💰Six alternative ways to fund your business

Founders Factory Startup Bulletin #23

Apr 4, 2023

Welcome to the Founders Factory Startup Bulletin—“Created for founders, by founders”.

Each month, we bring you a round-up of startup and investment stories, key learnings from founders, and insights from the Founders Factory team.

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The last six months has shown us how quickly investment can dry up in a down market. Faced with plummeting market values, VCs will no doubt have had to mark down many of their investments: as such, investors looking for high yields have become far more cautious with regards to where they put their money.

Global investment in Q3 2022 was down 53% year-on-year. So it’s not surprising that founders might look to turn elsewhere for funding.

With many options on the table for financing your business, we’re breaking down six popular alternatives funding routes, which businesses they’re best for, with pros and cons for each.

Also in today’s Startup Bulletin:

Our top recommended reads
Highlights from our portfolio this month
Opportunities, events, new roles

📣 Before we start—shout-outs

This month, we’re pleased to shout out our top referrer—Akbar Karenga, People and Talent Director at LiSA, who are building technology for brands to launch live shopping and social commerce campaigns.

Refer the Startup Bulletin to your network:

➡️ 10 referrals = shout out to our 17k subscribers

➡️ 25 referrals = a 30 min 1-2-1 with one of our expert Operations team

Earn a spot in next month's newsletter

💰 Six alternative ways to fund your business

In the world of tech, venture capital has cemented itself as the principal funding source for high growth startups. Yet few businesses will only ever raise VC money, with many finding other innovative ways to fund their startup at different stages in the journey.

Here are six alternatives to VC to fund your business:

1. Crowdfunding

How does it work: Raising money publicly in return for equity or rewards. Great way to engage your customers even more closely, giving them a stake in your business or early access to products. Usually facilitated through platforms like Crowdcube or Seedrs

Screenshot from Roomix’s 2022 crowdfunding campaign

Who is it for: Particularly popular with consumer brands—D2C products (see Roomix or Scooch from our portfolio), or with challenger banks (like Monzo) trying to establish a following.

Benefits: Helps you reward loyal customers, as well as convert them into ambassadors for your product, which is particularly helpful for new brands trying to make a splash. Can also be helpful for getting early feedback on your product.

Drawbacks: Crowdraises can be tough to manage, requiring daily effort. It also often needs to be rolled together with other financing—with VCs and angels often leading crowdrounds.

2. Revenue-based financing

How does it work: A type of loan where repayments are tied to your revenue, rather than fixed amounts.

Who is it for: Businesses at, or approaching, growth stage. It only really works if you are deploying money on things that are likely to generate revenue (e.g. hiring a new employee or launching a marketing campaign)

Benefits: Revenue based financing is helpful as a quick cash injection. It gives you more flexibility than a traditional loan, particularly helpful if you don’t yet have a steady source of income. It also won’t dilute your equity in the business, unlike most of these alternatives.

Drawbacks: You need strong margins to make this work, as you’re paying back a % of any revenue. And unless your plans are strictly growth related, it may be hard to obtain

3. Crowdlending / peer-to-peer lending

How does it work: Matches borrowers with lenders via online platforms like Funding Circle, Kiva, and Lending Club. Loans differ—some are unsecured (tied to revenue), others are secured (tied to assets).

Who is it for: Established businesses with traction, otherwise you may find it hard to convince people to lend to you.

Benefits: It’s a fairly simple process, meaning you can access cash quite quickly. It also won’t dilute your equity.

Drawbacks: Each platform differs, but these often come with high interest rates than traditional loans. You also may have to pay back the loan regardless of your success.

4. Angel financing

How does it work: While the set up is similar to VC (cash in return for equity), angels are quite different. They’re deploying their own money, and therefore tend to make investments less formally, often built off personal relationships.

Who is it for: Primarily early stage business (pre-seed to Series A), given that they are deploying smaller cheque sizes.

Benefits: You get far more than capital: angels can bring industry expertise, vast networks, operational experience that can be of huge strategic value (many would even view them as advisors who invest). In general, they can be far more flexible with how they invest since it’s their own money

Drawbacks: Since they are private individuals (not established funds), they are harder to find and therefore inherently more exclusive. It can also take time to build relationships with angels, which shouldn’t stop once they’ve invested.

