Headlines about large valuations and big funding rounds hide the fact that a huge number of venture-backed startups fail. And yet, that’s part of the game plan: most VCs expect three out of 10 of their investments to fail completely. This leads to VCs hedging their bets on one or two startups and reserving follow-up funding for them. It also leads to pressure to grow quickly, take further investment and exit.
For a startup, raising venture capital is time consuming. It can become a founder’s full-time job, taking them away from building their company and team. In return, they give up equity and gain an added voice at the decision-making table.
It’s also no secret, despite many initiatives, that VC is not inclusive. Investment into women-led companies has dropped to 2% globally. According to Atomico’s State of European Tech report 2020, 62% of founders of colour found it hard to raise VC. The need for networks, warm introductions, and family and friends rounds to prove a company’s thesis does not create a diverse industry.
Because of all of this, companies increasingly want other options. What if founders could keep their equity and their board seats and exit whenever they chose?
Alternative financing providers are springing up to meet this demand in the US and, increasingly, in Europe.
Revenue-based alternative financing can help democratise access to funding as it does not require warm introductions — you just apply. It does not require personal guarantees, there is no equity on the table, and no board seats are requested.
It is primarily focussed on ecommerce and SaaS companies who have a growing revenue stream. Flat fees are charged which vary depending on what the money is spent on (marketing is the lowest).
Companies in this space include:
- Riverside Acceleration Capital
Media for Equity
Media for equity or revenue is an alternative financing option that provides advertising products for television, print, online, etc. in return for equity in a company or monthly revenue. Benefits of this type of model are scaling up brand awareness, data on audiences, and professional experience from media companies without having to spend cash.
Companies in this space include:
- UK-based Channel 4 Ventures.
- Scotland’s STV Growth Fund. .
- Spain and Italy-focused Ad4Ventures.
- Seven Ventures
Earnest Capital (US but investing in Europe)
Earnest Capital funds early-stage companies building “calm, sustainable, profitable” companies. It des this through a shared earnings agreement — this agreement means all money is repaid only after the company is profitable above a pre-agreed threshold. Founders have an incentive to share profits back with investors as it effectively repurchases their equity ownership.
Founders are plugged into a platform of services and products called Earnest OS. There is a community of 150+ experienced entrepreneurs who are both investors in the funds (skin in the game) and mentors to the companies.”
Earnest Capital retains equity once 2-5x of the initial investment is paid back It helps us stay long-term aligned with the founders and support them if they want to really go the distance”.
Typical companies invested in – B2B SaaS primarily, but also developer tools, apps for remote teams, niche marketplaces, and subscription revenue-based media and content companies.
Tiny buys internet businesses with 3+ years operating history, annual net profits over $500k, and a solid team, and provides the resources and management to keep them running. Portfolio founders can stay or go; all options are on the table. The purchase price of companies is between $5m-$50m.
It is fully remote and open to companies anywhere. It has over 300 scouts worldwide that help with deal flow.
Others VC alternatives include:
- London-based Storfund. It provides cash advances to ecommerce merchants. Sellers must be on Amazon or France’s marketplace, CDiscount, and averaging £25k a month to be eligible.
- London-based Conscilience Ventures (CV). The community-based platform built on the blockchain allows startups to sell equity to the network in return for its CV currency. This currency can be used to buy expertise from within the community to help the business where needed.
- Liechtenstein-based Money Turtle. A new app built on the blockchain to simplify and legalise the raising of a family and friends round. Part of its proceeds goes towards protecting sea turtles.
The good news is that there are more alternative financing options than ever before.
The bad news is that an already complex innovation funding landscape is getting even harder to successfully navigate.
This is where Infintec can help – so why not drop us a line and get 2022 off to a great start.