Source: Ricky Pellitier, OpenView Partners
Today’s media does an excellent job of covering “successful” fundings. As a result, there is often the misconception that getting investors to pony up a bunch of cash in exchange for upside is easy. In fact, for anyone not actively involved in a fundraising process it can often seem like dollars are free flowing and anyone with an idea can raise capital.
This could not be any further from the truth.
As investors, we have a unique vantage point. We see lots of good businesses out there trying to raise money. Yes, many of those companies may be able to get their funding needs satisfied one way or another. Some may even have oversubscribed rounds that allow them to raise more money than they set out for at a higher valuation. Those are the success stories that get picked up by TechCrunch or VentureBeat.
Yet for each one of these businesses, there are significantly more companies that are unsuccessful in their attempt to find VC money. Reasons can range from lack of traction, lack of product-market fit, or the quality of the team. Whatever the case may be, there are lots of businesses that aren’t able to raise funding from venture capitalists.
But just because a company can’t automatically raise venture capital doesn’t mean it’s a bad business. It also doesn’t mean it will never be able to raise money in the future — or even today. If you’ve been unsuccessful raising from a VC the trick is to simply adjust your thinking as to what the appropriate source of capital is for your company is.
6 Alternatives to Venture Capital Funding
1) Bootstrap It
While it may sound painful, continuing to fund the business out of cash flow or your own personal investment may be the best way forward. This solution involves no dilution to the founders if there is no historical outside investment. If you are successful, you should be able to raise at a higher valuation once you have additional proof-points in the model.
2) Insider Round
Not all rounds are created equal. If this is not your first round of institutional funding, try going back to your existing investors for additional capital. While it may be set at a lower valuation, or done in a way where no valuation is set today, the diligence process should be less painful. Asking for additional funds will afford you more runway to hit your goals before raising outside money.
Depending on the stage of the business, debt may be a viable option for the company. Debt terms are great right now. If you can take advantage of the debt markets, you should.
4) Angel Investors
Not every business is ready for venture capital today. Sometimes a non-institutional round is what the company needs to set it up for success. Friends, family, high-net worth individuals, professional angels, and folks from the industry may all be viable sources of capital when VC money is not an option.
5) Private Equity
There are many small-market private equity funds that can work with a slower-growth, yet profitable business. However, this is not for many VCs. That said, there are investors who target these specific opportunities as it may fit into their risk profile a bit better. Step back and take a wider view — you may be targeting the wrong type of investors.
6) Sell the Company
I hear it often — “I’m debating whether I should raise money or sell the company. I’ve had lots of inbound interest from potential acquirers.”
Keep in mind that there may be some strategic value to your business that is not inherently available to VCs today. If the situation arises and it makes sense for the business, the investors, and the employees, you should certainly evaluate whether or not today might be the right time to sell.
Surprise Bonus Option!
There is another solution for your company that may be far less painful than selling it. In short, you need to make tweaks to your business model to change the perspective of the investor. This is why it is so important to gather feedback when you are turned down — find out exactly why they are passing on your company. If you start to spot some common themes developing, it may be time to evaluate whether or not you should make some changes to your business.
Some options in terms of adjustments could be altering your product, attacking a different market, or changing your revenue model. While it may sound awful to go back and change what you have invested so much in, those are sunk costs. You need to objectively evaluate what it will take for you to get to the next level — and if that includes raising VC funding, business changes may be your only option.
Can’t raise VC money? You still have lots of other options. Besides, raising from a venture investor is just the very beginning of a very long and tough journey — raising capital is simply a means to an end, not the end itself.
About Scale Finance
Scale Finance LLC (www.scalefinance.com) provides contract CFO services, Controller solutions, and support in raising capital, or executing M&A transactions, to entrepreneurial companies. The firm specializes in cost-effective financial reporting, budgeting & forecasting, implementing controls, complex modeling, business valuations, and other financial management, and provides strategic help for companies raising growth capital or considering M&A/recapitalization opportunities. Most of the firm’s clients are growing technology, healthcare, business services, consumer, and industrial companies at various stages of development from start-up to tens of millions in annual revenue. Scale Finance has multiple offices in the Carolinas including Charlotte, Raleigh/Durham, Greensboro, and Wilmington with a team of more than 40 professionals serving more than 100 companies throughout the region.