The legend of the successful startup follows a predictable pattern. Founders with a dream connect with wealthy investors, who believe in the founders’ vision. The company then uses the massive check to grow into a major disruptor.
In some cases, the legend holds true — but not all. Plenty of startups find their footing and grow into successful companies without the backing of angel investors or venture capitalists. Photography community startup ViewBug has been in business for more than 10 years and acquired more than 2.5 million users without a dime from investors. When watch company MVMT sold to Movado for $200 million last year, the company’s founders and employees kept 100% of the take.
Startup founders should be accustomed to going against the flow, yet many continue to believe that investors guard all the roads to success. That narrative serves investors well, but not every startup needs investor funds to scale. Money from other funding methods spends just as well as money from VCs. Before taking a dime from people who want a share of the company, founders should consider all their options.
The Hidden Cost of VC Money
Mark Cuban understands investor relationships as well as anyone. According to him, startups shouldn’t see investor money as a positive step forward, but as a last resort.
“The last thing on the list is venture capital money,” he said in a 2017 interview. “They aren’t giving it to you for charity — and the minute you take that money, that’s not the end, but when the obligation really starts. You thought you had an obligation to grow your business before you took the money? You have no idea.”
Funding should be a means to an end, not a goal in itself, yet many founders pop the champagne when they get their first big deal. Venture capitalists might enable companies to scale quickly, but they have little patience for experimentation or delays. Investors want fast growth and definite payouts, which leads many startups to follow unsustainable paths to please the people holding the purse strings.
Startup founders didn’t escape the 9-to-5 grind just to work at the whims of others. Entrepreneurs crave the freedom to innovate and enjoy the fruits of their labor. Taking VC money puts those goals at risk. Even when VC-backed companies find sustainable success, company leaders must continue to listen to the demands of the investors who helped facilitate their growth.
Alternative Funding Options for Startups
Fortunately, startups have plenty of options to invest in their companies without giving up control or stock. Consider whether these funding methods could work for your growing business:
1. Crowdfunding
Some companies use crowdfunding campaigns to prove the viability of their ideas and attract new investors. On its own, though, crowdfunding can provide plenty of money to help startups get off the ground.
Different types of crowdfunding serve different needs. Standard crowdfunding campaigns help companies raise the funds required to create and ship specific new products, usually offering perks or early access to their backers. Equity crowdfunding, on the other hand, connects young companies to large pools of non-accredited investors. Startups can give away as much or as little equity as they want, while small-time investors can fund the companies that appeal to them.
2. Grants and Government Funds
Not every startup is eligible for government funding, but you may be surprised by how many industries offer grants to companies and founders with big ideas. Fundera put together a massive list of 105 different small business grants for founders to consider, but that list is far from comprehensive.
Before you start sending applications to every national grant program, look locally to see whether your city or state offers assistance for your industry. You don’t have to be an environmental company or a nonprofit to receive these funds — often, your status as a resident is enough to qualify. Few grants offer the same massive figures as VC funds, but on the bright side, you don’t have to give up part of your business to take the money.
3. Friends, Family, and Business Partners
Business loans from banks and those backed by the Small Business Administration often provide funding, but not all founders can qualify for formal help. If you fall into that category, you may have better luck pitching your friends, family members, and business partners.
People within your social circle might be willing to lend you some cash to help get your company off the ground at friendlier rates than banks, and they’re all but guaranteed to ask for less control of your business than a VC firm would. If you don’t know many people with deep pockets, consider asking your vendor partners or biggest customers for advance payments. Good relationships will be critical as you grow your company. If you succeed, remember the partners who believed in you from the beginning and treat them accordingly.
When all else fails, don’t be afraid to throw your own savings into your business. Plenty of founders have worked creative side hustles to come up with the money they needed to invest in their companies.
Before you take that VC check, think about whether alternative funding options might be better for your company’s future. VC money could be a blessing — or a curse.
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Holly Hutton, Khareem Sudlow
