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  • 12.09.14

How To Raise Money When VCs Aren’t An Option

Hitting a brick wall on venture capital funding? Start exploring these alternatives.

How To Raise Money When VCs Aren’t An Option
[Photo: Flickr user Spirit-Fire]

When every startup success story seems to involve venture capital firms and a multimillion dollar funding round, it’s easy to believe that your startup must get VC funding to succeed. That couldn’t be further from the truth.

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The overwhelming majority of startups will get shot down by VCs, and frankly, your startup might not be the right candidate anyway.

VCs typically want to make a $3 to $5 million investment at minimum, and they might not consider any company generating less than $100,000 per month in revenue. Otherwise, the due diligence process and time they will spend supporting your company just isn’t worth the return. So, between the seed stage and Series A (often called “post-seed”), most startups have a hard time finding VC funding.

Not long ago the company I cofounded landed in this exact situation. We needed post-seed funding, but we didn’t need enough capital to warrant a VC. So, we found alternatives, and we’re meeting our funding goals. As a side benefit, we’ve retained full control of our company.

You don’t need to get hamstrung by post-seed funding issues. Instead, try these three alternative funding strategies:

1. Offer Convertible Notes

Early stage startups give investors pause for good reason–failure rates are extremely high, and valuations can fluctuate violently. To provide security to investors, you can offer convertible notes: short-term debt that will convert into equity, typically when you close your Series A financing.

Because the convertible note is a loan, you don’t have to worry about getting beat up on your valuation, and your investors will not receive controlling rights or a board seat (which is often the case with preferred stock and other funding instruments). Compared to preferred stock or full-blown Series A, the legal complexity and fees around issuing convertible notes are also minimal.

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2. Crowdfund With Accredited Investors

Kickstarter, Indiegogo, and their competitors have become proving grounds for startup concepts, but they aren’t right for everyone. What if you already have a strong product and need funding to build a marketing and sales team? You’re not going to galvanize Kickstarter supporters with that mission.

If typical crowdfunding isn’t right for you, try equity crowdfunding. We’re using a platform called Onevest to raise a $1.3 million round from accredited investors. We were able to participate in a Digital Demo Day, which involved giving a 10-minute virtual pitch to a group of over 100 investors. The time and costs required to pitch this many investors individually would have been prohibitive, but this one pitch brought about 10% of our audience into the due-diligence process.

3. Automate Investor Communications

You can’t spend your whole day calling investors when you’re trying to grow your business. If you’re raising money from a large number of angel groups and accredited investors, it only makes sense to spend one-on-one time with those that have demonstrated interest. So, you can automate the top of your funnel to protect time and gauge interest.

We find investors on AngelList, Gust.com, and LinkedIn, and we occasionally purchase lists of investors. We load their contact info into our CRM (Infusionsoft), and we automate this CRM to send our pitch deck to new leads. If they read the deck, then it automatically sends a term sheet. If they request further information (and verify that they’re accredited), then the CRM can send our financials, contracts, and other data. Last, we send the Private Placement Memorandum and close the deal.

Using this method, we have roughly an 80% closing rate among interested leads. We get hands-on with potential investors once they request the Private Placement Memorandum.

To succeed with alternative funding routes–particularly on crowdfunding platforms–plan to:

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  • Explain everything you do in laymen’s term. Drop the buzzwords and make it dead obvious what your company does–otherwise your virtual pitches will put the crowd to sleep.
  • Raise roughly five times more money than you think you need. If you think you want $200,000, you really want $1 million.

Keep in mind: this is not an indictment of venture capital, and I wouldn’t discourage any startup from going that route if they need $3 million to $5 million or more. This is a simply a wake-up call for startups that feel stuck or helpless because they keep hitting a brick wall with the VC route. You’re not trapped. Your success story isn’t ruined. It’s just time to explore alternative funding.

John Frei is CEO and Co-Founder of SpeechTrans.

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