Funding Options – Why Venture Capital is NOT Always the way to Go (2024)

Launching a new business is an exciting but challenging endeavor, especially when it comes to securing funding. While many startups turn to venture capital as a primary funding source, it’s worth considering other options.

Although venture capital may seem like the most common choice for many entrepreneurs, it’s important to remember that it’s not the only option available. As the founder of Contentserv, a successful global software company that I bootstrapped to 400 employees in 13 countries, I can speak from experience that there are alternative ways to finance a business that can be just as effective, if not more so, than venture capital.

Venture Capital is right for you if…

Venture Capital (VC) can be an excellent way for startups to secure funding, but it is essential to weigh the pros and cons before deciding if it’s the right option for your business. Here are some potential advantages and drawbacks to consider:

Pros of Venture Capital:

1. Access to funding:Venture capital can provide startups with large sums of money that can be used to scale the business quickly.
2. Experienced investors:Venture capitalists are typically experienced investors with a track record of success in identifying promising startups and helping them grow. They can bring valuable expertise, mentorship, and connections to the table.
3. Exposure:VC firms often have an extensive network of contacts in the business world, which can help to raise a company’s profile and attract potential partners, customers, and employees.
4. No repayment required:Unlike loans, venture capital investments do not require repayment. Instead, investors receive a share of the company’s equity, which can provide significant financial gains if the company is successful.

Cons of Venture Capital:

1. Loss of control:When a startup takes on venture capital, they give up a portion of its ownership in exchange for the funding. In most cases, this can result in a loss of control over the company’s direction.
2. Pressure to perform:Venture capitalists are looking for a return on their investment and expect a certain level of growth from the companies they invest in. This puts pressure on startups to prioritize short-term profits over long-term sustainability.
3. High expectations:VC firms often expect high returns on their investments and may pressure startups to pursue rapid growth at the expense of other important goals, such as social impact or sustainability.
4. Dilution of value:As more investors are brought on board, the company’s value can become diluted, making it harder for the founders to secure future funding or negotiate favorable terms.

Venture capital can provide startups with a valuable source of funding and expertise, but it’s important to carefully consider the potential downsides. Ultimately, each business owner needs to assess their own needs, goals, and priorities to decide if venture capital is the right path for their company.

In my case with Contentserv, it wasn’t, and in retrospect, I’m glad that I didn’t go the standard route here. I was definitely more successful because of it.

From funding, strategy, smart decisions, and a network of good mentors

In today’s business landscape, many startups feel discouraged when they fail to secure funding from venture capitalists. However, it’s essential to recognize that while venture capital funding can provide financial support, it may not always be the most advantageous option. It’s crucial to carefully evaluate the potential benefits and drawbacks of accepting venture capital funding before deciding because there is almost no way back.

The venture capital mentality often involves the philosophy of “burning” several (on average: 9 out of 10!) companies to succeed with one. These investors may acquire companies without much regard for their growth while taking a significant amount of equity and sometimes mistreating the founders.

As for myself, I chose a different path, prioritizing the autonomy to run my business and seeking out mentorship to acquire valuable skills and expertise in the field. Through this approach, I developed my strategic thinking, made sound decisions, and gained years of experience as an entrepreneur.

My personal way of financing to fuel growth

“There’s no need to burn money if you know how to make it.”

At the inception of Contentserv, my co-founder Alexander Wörl and I had no capital to start the business. Despite being a student at the time and only 20 years old, we had a strong conviction in our vision and product. Rather than spending months pursuing venture capital, I financed the company myself and remained focused on serving our customers. Leveraging my hobby of renovating old and neglected houses, I revitalized them and rented them out, using them as collateral to secure bank loans to fund Contentserv’s growth. This approach enabled me to start and maintain full control of the company, as it grew to encompass 400 employees across 13 countries, from Japan to the USA, through continuous construction and increased bank loans.

(Read more about how I started Contentservhere.)

