Alternatives to Equity Financing: When There’s Not Quite Enough in the Couch Cushions

Equity financings are exciting and make headlines, but they’re far from the only way to get funding for a venture. Entrepreneurs have a number of different ways to raise money, each of which has its own pros and cons. Here’s a quick tour of some of the alternatives to equity financing, and why you might or might not choose them.

Bootstrapping

The entrepreneur uses their own money to finance the business.

Why might this method work for you?

Very few VCs or angel investors will invest in a new startup with no product, no cash flow, and no business. Bootstrapping helps you get off the ground without outside assistance, and shows potential investors you have skin in the game.

Why might this method not work for you?

Your funding is limited to the amount of capital you already have on hand. Plus, if your idea fails, it could be very personally costly.

Friends and Family

The entrepreneur gets financing from their close personal network.

Why might this method work for you?

Friends and family are your biggest advocates. As a result, successfully pitching your startup idea to them is often easier than pitching to third party or institutional investors.

Why might this method not work for you?

If you don’t already have a wealthy network in place, it could be difficult to raise a significant amount of money. Over time, your business will need more capital to scale—money even wealthy friends and family may not be able to provide. Also, asking for money can lead to some very awkward Thanksgiving dinners!

Bank Loans

The entrepreneur gets financing in the form of a loan from a financial institution.

Why might this method work for you?

Debt financing can be particularly useful when diluting existing investors’ shares is not an option, when equity financing is too costly, slow or difficult, and when the startup isn’t growing quickly enough for equity financing.

Why might this method not work for you?

Since many startups lack consistent revenue sources, particularly in the early stages, you might find it difficult to find a bank willing to issue you credit. You'll also have to pay the money back that you borrow, and taking out too many loans can cause your company to come to a grinding halt due to interest payments.

Incubators and Accelerators

The entrepreneur gets resources from a collective, including office space, mentorship, and a professional network.

Why might this method work for you?

Incubators and accelerators allow you to pool resources with similar companies. In addition, you'll be able to lean on the expertise of seasoned entrepreneurs who understand the landscape.

Why might this method not work for you?

These organizations may take equity in your business in exchange for participation in the program. In addition, your company will often be committed to remaining a part of them for a year or two and hitting certain milestones, during which time you'll have less flexibility and control over the direction of the business. You should examine what you’re getting from the partnership, and whether it’s possible for you to get the same benefits from your existing network.

Angel Investors

The entrepreneur gets financing from a high-net-worth individual, often one with experience in the startup or VC space.

Why might this method work for you?

Angel investors usually do not have a large ownership stake or a seat on the board of your company, so you retain a greater amount of control. The process is also faster than an equity financing, since their due diligence process is typically “lighter” than that of an institutional investor.

Why might this method not work for you?

Angel investors represent one person’s pocketbook while VCs represent that of many limited partners, which means you won’t get as much funding from an angel. It’s also not always easy to find angel investors that are interested in your company; it could take a lot of outreach with no guarantee of success.

Grants

The entrepreneur gets free financing via government or private programs aimed at startups.

Why might this method work for you?

You won’t have to give up valuable equity to get these funds. Essentially, it’s free money—you don’t have to worry about reducing your ownership in your company, or paying it back down the line.

Why might this method not work for you?

Grants often have very specific requirements and a lengthy, competitive selection process. If you need funds right away, you might not have time to wait.

Incentive-Based Crowdfunding

The entrepreneur gets financing by appealing to a large number of people on the internet, who each invest a small amount of money via a funding platform like Kickstarter or IndieGogo. In exchange, those people gain early access to products, personalized gifts, public thanks or other incentives.

Why might this method work for you?

Crowdfunding can help companies figure out traction and market demand, as well as receive feedback and suggestions for the current and future products. It is also a great way to raise capital without losing equity.

Why might this method not work for you?

Many crowdfunding campaigns, even for useful products, fail to raise enough money to meet company goals, whether due to lack of exposure or lack of product understanding. There’s also a risk that you end up spending a lot of time creating and promoting your crowdfunding campaign, for a comparatively small amount of funding. Plus, you’re also on the hook to deliver any promised incentives, which can become a distraction from the work at hand.

While the fundraising method you ultimately choose will depend on your and your company’s needs, it’s a good idea to be aware of all of your options going into the process. Once you’ve decided on a method and are ready to move forward, let’s talk about how Fidelity can help.