Alternatives to Equity for Entrepreneurs
Current models of funding new businesses often do not meet the needs of regional entrepreneurs. The funding landscape in Silicon Valley may work for Silicon Valley but that same model, when applied to other cities across the country fails to respond to the financial needs of companies that don’t see hockey stick growth or an exit. Data shows that 83% of businesses never take venture capital or traditional debt. Clearly, the majority of entrepreneurs require new and creative funding approaches.
Last week, as part of Louisville’s Startup Week, Access Ventures hosted a panel discussion to showcase capital structures that bridge the disconnect that exists between venture capital and entrepreneurs. The panel spoke about creative funding methods and how different businesses with different needs require different funding structures in order to best support growth.
Sam Lillie, CEO, and Co-Founder of Vinder, started his business on his bicycle and bootstrapped it for the first 2 years. He didn’t have a strong investor network, he couldn’t get a loan from a bank, and he didn’t have enough personal capital to give his company the boost it needed. He raised capital through equity crowdfunding on Wefunder, the largest funding portal by dollars raised, number of companies funded, and number of investors. Wefunder describes itself as the “Kickstarter for investing.” But unlike platforms such as Kickstarter, instead of donating your dollars or buying a product, an investor on Wefunder is truly investing in the startup, hoping to earn a return. “It’s a great channel because if you have a product you believe in, you can go tell anyone about it, and if they believe in it too, they can invest on the spot from their phones!”
Revenue-based financing is another alternative funding structure. It allows businesses to receive capital almost immediately and pay your investors back based on your monthly revenue. Tendai Charasika has used this structure at SuperFan because it works really well for companies that operate cyclically. SuperFan’s sales are closely tied to the academic year, so when schools are out for the summer, their sales decrease, but so do their monthly payments to their investors. Revenue-based financing also enables entrepreneurs to retain full ownership in their company, which can translate into greater long-term strategic realization or even into other ownership structures, like employee ownership.
The majority of entrepreneurs require new and creative funding approaches.
At Access Ventures, we have a character-based loan program called the Growth Loan. Vanessa Koenigsmark manages the Growth Loan and on the panel, she spoke about the benefits of character-based lending and debt financing. “Qualifications for financing are often based on societal structures that are inherently exclusive. Character-based loans that don’t require a certain credit score or collateral help mitigate that structural exclusion.” Additionally, it’s not just the capital that is beneficial when it comes to character-based lending. The people who review your loan are from your community. If you are approved you have community advocates as well as oftentimes the network of the lender and other loan recipients.
The community you gain from raising capital plays a big part in why Sam Lillie leveraged equity crowdfunding. “I lean on my funding community all the time. From product development, to research, to introductions – and they want to be helpful because they are partial owners in the company. Vinder’s success is their success too.”
Whether it’s equity crowdfunding, revenue-based financing, character-based lending, or traditional venture capital, there is no one size fits all capital structure for companies seeking funding. Every business is different and we encourage businesses and lenders to think creatively about how capital deployment can be structured to work best for both sides.
At Access Ventures, we are always trying to think about how to fund businesses in a way that meets the needs of the entrepreneur and the lender. If you’d like to stay up to date on what we’re doing, join our newsletter!