Unlock Growth with Non-Dilutive Capital
The world of startups is a dynamic, ever-evolving landscape especially in a country like India. A critical piece of the puzzle that determines the success or failure trajectory of a startup is its ability to raise funds. In fact, a study from CB Insights has found that 38% of startups do not reach their full potential because they run out of cash or do not secure funding at the right time.
Traditionally, founders often think of angel investments or venture capital to fund their companies. These routes carry with them a stamp of approval and networking benefits in addition to getting funds. However, when you take these routes, you also have to exchange equity for the funds.
For owners who do not want to part with ownership in their companies, all is not lost. Alternate avenues of funding are gaining traction that do not require you to dilute your equity holdings. Broadly, these methods are called non-dilutive funding options.
As the name suggests, non-dilutive funding means a form of securing capital that does not require you to relinquish control of any portion of your company. You can retain full ownership while still securing funds required to help you grow your business.
Imagine a startup as a flourishing tree, with each branch representing a potential avenue for growth. Traditional or dilutive funding, like venture capital, is comparable to grafting new branches onto the tree. While it helps the tree grow taller and broader, it also means sharing the nutrients and resources of the tree among the new branches.
On the other hand, non-dilutive funding for startups acts as a nourishing fertilizer, enabling the existing branches to thrive and bear fruits without altering the fundamental structure or ownership of the tree. It allows startups to tap into external resources while preserving their core essence and value.
There are many types of non-dilutive funding such as securing a business loan or other forms of debt, grants, crowdfunding, bootstrapping or even getting funds from friends and family. A new popular method of non-dilutive funding is revenue-based financing. We at Recur Club go a step further and enable startups to convert your future revenue streams into upfront growth capital- but more on that later.
What’s The Real Difference Between Dilutive and Non-Dilutive Funding?
Let’s break down the previous section into understandable chunks:
Dilutive funding requires you to give up a portion of your equity or company ownership to the party giving you funds. Non-dilutive funding does not entail any equity exchange. You simply get funds as a loan or based on your - future revenue streams.
An example of dilutive funding is venture capital. When you raise funds from a venture capitalist, you must often give them a portion or share in your startup. Non-dilutive funding like small business loans will get you money in exchange for an interest payment. Or revenue-based financing can help you leverage your steady revenues in exchange for funds.
Dilutive funding also has other consequences. You will often have to listen to your investor and make decisions taking their preferences into consideration. Non-dilutive funding means that none of these bells and whistles are applicable. You do not have to run your company in accordance with-an investor’s opinions.
What Are the Non-Dilutive Funding Options For Your Startup?
Non-dilutive funding for startups can come in various forms. Some of the best types of non-dilutive funding you can explore are:
1. Small Business Loans
Any type of business loan that you take for your startup will be non-dilutive. Typically, a bank or another financial institution can provide you with a loan based on certain conditions. You can apply for a short-term or a long-term loan. Financiers of small business loans will often ask for a business plan, your financial statements and check your creditworthiness. They may also ask you to provide collateral as a security.
If you are looking for money for working capital, cash flow management, buying new equipment or inventory in the early stages of your startup, a business loan can ease your financial concerns.
2. Lines of Credit
A business line of credit (LOC) is similar to a short-term business loan, but it’s much better. Typically, you will have an approval limit for the amount you can borrow. The best thing about lines of credit is that you can choose how much you want to borrow within a given time-frame and only pay interest on the amount that you borrow. You can take on a line of credit for a few months or a couple of years.
This is a great option if you need funding for working capital needs but don’t know exactly how much capital is required.
3. Grants
Grants are a form of non-repayable funds that startups can apply for. They are very attractive for early stage startups because they do not have to be paid back. The government, foundations, corporations and high net-worth individuals may provide grants to entrepreneurs to support their growth and initiative.
For instance, PRISM’s Technopreneur Promotion Program (TePP) launched by the Department of Science and Technology, Govt. of India helps individual innovators to set up their own business.
This grant is issued at various stages from conceptualization and fabrication to development and application. In 2019, WhatsApp launched the Startup India-WhatsApp Grand Challenge to fund 5 Indian startups with a grant of $50,000 each.
While grants are very appealing, they can be difficult to get because of the intense competition that prevails in securing them.
