Founder / Funder Translator #2: There are Alternatives to VC Funding

In my first Founder / Funder Translator post, I talked about the concept of companies that are VC Fundable.  Most are not, and that’s OK.  VC fundable companies are aiming for multi-billion dollar global markets and doing everything they can to either IPO or be acquired in 7ish years for hundreds of millions of dollars.  (For more info on these companies, see the first post in this series).

If you let that sink in, you realize that’s a pretty narrow field of companies.  The ones that are best positioned to achieve that tend to be software companies, or deep tech or life science companies with strong intellectual property (IP). 

So, what do you do if you are not VC fundable? You can build an amazing and profitable company without ever having to pitch a VC.  VC funding is a means to an end, it is not the goal itself.  Let’s talk about some alternatives.

1.    Customer Funding

2.    Self-Funding

3.    Friends and Family Funding

4.    Non-Dilutive Grants

5.    Business Loans

·       Customer Funding is obviously the best.  If you can build and sell something that people will pay for, and you can ramp up your business quickly to the point where your revenues more than cover your expenses, you have just won the startup game. There are legendary tales of people solo–creating a dating app for instance, that requires only a few hours a day to monitor and that generates ungodly amounts of revenue.  Tim Ferriss wrote his famous book “The Four Hour Work-Week” on how to create businesses like this, often through drop-shipping and outsourcing as many admin tasks as possible.  Content creators fall in this category of relatively low-expense businesses that can relatively quickly become profitable.  Millions of solopreneurs make a living through shops on Etsy or Shopify.  The secret is to build something people will pay for.

·       Self-Funding is the humble beginning of just about every startup.  If you want to play the startup game, think ahead to build a reserve that you can invest in yourself.  Many a founder has run up their credit cards and/or mortgaged their home to fund their early startup days.  I certainly did, and it definitely added to the “failure is not an option” mentality that it takes to succeed.  Many founders have one spouse keep their corporate job while the other is given a limited time and budget to chase their founder ambitions.  So, while this is a time-honored way to go, the only caution is to not bite off more than you can chew.  Keep your job and start your entrepreneurial journey as a side-hustle at first. Don’t put it all on the line until you are more convinced you have a something people will buy.  Make a plan that will enable you to cover your expenses and switch to customer funding ASAP.

·       Friends and Family Funding goes beyond just a deal with your spouse or partner to be the primary breadwinner for a while.  This is where you persuade parents, siblings, your rich uncle or your neighbor who won the stock option game to invest. This takes confidence and should also be done only after you have some evidence that people are buying what you are selling.  Sometimes you need to scale to a minimum threshold before you can really determine whether you have product-market-fit, or sometimes you have it in your initial market, but it requires capital to expand into an adjacent market that is giving you strong signals it wants your product.  Don’t treat these as handshake deals – treat them as legit investments on your cap table and set it up properly with the help of a lawyer and an equity tracking service like Carta even if the amounts are small.  Two big caveats from lived experience: 1) sometimes the less sophisticated “friends and family” investors can make the most noise and create a big distraction. They often need more communication about risks than investors that do this more routinely.  2) Are you OK with facing close friends and relatives at Thanksgiving if they lose their money? 

·       Non-Dilutive Grants.  See next post for more details.

·       Business Loans. See next post for more details.

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Wishing you all success.