Get your business off the ground with these sources of critical capital

Last week, I wrote the article, “Please Don’t Take Venture Capital.”

Venture capital is designed for funding moonshots that will grow exponentially to $100M in revenues in 5 years and be acquired (or go IPO) for billions. But 99% of startups are not moonshots and crash and burn when they shoot for orbit.

Instead of taking venture capital, most founders would be far better off building a profitable, sustainable business that can thrive over the long term. $3M in profits each year from a $20M niche business is far more viable than a venture capital unicorn.

The inevitable reaction to my missive? A lot of people asking: without VC funding, how can they possibly get their startup off the ground?

So here are 7 sources of funding to build your business that don’t require making impossible promises of exponential growth and billion dollar exits.

#1. Personal Funds

How do most businesses get started? The founders fund it.

Especially with software or services, the founders can build the product over nights and weekends until the startup generates enough income to jump in full-time.

Or a spouse might work a regular job while the founder builds the startup. Or a tech co-founder works full-time while the business co-founder holds a regular job and pays the out-of-pocket expenses.

In my case, it meant waiting until I was in my 40s and could afford to step away from a regular income. By waiting, not only was I in a financial position to succeed, but had the experience, skills, and customer contacts that I needed to turn an idea into a successful business.

#2. Friends and Family

An obvious extension to personal funds, if your parents have money, if you have a rich Uncle Jack, it’s time to hit them up. If one of your friends from college hit it big, it’s time to help them gain karma points by loaning you some money.

Do not make the mistake of structuring this assistance as a SAFE (or worse, actual equity). Those are for venture investments. They only provide a return when the company exits, and your goal is to generate profits, not get acquired quickly. Structure their assistance as a loan instead with a high interest rate paid back once the company can afford it.

#3. Customers

For B2B products, if it’s truly a hair-on-fire problem, they’ll pay you to develop a solution for them. There are many different ways customers can fund development:

  • A deposit of 50% with delivery 6 months later.
  • NRE (non-recurring engineering) to have the product developed to meet their specific requirements.
  • Consulting contracts for you to implement a solution for them.
  • Site licenses with a lump-sum payment instead of paying for individual copies over time.
  • For hardtech products, customers may provide equipment, supplies, lab facilities, test rigs, and other materials you’d otherwise have to pay for.

If you can’t find even a single customer willing to pay upfront, you may want to reconsider how important your product truly is.

#4. Crowdfunding

The B2C equivalent to customer funding is crowdfunding. You can sell your product while it’s still an idea on platforms like Kickstarter and Indiegogo.

If you can’t get customers excited about your product on Kickstarter, that’s a warning that it’s going to be a hard sell when you face 1,000 competitors on Amazon.

I’m only referring to sites where customers prepay to buy products, not programs like StartEngine and WeFunder where you sell equity in your business. Those are worse than venture capital and should be avoided.

#5: Government Grants

If you’re developing a new battery chemistry or carbon capture technology, you’ll need $10M just to find out if it works. You probably won’t fund that with personal savings (at least I won’t). Fortunately, the government is here to help.

If you’re building anything for sustainability, or for health, or with medical applications, or with military applications, or for farming, fire fighting, space, environmental protection, transportation, telecommunications, or dozens of other topics, there are government grants to fund development.

The US government’s SBIR program provides $1.25M per grant, split into 2 phases. You can stack multiple SBIR grants to cover different use cases to multiple the capital available. While the SBIR program is limited to US startups, governments in Canada, UK, EU and other countries have similar programs.

In addition to the SBIR program, there are bigger grants for later stage startups. State and local governments, economic development agencies, corporate foundations, disease support groups, and many other organization offer grants as well.

These funds are free. They’re not loans; you don’t give up equity. If applicable, this should be your first and largest source of funding. Go get them!

#6: Loans

Loans can be the lifeblood of any small business.

Many a business owes its existence to American Express since they offer nearly limitless credit for their charge cards.

Refinancing a home mortgage can unlock hundreds of thousands of dollars in home equity. There’s also second mortgages, home equity loans, and home equity lines of credit.

If your business qualifies, government-subsidized loans from the Small Business Administration can be ideal.

Once you reach profitability, small business loans from the bank can provide working capital at a low interest rate. Factoring of invoices can cover cash needs while waiting for customer payments.

If you’re selling your products internationally, the Export-Import (EXIM) Bank can help with credit needs.

#7. Operators, Partners, and Co-Founders

We’ve all watched Shark Tank. Most viewers think of Mark, Kevin, Robert, Lori, Barbara, and Daymond as venture capitalists or angel investors. They’re not. They’re operators.

The difference is critical. A venture capitalist hands you a check to buy a stake in your business and goes away until the company is acquired and they get their payday.

The Shark Tank crew doesn’t work that way. They become your marketing arm, your sales team, your distribution partner. They’re in your face helping you run your business, whether you want their help or not. And they charge you for that assistance.

Their deal structures are complicated. They may include a loan, so they get paid back as soon as the company has income. There’s usually fees for their services, commissions for sales, and sometimes a royalty just for using their name.

In other words, the sharks reduce their risk. The company may fail, but they’ll get their money back. That may seem unfair, but it allows them to invest in small businesses without having to wait 10–15 years for a 1-in-10 chance at a return.

You can do the same without having to embarrass yourself on television. Find an operator to join your business.

It will be someone with deep experience in your industry who can jump in and help build the business. They can provide needed capital as a loan that gets paid back as soon as the company can afford it while earning a salary for their work and equity to share in the profits.

Operators aren’t always easy to find. Look for partners and co-founders with complementary skills and cash to contribute to the effort.

Funding to Avoid

Unless you’re building a rocketship, avoid taking venture capital in all its forms. Once it’s clear the startup won’t reach orbit, they let the company die, even if it’s a strong business that would’ve been profitable if it hadn’t been shooting for impossible goals. This includes:

  • Venture capital funds
  • Angel investors (They write smaller checks at an earlier stage than VCs, but the economics are the same.)
  • Accelerators (They may not be as vociferous about demanding a big payout as venture funds, but their business model is the same — cash for equity that pays out when you have a big exit.)

Claw Your Way to Success

Bootstrapping isn’t easy. But it is the path to success.

You have to claw and scrape for every dollar. It’s eating what you kill, because nobody is cooking you a steak. You need to prioritize sales and only hire when you can afford to.

But once you get the business off the ground, you can make decisions for the long-term benefit of customers, employees, and founders instead of working for investors only looking for a 100x payout. And that’s the only way to build a truly successful business.

SüprDüpr raised $1B in venture capital to develop a teleporter. Under pressure from their investors, the founder pushed the schedule hard to get to commercial operation. Now people are turning up dead. Is it murder, or just a bug in the software? Find out in my award-winning Silicon Valley novel, To Kill a Unicorn. Get your copy today!