Venture capital funding isn’t always the best choice for early-stage startups: here are other routes to consider

Venture capital funding isn’t always the best choice for early-stage startups: here are other routes to consider

By Arutyun Arutyunyan, Innovation Associate, Plexal

Many startups often see one success route in front of them: bootstrap, secure a first VC round and then use that as a stamp of success to win the confidence of clients, future investors and the media. Before long, they’ll have joined the growing unicorn club. But founders should consider whether it’s the right time for them to secure funding rather than focusing on product or business development. More importantly, they should also think long and hard about whether VC funding is the right path altogether.

By working with Plexal’s Cyber Runway accelerator cohort and our workspace members, I see lots of founders become completely distracted by chasing VC approval at the wrong time. They may want to take a cue from Plexal member James Kong, who initially resisted offers from VCs precisely because he didn’t want anything to affect his chosen timeline as he developed his core battery technology. A whopping 17 Innovate UK grants kept him going for years and, now that he’s in the commercialisation phase, he’s open to VC investment.

What’s more, many companies want to view themselves as a startup but in reality their business model means they’re more like an SME. And that’s OK – not every business needs to scale at lightning speed or target unicorn-sized revenues. When did “SME” become such a dirty word?

If you do need a big cash injection or access to specific markets, VC funding can be a very powerful option but it’s important to be aware of the pros and cons.

Some VCs place pressure on startups to deliver large returns quickly – which can lead to bad decisions – while others have a stretched portfolio so can’t dedicate much time to every founder. This is driven not just by their own ambitions but also the expectations of their limited partners – which show signs of becoming even higher.

But every VC is different and founders shouldn’t view the VC world as a monolithic block. Instead, only pursue VCs who align with your long-term strategy. The right VC can be a game-changer for your company’s growth trajectory.

Likewise, VC funding isn’t the only option out there…

Six ways to fund your startup that don’t involve a VC

1. Angel investors

Angel funding is currently the second biggest source of investment for UK startups and tends to be favoured by early-stage startups. Because they invest their own money – rather than a fund – they have different criteria and by and large tend to take bigger bets.

The right angel can provide mentorship and support in certain sectors, so look for someone who gets your vision and has relevant experience.

2. Corporate VC

CEOs of large corporates are under pressure to innovate. As a result, quite a few companies have built their own VC arms aimed at helping them become a first-mover when it comes to technology. These investments are also expected to deliver returns for the corporate.  

Corporate venture capital can come with useful technical advice that can help you with your product roadmap and in some cases pave the way for you sell to clients because you have the backing of the parent company.

That being said, if the parent company isn’t aligned with the corporate venture capital arm when it comes to timelines or the need for startups to maintain a separate culture, it could spell trouble.

3. Banks and the Start Up Loan

Banks can provide debt-based financing, which means the startup pays back a loan over a pre-determined period of time – along with interest. Startups tend to be able to raise around £50,000 or less from banks but that figure varies.

If you’re really early-stage, the UK government-backed Start Up Loan gives businesses up to £25,000 and provides 12 months of free basic business mentoring.

If you don’t need mentoring or the huge cash injection that VCs can provide, this could be an attractive option.

4. Private equity

Private equity investors tend to focus on companies that are past their growth stage and are seen as less risky investments. They can provide mentoring and access to networks but they traditionally go for a majority stake of a company.

Using private equity tends to be the approach of companies that have operational challenges that are preventing them from becoming profitable. If you’re enjoying healthy growth and aren’t experiencing any profitability issues it might not be worth giving up such a huge amount of ownership.

5. Government

The Department for Business, Energy & Industrial Strategy has a full list of national and local funding options that come in the form of government loans or grants. If your business aligns with the government’s priorities, this could help fuel your growth – especially in the early stages.

The main drawback is how time-consuming it can be to apply for these grants. Many startups become more efficient at applying over time but it will take a while to become a well-oiled bid application machine.

6. Notable mention: revenue share

Companies like Pipe, Clearco, Fairplay are offering companies upfront capital based on their recurring revenue. Founders retain 100% ownership and pay back the debt as a percentage of their revenue. But it’s a relatively new model so we don’t know a huge amount about the risks and rewards that come with it.

Final thoughts: make it work for you

At the end of the day, your funding route should reflect the type of business you want to be – how much external investment you want, where you want to focus your time and how quickly you need to grow. There’s no one-size-fits-all solution, so you should consider all your options.

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