4. Licensing
Licensing is an innovative way to get money for your startup if you already have some established products, services, processes or intellectual property. Licensing allows you to give permission to another party to use your particular asset in exchange for a licensing fee or royalties.
For instance, if you have a process that can be used by other SaaS companies, you could license that in exchange for money. This can be useful to help you with your working capital needs or for innovation projects and research.
5. Vouchers and Bonds
You can also turn to vouchers or bonds to fund your startup. A voucher is a “promise to pay”. For instance, if you have to receive money from a supplier or client, you can get a voucher in exchange for that payment, promising to pay the financier in future. This form of funding only works if you have an existing revenue stream.
Bonds are financial instruments that allow you to raise money from investors such as the general public, pension funds, mutual funds, etc. It is a form of loan wherein you promise to repay the borrowed amount plus an interest to the investors.
However, instead of raising money from a financial institution, you go to the general public to get funds. The advantages include non-dilution of equity and easier funds since you do not have to jump through hoops that financial institutions put in place.
6. Revenue-Based Financing
Revenue-based financing, or royalty-based financing, allows you to raise funds by pledging a certain percentage of your revenue in exchange for money. Investors will receive a regular share of your startup’s income until a certain amount has been paid off.
Typically, the predetermined amount is some multiple of the principal provided, like two to four times the original amount invested. To access this form of funding, you must have regular revenue.
7. Venture Debt
Venture debt is a form of funding that is only available to startups that are already venture-funded. This allows you to avoid further dilution of capital. Venture debt is not provided by venture capitalists.
Instead, banks or other financial institutions offer venture debt based on the goodwill of venture capital already raised. This type of funding can be used to purchase equipment, for research and innovation or other important milestones in your startup journey.
Apart from these options, you can also consider tax credits or crowdsourcing as options for financing. Getting money from friends and family either as a loan or just to help your business move forward can also be options worth considering.
Is Non-Dilutive Funding For Your Startup?
There are numerous benefits of non-dilutive funding for your startup - you maintain full control of your company and investors do not influence your key business decisions. If you get a grant, you can gain more visibility and inclusion into startup incubators and other networks. The repayment options are also more flexible for non-dilutive funding when compared to raising funds from a venture capitalist or an angel investor.
Choosing the right form of financing for your company is pivotal to ensuring its success. However, to decide whether non-dilutive funding is for your company, answer some of these questions:
· Are you particular about retaining ownership?
· Do you have the revenue to repay any loans you take?
· Will you be eligible for the kind of funding you want?
· Do you stand a chance to win the grant? What is the probability?
If the answers to these questions are positive, then you can consider the different types of non-dilutive funding options. You could also consider a mix of dilutive and non-dilutive funding options as a strategic mix for your company.
How to Leverage Non-Dilutive Funding for Venture Capital?
As a startup, it is important to consider what is the best possible way to fund your growth strategy. If you don’t mind giving up some control of equity, you could consider a mix of dilutive and non-dilutive funding for your startup.
For instance, non-dilutive funding is typically used to provide targeted resources for specific projects. You could apply for a loan for working capital needs or build a product prototype. You can explore non-dilutive funding options that align closely with your business model, technology, or target market. By securing such funding, you can access not only capital but also domain-specific expertise, networks, and support.
This can enhance your competitive advantage, credibility, and position you as a leader in your field , -attracting attention from-VC investors. In many cases, VC investors view non-dilutive funding as a positive signal. You can leverage non-dilutive funding as a form of matched funding, indicating external validation and support for your ideas.
Venture capital, on the other hand, is used to scale and target more ambitious goals. VC funds can be utilized for uncertain expenses and long-term investments that require substantial capital, such as expanding into new markets, launching new projects or product lines, acquiring other businesses, or building infrastructure.
There’s also a difference in the amount of capital that you can raise from both sources. Typically, non-dilutive funding is limited to your startup’s size and revenue potential. Amounts that you receive as a loan or a grant will be much smaller compared to what you can raise from a venture capitalist. Non-dilutive funding is generally up to 50% of annual revenue. VC funding, on the other hand, can fetch you 1x-3x of annual revenue and is often based on the valuation of your company. When combined, they can help you meet short-term and long-term growth objectives.
If you want to consider - alternative financing for your startup, then we at Recur Club can help you reach your goals! Check out our offerings here. Also check out our blog on whether you should consider VC funding for your startup.