Scaling up a company involves more than just financing; it requires a great team to help develop software and market the product. We always placed customer needs at the forefront, resulting in their appreciation of our products and services, and our growth alongside their needs. For businesses, the market and customers are the only truth, and energy should be focused on satisfying customers as it pays off quickly. Entrepreneurs who rely on their customers for growth usually do not complain about a burn rate.

Despite high demand for our product, I intentionally financed Contentserv myself as full control over the company was important to me. Building Contentserv was not solely about financial gain, but a deeper motivation. In reality, building a business means losing more money than you make, and an exit should not be the primary goal. It is only a viable option when the company thrives to the point where you no longer want to sell it. That’s when you know you have succeeded!

Angel investor and business advisor

One key lesson from my journey as a business owner is the importance of having someone who believes in your vision. This could be someone who offers valuable advice or has the financial means and a good network to support you in getting your business up and running. Having faced the challenges of being a startup owner myself for more than 20 years, I empathize with others in a similar situation. As a result, I have become an angel investor and business advisor, using my experience to help others achieve their entrepreneurial goals. When companies make faster progress with my help and my expertise, that motivates me a lot.

Besides VC, there are at least 15 more ways to fund your business

I aspire for business owners to find the appropriate funding for their ventures. It’s essential to consider and explore other financing options apart from venture capital. To help you identify what kind of funding your business requires, I listed here other forms of financing and their brief explanations which you need to carefully consider for your funding as each has different pros and drawbacks:

1. Angel Investors: These are typically wealthy individuals who support with time, resources, like network and personal funds (usually not more than $20,000) in startups in exchange for equity or convertible debt.
2. Crowdfunding:This involves raising money from a large number of people, usually through an online platform. Usually, very time intensive and takes at least 3 months of preparation.
3. Small Business Administration (SBA) Loans:These are government-backed loans for small businesses that are typically easier to obtain than traditional bank loans. No cap table will be touched and not very time consuming.
4. Microloans:These are small loans ranging from $500 to $50,000, usually made by nonprofit organizations or government agencies.
5. Grants:There are various grants available from government agencies and private organizations that provide funding for startups in specific industries or for specific purposes. Time-consuming but the cheapest way to fund your company.
6. Equipment Financing:This is a type of loan that provides funding specifically for equipment purchases.
7. Revenue-Based Financing:This is a type of financing where investors provide funds in exchange for a percentage of a startup’s future revenue.
8. Purchase Order Financing:This is a type of financing where a lender provides funds to a startup to fulfill a customer’s purchase order.
9. Invoice Financing:This involves selling unpaid invoices to a lender in exchange for immediate cash. Very common for startups in the growth phase.
10. Friends and Family:This involves borrowing money from friends or family members who believe in the startup’s potential. One of the best ways in the early stage, because these people believe in you and your idea and have already a long relationship with you. But you can burn those relationships when you aren’t successful with your business.
11. Business Incubators and Accelerators:These are organizations that provide support and resources to startups, including funding, mentorship, and networking opportunities. Some are for free if they are a government initiation, and some take up to 3% of company shares on your first exit.
12. Strategic Partnerships:This involves partnering with established companies most time in the same industry to share resources and reduce costs. Big companies often need innovation and speed, excellent for you to help them with your dynamic and innovation.
13. Pre-Sales:This involves selling products or services before they are actually produced in order to generate revenue and fund the startup.
14. Royalty Financing:This involves selling a percentage of a startup’s future revenue to investors in exchange for funding.
15. Bootstrapping:This involves starting and running a business with little to no external funding. This involves using in most cases your personal savings, credit cards, or other personal assets to finance your startup. For sure the best strategy if you want to stay as the owner of your company.

In conclusion, if you’re an entrepreneur looking to finance your startup, know that there are many options available. Be open to exploring all possibilities, and don’t be afraid to seek advice from business advisors, mentors, and business angels. With the right funding and support, your startup can thrive and grow into a successful business.

My advice

As an advisory board member and business angel, I have found that after just a few brainstorming sessions with my startups, much better financing options become available compared to venture capital and private equity. Therefore, I advise taking the time to carefully and thoughtfully consider all available options, as the decision can have a significant impact on both you and your company.