There's no escaping the reality about starting a business: you need funding. Sure, there are startups that bootstrap their way to success. But for most of us, raising money is absolutely necessary for starting up and scaling fast.
The solution for most startups and founders is to raise money by giving up their equity. You create a pitch, work your tail off to get in front of the right investors, and hope they say "yes." If they do, you give up a portion of your equity in exchange for the operating capital you need. As a result, you have diluted your equity position and now own less of your company.
Luckily, there are alternatives to the traditional equity fundraising path that do not result in dilution. While everything in business (and life) has trade-offs, these options give you access to capital without the dilution.
After many investors said we were crazy, we decided to launch a crowdfunding campaign on Indiegogo to raise money for our video doorbell idea. It worked. In just 30 days, I launched a campaign that raised $600,000 from approximately 4,000 customers. That $600,00 allowed us to develop our first version of the hardware and ship to backers - without any dilution.
In addition to the funding, crowdfunding is effective because it gives you consumer feedback, orders, brand awareness and validation for your idea. Each one of those items is helpful in raising your valuation for a traditional equity round after your crowdfunding campaign. Crowdfunding is a go-to-market strategy and a funding source.
Initial Coin Offering (ICO 2.0)
ICOs have come into the spotlight due to blockchain companies raising loads of money. However, many of those ICOs have come under regulatory scrutiny. While the laws and regulations around ICO's are changing, startups can still use them in a compliant way to gain access to capital - in a similar process to crowdfunding. People are now referring to this evolved process as "ICO 2.0."
If you're curious about this route, it's imperative to check with securities attorneys or work with a platform who knows the regulatory landscape.
One example is StartEngine. They have an SEC compliant turnkey ICO solution provides founders with an option to offer a non-convertible preferred share class that pays a dividend, and does not cause dilution on an equity level. Instead of equity, investors get a revenue share.
In specific circumstances, debt can be a very appropriate and effective tool for raising capital. Debt can take the shape of short term loans, lines of credit, purchase order factoring, etc. You can also take loans off company assets, including real estate, equipment or intellectual property.
Another option many founders overlook is in the supply chain. In many cases, your manufacturer can offer lines of credit to cover the costs of materials or labor.
Debt does have its downsides, so it's important to work with an advisor or your CFO to determine the appropriateness and risks of a debt vehicle.
It's important that you consider these options and then discuss with your legal and financial counsel to evaluate on a deeper level. Each option comes with its advantages and risks, so carefully assess all the angles to determine which, if any, are most suitable for your business.
Also, this article intends to provide alternatives and compliments to traditional equity fundraising. It does not intend to criticize the equity fundraising model. There are pros and cons to each, and my belief is that they can work together to help you navigate the funding process for starting and scaling a business.