Looking for an investor to fund your startup can be a difficult and very delicate process. If for whatever reason, you need funding but don’t want to dive into a traditional investors’ deal, we have listed some alternative funding methods for startups in this article. How can you fund your startup without an investor? Discover 8 alternative ways below, including a brand new one!
Incubators like the Birdhouse provide funding for startups that are participating in their program Depending on the incubator, funding can take place in different forms: the incubator can ask for shares in the startup, it can grant a convertible loan, a bullet loan or the incubator can invest in working capital. In general, getting your startup funded by entering an incubator or accelerator program is a pretty easy way of getting funding.
For an early-stage startup, stepping into an incubator allows you to be surrounded by coaches and experts. This network of coaches and experts could play out to your advantage when looking for funding at a later stage. Moreover, you’ll connect with fellow-entrepreneurs in the incubator who are in the same stage as you, or with entrepreneurs who have already lived the struggles you’re facing today. Such connections are worth a lot, sometimes even more than hard cash.
Even for mature startups, an incubator can be interesting. Mostly, those startups look to join incubator or accelerator programs related to a specific industry. These programs are often set up by important players in the industry, who are potential investors or clients of your business.
There are some disadvantages linked to participating in incubator or accelerator programs. First of all, the programs are very time-consuming. They expect you to be present at every workshop and have to attend obligatory events, which sometimes decreases the time you actually spend on growing your business.
Also, be careful if you plan to participate in several programs. This might create a wrong perception towards investors: it could look like your business model isn’t viable and desperately needs the support of incubators to keep it alive.
Bootstrapping means growing your business with little or no help from external parties. If you focus on constantly improving your business model, you will generate your revenue without support from others. The generated revenue will be invested in the growth of your startup. However, bootstrapping isn’t that easy, because you need to make sure your business generates revenue as soon as possible. On the other hand, it’s the perfect way to focus on the business model and to test its viability in the market.
Future investors appreciate the bootstrapping method because the business model has already been validated by customers.
A big disadvantage of bootstrapping is that your growth path will be longer. This can be frustrating, especially when the competition is raising external capital and growing faster.
This method targets (potential) consumers that will fund your business. Basically, you fund the development of your product or service by pre-selling prototypes, finished products or shares of your company. Or you set out a loan. Typically we see 4 different ways of crowdfunding:
The first type of crowdfunding is donation-based. This manner is the preferred way for NGOs. They mostly rely on donations to finance their activities. The second type of crowdfunding, reward-based, is mostly used by companies that develop a tangible product. Their nearly finished products or prototypes are usually sold during a crowdfunding campaign. This is a perfect way to get to know your early adopters and potential ambassadors.
Lending-based crowdfunding is a third way to start a crowdfunding campaign. The “crowd” will lend you money to further develop your business. Lastly, the fourth type of crowdfunding often goes hand in hand with the lending-based one: equity crowdfunding. These campaigns will give shares of the company in return for the financing. By combining these two models, you can offer crowd investors a convertible loan.
Competitions are especially interesting when you’re just starting your business. Participating in competitions helps generate visibility and can help you shape your story. Each time you’ll pitch your company, you will receive valuable feedback from judges and participants. Don’t underestimate the importance of winning competitions: the prize money can run up to 500.000 euros. Not only does this give you a great cash injection, but you’ll also gain credibility and create great visibility for your company!
You can set up different types of partnerships to grow your company. The most popular one is a co-creation with a bigger company. In a co-creation, you collaborate with a company to build something new. Together, you can improve the technology and create a marketable product.
During a partnership, you often get the chance to use the facilities (machines, design, product development, offices, etc.) and network of the bigger company. This will give your startup a big boost!
If a partnership is done right and the expectations of both parties are well-defined at the start, then this type of collaboration can be a huge win-win for both. On the one hand, your partner will be able to integrate innovation within the company. On the other hand, you, as a startup, will be able to surf on that success for a long time and leverage the network you created during that partnership.
6. (win-win) Loans
For early-stage startups, traditional loans at the bank usually aren’t interesting. If your startup isn’t generating any revenue yet, the bank won’t give you very interesting conditions to opt for a loan.
Luckily, there are some alternative ways to take out a loan. A popular way is the winwin loan in Flanders. This is a loan of the Flemish Government for which you’ll pay 1,75% interest. Those who give you the loan, will profit from a government guarantee, recently increased to 40%, and a tax credit of +/- 2%. You can see why private investors are very keen on this type of investment! As a startup, it’s a very accessible way to get cash.
7. Grants / Subsidies
Many organizations and institutions provide grants and subsidies. Popular examples are the Flemish Government (Vlaio), Brussels, Wallonia, FIT, European Commission, etc. Vlaio has a whole series of subsidies, from which the research & development subsidy and the SME growth subsidy are the most current ones.
Next to public institutions, you have a bunch of private institutions, like the Bill & Melinda Gates Foundation, who provide grants and subsidies for certain industries.
Do you need help in choosing the best type of subsidy and writing your proposal? We can do it for you! Contact us here.
8. NEW: Revenue-based financing
Last but not least, we’d like to introduce a fairly new concept that gains popularity in the US at the moment: revenue-based financing. This is a way to raise capital, but without giving your investors equity. In short: you loan an amount of money and you’ll pay it back with interest. The interest depends on the revenue you generate. That means the payment of the loan depends on the financial performance of your company. If you’re experiencing strong growth, you can pay more. If your company is performing less than expected and you’re generating less revenue, then you can pay less.
This new way of financing has a huge potential and has proven its benefits, especially for tech startups. Examples of companies providing revenue-based financing: Uncapped (UK), Clear Bank (CA), Shopify (USA), Amazon (USA).
Investors aren’t the only option for you to grow your company. Depending on what you’re looking for and the type of product or service you’re developing, there are many ways to get funded without taking an investor on board. Of course, you can choose to combine the types of funding mentioned above with an additional investment round.
Our team can help you choose the right type of funding for your company and support you in your funding journey. From shaping your pitch to negotiating term sheets with investors, we stand by your side to make sure to make the best decisions for your company!
Jelle Jacobs, Funding Expert at EY The Factory, hosted a session about Alternative Funding Methods for Startups on The Big Funding Live, a funding event The Factory co-organized with Birdhouse. You can watch the session here: