Five ways to fund your startup without angel investors and VCs

Starting and building a startup is a common ambition among professionals and even students. A successful startup opens up the possibilities of earning name, fame and financial success at any age or stage of life. It also offers young professionals an opportunity to retire early, enjoy life, and pursue their hobbies and passions.

Building a successful startup is however not easy. It takes years of hard work and sleepless nights to build a financially sustainable business. The toughest part of this journey is to arrange the initial capital and the operating expenses for the early years when the cash flows from the new business are not sufficient. 

This is especially challenging for professionals or budding entrepreneurs who don't come from families with established businesses or don’t have access to the network of angel and venture capital (VC) investors.

But there are still many ways for entrepreneurs to obtain startup funding without approaching angel investors or venture capitalists. Here are five of them:

1. Bootstrapping or self-funding

This is perhaps the oldest and the most obvious way to fund a start-up or a new business. Use your personal savings to fund the initial investment in the business and then use the cash flow generated from the business to pay for running expenses and to fund growth. 

Bootstrapping is a slow way to grow a business but the upside is that it allows you to maintain full ownership and control your business and its future growth trajectory. 

Self-funding is also a good option for start-ups where revenue visibility is clear and the business offers the possibility to generate adequate amounts of recurring cash flows but doesn’t require large follow-on investments to sustain the operations. Bootstrapping however exposes the founder to personal finance and she can lose all her personal savings in case of a business failure. Given this, you must draw a line or put a limit to how much personal savings you can put into the business.

Stockbroking giant Zerodha, software-as-a-service company Freshworks, and content and news aggregator application Dailyhunt are all examples of successful bootstrapped ventures.

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2. Raising money from family or friends

Another option is to tap your immediate family members and close friends or colleagues to part-fund the initial capital required for your startup. You can raise money either as an interest-bearing or interest-free loan or provide a pro-rata stake or share in your business to your family members and friends. This is a good way to divide the financial risk of a start-up among many and thus reduce your own financial risk. But remember your family members and friends may ask for a convincing and credible business plan before opening their wallets for you.   

Not surprisingly, as per the Reserve Bank of India, ‘Families and Friends’ emerged as the primary source of funding for 43 percent of the 1246 startups that participated in RBI’s survey conducted between November 2018 and April 2019.

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3. Crowdfunding

Entrepreneurs and founders can also raise the initial capital for their startup from the general public aka small retail investors through crowdfunding websites or marketplaces. Crowdfunding platforms like Kickstarter, Indiegogo, and GoFundMe enable startups to raise funds by soliciting contributions from a large number of individual investors. 

In some ways, crowdfunding is similar to the initial public offers that establish business launches on stock exchanges and raise equity from individuals and institutional investors. Crowdfunding offers the possibility to raise significantly more money than you can ever raise from your personal savings or from family and friends. 

One of the most successful crowdfunding campaigns was done for Holosuit, the flagship product of Holoworld. Holosuit is the world’s first affordable, bi-directional, wireless and easy-to-use full-body motion capture suit. Founders Harsha Kikkeri and Shwetha used crowdfunding which got a lot of support from domain experts.

So a side benefit of crowdfunding is that it can help you validate and fine-tune your idea and also generate buzz around your product or service while raising capital. 

If your idea clicks on a crowdfunding platform it will also be easier to rope in big investors in the future.

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4. Grants and awards

Many philanthropic organisations, charities, family trusts and even government organisations provide grants, awards and donations for start-ups that have the potential to create a big positive effect on the communities in which they operate. 

Many organisations also offer financial support, mentorship, and resources to innovative startups that could revolutionise or create a positive disruption in their industry or segment. 

This funding route is best suited for non-profit start-ups and social enterprises that seek to improve the lives of the communities living at the bottom of the pyramid rather than make money for the founders. Grants are also a good option for start-ups in the environment and climate change mitigation space.

Startup India Seed Fund Scheme (SISFS), NIDHI- Seed Support System (NIDHI-SSS), Technology Business Incubator (NIDHI-TBI) and many other such government schemes are available for startups. There are also many private grants and awards available for startups in specific sectors.

5. Revenue-Based Financing (RBF)

Start-ups not only require initial seed capital to kick-start their operations but they may need working capital to fund the day-to-day business operations. One way to raise the maintenance or running capital is to go for revenue-based funding (RBF) from investors and specialised institutions. 

RBF allows startups to raise capital by selling a percentage of future revenues to investors. Unlike traditional equity financing, RBF investors receive a portion of the company's future revenues until they achieve a predetermined return on their investment. 

This is a good funding option for businesses with strong revenue visibility and a clear growth path. Any slippage in achieving future revenue targets or a slowdown in growth trajectory will be frowned upon by RBF investors. So, be ready for scrutiny by your investors.

If your idea is convincing and you have a good business plan then you can leverage any of these non-conventional funding sources to raise capital for your start-up without losing control to angel investors and venture capital funds. Each of these funding methods has its own advantages and challenges, so it's essential to evaluate which options align best with your business plan and long-term vision of your business.

(Karan Deo Sharma is a Mumbai-based finance and equity markets specialist).

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