5. Grants

How does it work: Non-dilutive money offered by specific organisations looking to fund business in certain sectors

Taken from our 2021 survey on grant funding

Who is it for: Grants are mostly for business which are some/all of the following: innovative (building something new), research, science or impact driven, and commercially viable

Benefits: The detailed application process is a good exercise for considering and articulating your business vision. Winning prestigious grants also acts a stamp of approval on your business, helping get other investors over the line

Drawbacks: The process is lengthy and time consuming, and can be a drain on your time as a founder. These applications are highly rigorous too: if you fail to meet even one of the many criteria, you won’t be successful.

6. Accelerators

How does it work: Programmes offering operational support and capital over a fixed period of time, in return for equity

Who is it for: Mostly early stage businesses approaching growth stage, looking for support that they wouldn’t be able to pay for

Benefits: Capital is secondary to the invaluable support you get from experts who will closely support your business. You can also tap into their established networks to access investment and potential clients or partners. Moreover, joining a prestigious accelerator signals confidence to investors.

Drawbacks: Capital may be limited compared to VCs. If you’re viewing it as a cash injection, you’re probably there for the wrong reasons.

Read our full Alternative Funding Guide, created in collaboration with Esme Verity from Considered Capital

Read the Alternative Funding Guide

📚 What we’ve been reading

Decentralized Ventures: Networked, Moisturized On-Chain and Flourishing (Tally)—how web3 and decentralisation is transforming the venture building value chain, from incubators & accelerators all the way through to venture capital
The New Avengers: How AI is Giving Us Superpowers (Digital Native)—Rex Woodbury’s perspective on AI not as replacing humans but rather superpowering them as assistants
Silicon Valley Firms Gird for Change After US Backing of SVB (Wall Street Journal)—how SVB’s collapse has changed what it means to be a good financial steward of your startup
Substack: Empire of Narratives (The Generalist)—a deep dive into everyone/VC’s favourite newsletter platform
25 HealthTech Startups To Watch (Founders Forum)—who are the next big healthtech success stories to look out for?
The Responsibility of AI: Who is Accountable for the Results of Predictive Models?—Founders Factory product coach Ines Liberato on a great ethical challenge facing the proliferation of LLMs

🚀 News from the Founders Factory portfolio

We’re excited to announce today the launch of Planet Positive Lab, a 10-week climate bootcamp we’re hosting this summer in partnership with the University of Oxford. Find out more & apply here
We announced the launch of Blue Action Accelerator, our new programme in partnership with Blue Action Ventures to find, fund, and scale founders solving challenges in ocean and coastal health. Follow progress here
Proptech startup Acre, who are bringing the end-to-end mortgage process onto the blockchain, raised a £6.5m seed round
Robot kitchen manufacturer Karakuri launched a trial of their FRYR (automated chip fryer) with popular UK food chain Nando’s. Read more
We saw the launch of three businesses out of our Venture Studio: Prism, a decentralised talent marketplace; Bundant, a smart home organisation platform; EcoNest, a sustainability-first property developer; and Carno, heat pump management software
Kayna won the Carrier/Broker Global Start Up Award at Insurtech NY. They are building embedded insurance infrastructure for vertical SaaS platforms
Ohana featured in Martin Bryant’s PreSeed Now newsletter, with founder David Henry talking about their vision for facilitating purpose-led partnerships for impactful brands
Luca Schnettler, founder of Qumata, featured in the Forbes 30 Under 30 Europe Technology category. Qumata is building an API-powered insurance solution
Metaverse builder LandVault announced a $3m extension to their Series B, bringing their total raised to $37m. Read CEO Sam Huber’s story here

✅ Opportunities in tech

Events

Women Who Build (April 18th, London)—a community of women in technical roles and technically minded founders. Hosted by firstminute capital, Kindred, and Atomico. To attend, email atouton@firstminute.capital

Jobs

CTO/Tech Lead Co-Founder at Project Gigu (D2C e-commerce business launch platform)
Tech Lead at Brewmoney (fintech for renewable installers/tradespeople)
Entrepreneur-in-Residence at Future Founders Mission Lab—a chance to validate and develop impact concepts & pitch for investment. Theme for this sprint is ‘A Fairer Start for All’
Talent Investor at Founders Factory Italy (Milan)

See you next month 👋

Interested in reading more of the same insights? Check out the Founders Factory blog, and previous newsletters.