Early-stage founders often face fundraising challenges, especially in the current rocky capital markets. With the impact of the current recession and its ripple effect on big tech layoffs, the venture landscape has taken a hit on multiple fronts, resulting in prolonged timelines for startups to close a round.
7 Alternate Funding Sources for Startups
- Online lenders
- Equity crowdfunding
- Venture debt
- Revenue-based financing
- Small Business Innovation Research (SBIR) grants
- Angel investors
- Roll Up Vehicles (RUVs)
So, how can founders secure the funds they need to fuel their growth when economic and industry factors are working against them? At Embarc Collective, a Florida startup hub supporting more than 125 tech startups, I’ve helped early-stage founders navigate their fundraising journeys against these tailwinds.
For MVP to seed-stage startup founders, here’s a breakdown of three alternative funding paths that can help startups raise capital to fuel their journeys, along with real examples of how founders used these options to scale their businesses.
Small Business Innovation Research (SBIR)
There is increasing awareness of how early-stage tech startups can benefit from SBIR (Small Business Innovation Research) awards through the federal government’s $3.6 billion fund, which is coordinated by the Small Business Administration and intended to help certain small businesses conduct research and development.
SBIR grants and contracts have been available for decades, and tech ecosystems outside of Silicon Valley have been tapping these capital networks in addition to, or instead of, institutional investment from VCs for decades.
The upside is that these are cash awards that do not require equity ownership or licensing fees, meaning that your ownership won’t be diluted. The downside is that it can be difficult to understand how to apply for SBIR funding. Here’s the lowdown:
- If a federal agency, such as the Department of Energy, Defense, Transportation or others has a need and there is no existing solution, it releases an SBIR opportunity to the public.
- Interested companies propose solutions. The most promising options receive funding for a proof of concept. This could be a startup idea you’re already working on (Phase I: Up to $250,000).
- Depending on the success of the proof of concept, the company is evaluated for a prototype (Phase II: $750,000). If the prototype is successful, the government can begin to purchase solutions they like (Phase III).
EaseAlert provides personal alerting devices to reduce stress and improve efficiency for emergency responders. It was awarded a $384,782 Phase I SBIR through the National Institute of Health and the National Heart, Lung, and Blood Institute in response to an open solicitation for projects requiring a clinical trial.
Today, the clinical trial is in process with National Development and Research Institutes-USA, Center for Fire, Rescue, and EMS Health Research, and Embry-Riddle Aeronautical University to prove the efficacy of its technology. EaseAlert serves a variety of emergency responders, including MacDill Air Force Base, through its Phase III SBIR contract.
Angel Investment and RUVs
Often, startups seeking funding from institutional investors are simply too early in their development. If you have pitched to firms and have been told to come back for the next round, consider pitching individual angel investors. Angels are often entrepreneurs themselves and can empathize with your startup journey, connect you to their personal networks and help you stay accountable to your growth goals.
Founders can either pitch to several individual angels who can fill out the round, or they can leverage tools like AngelList’s roll up vehicle (RUV). RUVs are a type of special purpose vehicle designed for founders who want to efficiently raise capital from individual operators and angels with a single cap table entry. Outside of targeting friends, family, or angels to come in on the RUV, founders can pitch to groups like the RUV Alliance, a discord group to help founders get funding from a larger group of small angel investors.
Overall, startups can expect to raise less overall capital in an angel round, yet enough to help them prove their value proposition and attract a larger round of funding down the line.
Roll Up Vehicle Example
Bobby Quinn, founder of Paypixl, leaned on his personal network of friends, family, and industry experts to raise initial capital through a RUV on AngelList. This round provided enough capital to hire a team, build Paypixl’s marketplace for on-demand drone imagery and video, and gain national visibility through a 60 Minutes segment showcasing the company’s natural disaster response work.
Equity crowdfunding, similar to traditional crowdfunding models like Kickstarter or Indiegogo, allows a large number of backers to invest in a startup. However, instead of product perks, backers receive a percentage of ownership in the startup with the goal of receiving a future return.
This funding model has opened up private markets to people, regardless of accreditation status, to invest with little as $50 while rolling up as just one line item on the startup’s cap table for a clean and efficient fundraise. For startups, it’s an opportunity to have supporters, partners, and customers invest and participate in the upside of their growth. It can also increase product awareness for a new global audience.
As more seasoned founders launch equity crowdfunding campaigns, it’s becoming more readily accepted in the fundraising ecosystem to go on and raise more traditional venture rounds. For example, users on Republic became Maven’s early backers, and just three months later, the company raised a $20 million Series A led by Andreessen Horowitz.
On the flip side, being selected to run a campaign on one of the top equity crowdfunding platforms is nearly as competitive as going for venture funding. It can also be time consuming to craft a successful campaign, with the average campaign taking about six months from application to launch.
Equity Crowdfunding Example
COI Energy raised nearly $600,000 by 1,700-plus investors on Republic via a CrowdSAFE, an adapted version of the Simple Agreement for Future Equity, which is designed specifically to work for investment campaigns accepting hundreds or even thousands of investors.
COI Energy, a greentech startup founded by SaLisa Berrien, received a tremendous amount of support and feedback from backers looking to invest in sustainable energy, ultimately providing the company with a new channel to reach customers and build awareness for the problem Berrien is solving.
In a hazy fundraising environment, one thing is clear: startups have solid options to consider when seeking capital outside of traditional venture funding. From equity crowdfunding to federal grants or small angel checks, entrepreneurs should take advantage of the capital that best suits their current needs and optimizes ownership for the long-term.