks or financial institutions.

Pros:

• No equity dilution: Allows founders to retain ownership.
• Tax benefits: Interest payments can be tax-deductible if the loan is for purely business purposes.

Cons:

• Repayment obligations: Can be a financial burden if revenue doesn't grow as expected.
• Credit requirements: Often requires good credit and collateral - which can often include you providing a personal guarantee for the loan - especially when you are just getting started.

6. Incubators and Accelerators

Organisations that support startups by providing resources, mentorship, and sometimes funding, typically in exchange for equity.

Incubators focus on early-stage startups, helping them develop their business model and product, while accelerators aim to scale up the growth of more established startups.

Pros:

• Mentorship and support: Offer access to experienced entrepreneurs, investors, and industry experts.
• Networking opportunities: Provide connections with potential investors, customers, and partners.
• Resource access: Can include office space, administrative support, and sometimes seed funding.

Cons:

• Equity requirement: Many require equity in exchange for participation, which can be costly in the long term.
• Intensive commitment: Programs can be time-consuming and require founders to focus solely on the accelerator/incubator activities taking some attention away from the running of the business day-to-day.
• One-size-fits-all approach: Programs might not be tailored to the specific needs of each startup, potentially leading to mismatched advice or resources.

As you can see, there are various alternatives.

Definitely don’t think VC is the automatic or only option.

We would always suggest that founders think about what success looks like for their business and then work backwards through the sorts of funding that might be the best fit with how to get there.

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