Fund your Startup Without Giving up Equity

Equity is the most expensive kind of capital a successful startup can raise.

In the long term, raising large amounts of equity funding early can change the entire trajectory of a startup.

I have spoken with so many founders in the past few years that lament spending years of their lives building a business that ends up belonging to VCs and early investors.

Equity is not inherently bad, and for many startups makes the most sense. However, it is not the only path. There are many overlooked funding types that can be game-changers for founders looking to maintain control.

Here are some of the best ways for a startup to raise money besides giving up equity.

Revenue-Based Investing

I have only been submerged in this new frontier of startup capital for about a year, and feel that I have only begun to explore the rabbit hole that is revenue-based investing.

In short, I love the model. It looks something like this:

An RBI fund decides to invest in a company. Although the parameters for investment differ from fund to fund, it is generally predicated on a startup having at least a 6-month revenue history.
Terms are set and the business agrees to pay a set return through a percentage (usually single digit) or their revenue.
There is no time limit on when the investment is paid back. If the company does well and revenues increase faster than expected, the fund is paid back sooner. If the company does poorly, it is paid back slower.
At the beginning of the deal, the fund will often take a right to equity. That right to equity is bought back by the company as the investment is paid back.
This right to equity is only activated if the company has an exit or if the company raises an equity round while still paying off the revenue-based investment. This allows the fund to participate in that round with the right equity that has not yet been paid back.
No board seats are taken, the fund is already aligned with the business, when the business does well, the fund does well.
There is no emphasis on evaluations, just monthly recurring revenue.
It is non-dilutive by the time the company completes the payback.
There is no personal guarantee, eliminating some of the difficulty and intimidation that debt often has.
It is, in the long term, way cheaper than equity. VC firms look for a 10x return. Revenue-based investing looks for about 2.5x return.
Because RBI funds are not interested in evaluations they will not push founders to unhealthy growth rates or exits. The founder maintains control.

Startup owners are increasingly turning to revenue-based investing as a way of financing their businesses. The perks are amazing, and can really benefit the founder long term.

RBI is similar to traditional debt in the sense that investors give money in exchange for a set amount of income over time. However, unlike debt, RBI does not require any collateral or guarantees and is flexible based on the business performance. A slow month for the business means a smaller payment to the investor.

Debt

Taking on debt is often seen as a less desirable option than equity, but it can be a great way to get money in the door while maintaining control of your company. There are a few things to keep in mind when looking into taking on debt:

Find a lender who understands your business and is willing to work with you. Sharks are out there and can pulverize your business if things go south
Be prepared to make monthly payments, even if your company isn’t generating revenue yet. This probably means having a solid emergency fund in place.
Decide if you will take out a personal loan or a business loan. The interest rates and payment terms can differ greatly depending on your decision.
If possible, only borrow what you need and not more, debt can be expensive!

There are two main types of debt: secured and unsecured.

Taking secured debt means that if the company is unable to repay, the lender can take assets from the business to pay back what they are owed.

Unsecured debt is a little riskier for lenders as there is no collateral that protects them in case of default on repayment.

Obviously, interest rates will often be higher for unsecured debt.

As with all types of funding, it is important to make sure that you are fully aware of the terms and conditions before taking on any type of loan. Startup owners should only take out what they need, as interest can add up quickly and is not an expense that will ever add to growth.

Inventory Financing

This really only applies if you have a physical product business.

I like inventory financing because it allows for scaling and attaches your ability to grow directly with sales. This type of loan is a great option for businesses that are seeing consistent growth and have a healthy order backlog.

Basically, with a good enough sales record, the bank will buy your next round of inventory. When that inventory sells, you pay the bank back and the cycle repeats. This cycle allows for faster scaling, but naturally, you take an overall hit on your margins as you pay the interest of the loan.

Be sure to do your research before going with any specific lender, as interest rates and repayment terms can vary greatly.

Equipment Financing

Similar to inventory financing, equipment financing is a type of loan that uses the equipment itself as collateral.

It works a lot like debt but is often more appealing because a personal guarantee is not required.

This means that if you are unable to repay, the lender can take possession of your tools and machinery. Startup owners should only consider this option if they have enough cash flow coming in from sales to make monthly payments on time.

Inventory financing usually does not work as a lifeline and is all too often used as a last resort method of getting funding.

It is much better to use a growth mechanism than to simply give a business more runway.

Bootstrapping

Bootstrapping is the process of finding a business with its own revenue and without outside investment.

This can be done in a few ways, but the most common is through self-funding (using your own money to finance the business) and/or generating revenue from sales as soon as possible.

Bootstrapped companies are amazing. They almost always have a team of ultra-confident and capable founders as the founders themselves are taking on all the risk and all the reward.

Many companies believe that bootstrapping is impossible for their kind of business. This is not always the case. Sometimes adding a cofounder to bridge a gap may be far more impactful than bringing on VCs and hiring someone.

Committing to bootstrapping as much as possible early can be one of the easiest ways to build long-term value in a company.

Grants

We are getting increasing exclusive with the second half of this list.

However, Government grants are a great way to finance a startup without giving up equity.

There are several startups that I have spoken with recently, and we’re able to secure grants for specific activities. This is especially applicable if your company is on the cutting edge of new technology, or doing impactful humanitarian research.

The best part is that the money does not need to be repaid.

There are many different types of government grants available, so it is important to do some research and see if your business qualifies.

Also, grant writing pretty much sucks and until one is secured, can feel like a huge waste of time. However, it only takes one successful application to make it all worth it.

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Somehow startup success has been equated to how much money they are able to raise. This is not always the case.

I have so much more respect for a scrappy bootstrapped startup making a couple million a year, than a collateral unicorn that is burning through millions of others people’s money.

Don’t get me wrong, equity can be great for a startup to raise money. For many businesses, it is a great fit. However, it is not the only way. Other options exist that can often produce healthier businesses and happier founders.

Understanding your goals and aligning funding to that vision should always be a step in the process of raising money.

Best of luck out there,

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