3 Alternative Funding Sources for Startups – There’s no way to sugarcoat it: Technology is helping startups launch their big ideas more quickly than ever. This is translating to a slow stream of early revenue for many startups, no matter how small.
But that’s not all. Technology is also transforming the ways that business owners finance their ideas. Not only are there more financing options available than ever to startups, alternative funding sources are now allowing Founders to leverage more broadly defined assets. These market shifts are helping startups to become increasingly agile in early growth periods.
Top Alternative Funding Sources
Here are 3 Alternative Funding Sources for Startups that Founders might consider to meet their capital needs at the early stage.
What if you could raise funds from regular people who have a specific interest in what you are doing, rather than just large institutional investors? In today’s online world, of course, it’s possible.
While crowdfunding got its start in the late 90s, it emerged as a major funding source in 2009, the same year the popular platform Kickstarter launched.
Crowdfunding is a way of raising capital to fund specific ventures from a number of investors through an online platform. Some crowdfunding is equity-based, meaning that you give away equity in your business in lieu of signing on to a regular repayment schedule, while others are based on product delivery. Instead of equity, Founders might agree to give away the finished version of a product or service to investors. Crowdfunding is attractive to startups in part because it’s so flexible. It’s also a great way to raise awareness and build excitement for a new product, but allowing customers to buy something before it’s available to the general public and participate in its creation.
2. P2P Lending
P2P lending, or debt-based crowdfunding, is an alternative way for startups to borrow money. If crowdfunding is like raising money by selling shares of equity on public market stocks, debt crowdfunding is like raising money by selling bonds.
Similar to traditional bank loans, Founders must apply for debt-based crowdfunding. The difference, however, is where the funds come from: multiple investors rather than a large bank. Typically, funds are raised through a peer-to-peer lending website, like LendingClub or Prosper. When signing up for a P2P loan, borrowers are agreeing to repay the loan amount over a fixed repayment term.
P2P lending is a fairly recent phenomenon. Prosper was founded in 2005 as the first peer-to-peer lending marketplace in the United States. It has facilitated more than $16 billion in loans to more than 980,000 people since then.
P2P lending offers investors attractive investment returns via loan interest and dividends on profit shares. In some cases, investors are able to sell their shares for a profit in the future. While loan interest promises regular payments to investors, they are excluded from the large gains for the acquisition of a company, for example. P2P lending also has a social appeal, often including stories about borrowers that have been helped by the funds.
3. Revenue-based financing
Revenue-based financing provides up-front capital to a Founder in exchange for a set percentage of future revenue. This model of financing is ideal for SaaS startups that have a steady monthly recurring revenue generated by subscription-based users. Pioneered in the early 90s, the industry has seen enormous growth over the last few decades, which is in part due to its popularity in the SaaS industry.
Revenue-based financing is typically used by entrepreneurs who have bootstrapped or used angel financing. Not only does it allow startups to raise capital quickly, it limits the legwork that fundraising requires, allowing businesses to focus on product development. It also limits dilution, as investors do not receive equity.
Maturity is typically between 3-5 years, making it a long-term growth strategy. Monthly payments are flexible and might equal 5% of net customer payments. This flexibility prevents cash crunches.
Revenue-based financing also fosters partnerships between borrowers and investors in that investors are incentivized to help the companies that they’ve invested in to grow, as growth translates to faster repayment and a higher Internal Rate of Return (IRR).
There is no such thing as free money, but there are lots of options to finance your startup. Whether you need fixed payments, you have equity to sell, or you forecast steadily growing revenue that you can leverage, you can use one or all of these alternative funding solutions to help your startup succeed.