Ifyou run an early stage startup, you’re probably familiar with the catch-22 of raising your first round: It’s hard to get traction until you’ve got some cash to work with, but it’s hard to bring in cash before you’ve gotten some traction.
You already know fundraising can be extremely challenging and can become a full-time job that takes you away from improving your product. If you have the right introductions to the right people, or a user base that’s robust enough to attract investors’ attention on its own, you’ll likely be able to start with angel investors and VC firms, which is ideal.
But, if those inroads aren’t lining up for you, you may try securing funds for your early-stage startup with these four alternative methods:
Method #1: Syndicates
Fundraising potential: $5k — $20k per investor
Syndicate investing is when a group of investors (backers) co-invest in a startup. Typically there’s a lead investor who’s an experienced angel or successful startup founder with relevant industry experience, and who then invests with other backers into a portfolio of startups. The lead investor’s monetary interest adds credibility, but the risk is more broadly dispersed.
AngelList is a good place to try out this method, especially since they handle many of the nuts and bolts of the fundraising process. As a management fee, they’ll take 5% of the total amount your company raises. Other syndicate options include Portfolia (invest in women-led startups) and Syndicate Room(European firm) to name a few.
- Remove investment barriers: It may be easier to ask for a smaller amount of money from a larger number of people. When you set up a syndicate, you’re opening the door for investments of around $5–20K per investor.
- Enable advocates: The type of investors likely to contribute to syndicates may be a great fit for your startup anyway. They are often radically different in mentality and approach than institutional investors, which means they may be able to do more in terms of seeding your company in their respective communities.
- Increase scope: They may also have differing backgrounds/geographies that allow them to add new ways of thinking about the problems your company tackles, or the ability to offer unique insights on how to enter the market.
- You pretty much only get one shot: If you screw it up, the syndicate model will likely not work for you in the future.
- Too-many-cooks-in-the-kitchen: With each additional funding member will come added opinions about how you should operate and it might be more harmful than helpful.
Method # 2: In-kind-trade
Fundraising Potential: Decreased costs (supply chain, software, business development…)
When your primary needs for cash are to pay suppliers, you could consider trading a small percentage of your company or your services for access to that material.
Axiom Communications in Vancouver, B.C. used this method on a small, short-term scale when they were in need of marketing materials, but didn’t want to wipe out their marketing budget getting them made. As a primary internet provider in the area, they approached a print shop who was already a customer of theirs. The printing company agreed to make brochures and other marketing materials for Axiom in exchange for several months of free internet. Both companies were able to save hard cash, get something they already needed, and form a local business relationship.
If the method of service for goods doesn’t work for your company, trading a portion of your company might. Say you were starting a chocolate bar company, but the cost of wax paper wrappers was making them exorbitant to produce. A paper company may be interested in giving you access to their materials in exchange for a piece of your candy bar company.
The upshot for the paper company is diversifying how their product is used and possibly breaking into a new market. On top of these things, they hope to get partial ownership and profit off of the chocolate company’s venture.
Note that the trade of product for company shares is the least favorable of all sources of funding, as your suppliers or supply chain will never have the same knowledge about your business — or vested interest in your success — as experienced investors would. You may also find that future investors are more hesitant to partner with you because of your involvement with this risky model.
- Your investors have skin in the game: both businesses profit together
- Your investors can optimize your supply chain: you can receive supply chain prices lower than any of your competitors. This means you can grow significantly faster and compete at an unmatched price point
- This will only work for certain types of businesses: And if it’s an ongoing agreement, you need to be sure you’ll always need the thing they’re providing.
- It can be very risky: What happens if your materials provider goes out of business and you need to develop a partnership with their competitor? What happens if trade rules and exchange rates change unfavorably? What happens if your Version 2.0 no longer depends on what they’re offering? You should have safety nets built into your agreement.
Method #3: Pay-as-you-grow model
To strengthen confidence in newer investors, you could opt for an immediate partial-payback tied to your first flow of revenue.
This is similar to the Kickstarter or Indiegogo methodology, but instead of capital from many in the market, it’s from someone with more money to give your company than the average consumer and involves a different trade-off. Rather than returning their investment with a physical product at the end of the development period, you’d give them a portion of the cash earned through your initial product sales or closed deals.
- Capital upfront (always a good thing): you get a helpful advance but the pace of returning this to investors is directly to a percentage of sales, lowering risk and allowing you to build a better product faster
- Double the marketing: You’ll still have to find this investor and invest in marketing to your larger customer base. It’s hard to find a customer who is also an investor and willing to invest that much capital. It’s an additional campaign on top of your product launch/Kickstarter or Indiegogo campaign to find your larger pool of customers.
- This won’t be beneficial if the math doesn’t work out: The risk of going broke by paying back your investors quickly is definitely there, so your calculations need to be sound.
Method #4: Accelerators & Incubators
Fundraising Potential: Percentage of startup and/or non-financial incentives
Oftentimes, these two phrases are used interchangeably but differ mainly in if your startup is receiving funding. An incubator provides office space and/or core resources such as business training, access to mentors, etc. An accelerator offers these basic needs and additionally, capital investment to help early stage startups hire employees, build their product, and make preliminary go-to market decisions. Because of the additional benefit of a cash injection, accelerators are more beneficial and more likely to lead to your startup’s success.
With accelerators the capital investment comes in exchange for a percentage of your company. Some of the top accelerators include: Y Combinator, 500 Startups, Techstars. Each has their own restrictions and model on what percentage of your company they take in exchange for capital.
- More than just capital: Joining an incubator or accelerator means so much more than funding help. They’ll provide the ability lower your startup risk through giving you other resources, like instruction and advice, partnerships, workspace, and prototyping.
- Well-rounded startup training: I love working with companies that have gone through an acceleration program because it verifies that they’ve done the work to think through many of their needs and obstacles. Their product or service and plan of execution is solid and well-informed.
- Beneficial network: Becoming part of an accelerator or incubator will also give your startup the opportunity to meet the right people. Investors may come to your group’s pitch day and mentors could become angels after seeing what you have to offer. On a day-to-day basis, you’ll be surrounded by and have access to top-notch entrepreneurs.
- Make the shortlist: Accelerators and incubators get thousands of applications and are highly competitive. From a branding perspective saying you were selected into these elite programs means significant people believed your startup will have success. This gives you credibility when talking to investors. For example, TechStars gets thousands of applications and they only select 8–12 startups to invest in at a time. When I mentor those startups at InterimCMO, I know they’re really good and have a solid understanding of their business and industry. And from those I’ve mentored from TechStars there is a very high success rate.
- Loss of lots of company shares for less upfront cash: you may give away a hefty share of your company in exchange for a small amount of cash.
- Get caught up in the startup world and lose focus on your product/service: Incubators may be soft cozy places where it’s easy to forget that you need to focus on finding customers for that product you’re polishing.
Angel or institutional funding is still going to be your best bet, as it’s a cleaner process involving more experienced parties, and will look less risky when you head into your next round of fundraising. But, the above are viable alternatives if the traditional path isn’t working out. Should you decide to go down the alternative path to meet your fundraising needs, keep in mind the risk-components of each.