Entrepreneurs fighting to reach $1M in annual revenue have a one-track mind. Ask one how they plan to raise capital to meet their sales goals and the response you’ll likely receive is, “Venture capital.”
Trading precious equity in exchange for capital is usually the first funding option entrepreneurs consider. TechCrunch headlines about multi-million dollar equity rounds and jaw-dropping startup valuations have fed into the notion that VC must be the way to go. That it’s the only way to go.
However, many first-time entrepreneurs don’t realize that what looks like the end of the journey — earning that VC round your company needs — is actually only one step in an exhausting cycle.
Look for money. Raise money. Grow. Look for money. Raise Money. Grow. You’re never one round and done. In fact, you may wind up running in place, going through the motions of the cycle, without gaining real traction.
And you’ll sacrifice far more than equity.
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I call this the hamster wheel.
You need money to make money. So you turn to VCs, but finding one that’s the right fit — and willing to take a risk on your startup — takes a lot of time and diligence. And coffee. Meeting with investors means you’ll be sucked away from running your company for months, instead attending one pitch or coffee meeting after another.
You’ll find yourself doing a lot of running around town, repeating your pitch non-stop, updating your financials, tweaking your deck, running, running, running. It’s an exhausting, discouraging process. You’ll spend hours meeting with many investors, some of whom aren’t even serious about your startup, some of whom like it but won’t fund it for reasons of their own. And, you’ll receive countless “No”s — possibly hundreds — before finding your “Yes.”
The entire time you’re working the meeting circuit, you’re not working on your business.
Fundraising is another full-time job.
The Venture Capital Journey
Congratulations, you’ve found an investor. You can rest your legs. For now.
Once you invite an investor to the table and give up a chunk of equity, you’re on a whole new hamster wheel. You have just 18 to 24 months before you’ve burned through the capital you’ve just worked so hard to raise. Sure, you have a cash runway, but you’re spending much faster than you were before.
This puts you right back on the hamster wheel of fundraising again, with new board members urging you to run faster.
And while you work to raise additional rounds of VC, your equity continues to get diluted. To put it bluntly: you work harder and harder for an ever-smaller piece of the pie.
Jive's founding CEO Dave Hersh explains why he's "anti-too-much-VC"
“I think there is a system that gives rise to a certain type of thinking that is clearly problematic, and it doesn’t have to be that way. I’m not anti-VC by any means. I’m anti-too-much-VC. And I’m against people following VC on this lemming-like path to building a company.”
— Dave Hersh
Alternative Funding Methods
You don’t have to run on venture capital’s hamster wheel to grow your business. Here are 4 non-VC funding options that can get the job done and preserve your equity.
1. Ramp your revenue the old-fashioned way
There’s a lot to be said for bootstrapping. Your growth trajectory may be softer, but you won’t compromise your ownership. Tech giants like MailChimp and Atlassian not only bootstrapped their way to scaling, they bootstrapped their way to profitability, too.
2. Crowdfunding
Crowdfunding can be a mixed bag. While it’s worked for some startups, others have found themselves spinning their wheels. If it works, you’ve gained a database of enthusiastic customers before you’ve officially launched — always a win. On the other hand, you find yourself fixated with marketing your crowdfunding campaign, time you could be working hard to market your actual business.
3. Revenue-based financing
This is a type of loan in which a company agrees to share a percentage of future revenue with an investor in exchange for capital up front. No equity changes hands. Revenue-based financing looks only at key metrics like MRR and churn rate to make a fast funding decision (pitch decks and coffee meetings no required). At Lighter Capital, a revenue-based financing provider where I’m CEO, much of the process is automated, which means entrepreneurs can spend weeks securing their next round of funding versus months.
4. Credit
Hit more than $5 million in sales, and tech banks will open their doors to you. You could be eligible for accounts receivable (AR) and monthly recurring revenue (MRR) credit lines, but you’ll also see debt covenants, such as required revenue growth or restrictions on your additional debt.
VCs aren’t evil — I used to be one, and my current company is VC-backed — but they’re designed to work with a certain type of company, one on the path for tremendous growth. If sacrificing equity for rocket fuel — and spending months doing it — doesn’t fit your goals for your business, remember: there are other ways to access the capital you need.
This piece originally appeared on TechDay.
Raising capital? Know the right strategy for your business
Most entrepreneurs see venture capital as the holy grail of funding solutions, but fewer than 0.05% of U.S. startups ever raise a VC round. There are other startup fundraising options, and some of them might be more advantageous for your business. This fundraising guide will help you decide what kind of capital to raise, when to raise it, and what you need to get it.