Beyond VC: Alternative Routes to Fundraising for Start-ups

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Exploring Alternative Fundraising Routes

As a venture capitalist usually the only thing people talk about is raising a round of funding. But, for an early-stage start-up, especially pre-seed, it is hard to get venture capital firms to agree to invest with just a Powerpoint deck and vision. Next week we plan on breaking down what every founder should have in their pitch deck, but for now, we wanted to jump into other pathways for raising capital without traditional venture capital.

This edition unpacks various unconventional fundraising methods that have been successfully leveraged by notable companies in the past.

1️⃣ The Classic Route: Bootstrapping

Bootstrapping is self-funding your business through your own financial resources, personal savings, or the generated revenue from the business. This method allows founders to maintain complete control over their company's direction and growth without the influence of external investors.

Spotlight on Spanx:

Sara Blakely exemplifies bootstrapping success by turning her $5,000 savings into a billion-dollar brand without external capital. Her journey underlines the potential of using personal resources and revenue to gradually build a business while retaining full ownership and decision-making power.

Why Consider Bootstrapping?

• Control: Keep full decision-making power and retain total ownership of your company.

• Growth at Your Pace: Expand your business according to your own terms and timelines, free from the pressures of investors.

Considerations:

• Resource Limitations: Growth can be slower, limited by the availability of personal funds or business-generated revenue.

• Financial Risk: Higher personal financial exposure, with your own money on the line.

2️⃣ Crowdfunding: Community at the Core

Crowdfunding is leveraging small amounts of capital from a large number of individuals, typically facilitated through platforms like Kickstarter or Indiegogo, to fund new projects and businesses.

Spotlight on Oculus:

In 2012, Oculus launched a Kickstarter campaign to fund the development of their Rift virtual reality headset. The campaign was incredibly successful, raising about $2.4 million from nearly 9,500 backers, which was substantially higher than their initial goal of $250,000. This success not only helped fund their initial development but also positioned Oculus as a leading innovator in virtual reality technology. Eventually, Oculus was acquired by Facebook in 2014 for $2 billion, showcasing the significant potential of crowdfunding as a launchpad for cutting-edge technology and startups.

Benefits of Crowdfunding:

• Market Validation: Gain direct feedback from the market and demonstrate product demand.

• Brand Advocacy: Early backers often become enthusiastic supporters and promoters of the brand.

Drawbacks:

• High Expectations: You must meet the expectations of backers with timely updates and product delivery.

• Campaign Intensity: Successful campaigns require significant effort in marketing and maintaining transparency.

3️⃣ Revenue-Based Financing: Aligning Funding with Sales

Revenue-based financing is a type of funding where investors provide capital in exchange for a percentage of ongoing gross revenues, with payments made over time based on income.

Spotlight on Spotify:

In 2016, Spotify secured a form of revenue-based financing from TPG and Dragoneer, where these private equity firms provided funding in exchange for convertible debt. This debt would convert into equity at a discount to Spotify’s share price in its eventual IPO, depending on the timing of the IPO. This innovative financing strategy allowed Spotify to raise capital without immediately diluting equity, while aligning the cost of capital with its revenue growth, which was particularly important as Spotify continued to scale its operations globally.

Advantages:

• Non-Dilutive: Does not require giving up equity.

• Scalability: The amount of funding can scale with your company’s sales performance.

Limitations:

• Cost of Capital: Often more expensive over time compared to traditional equity.

• Sales Dependency: Best suited for businesses with consistent revenue streams.

 4️⃣ Blockchain Innovations: The ICO Phenomenon

Initial Coin Offerings (ICOs) are a blockchain-based fundraising mechanism where new projects sell their underlying crypto tokens in exchange for bitcoin or ether.

Case Study: Ethereum 

Ethereum conducted one of the most notable ICOs in 2014, raising funds to develop its decentralized platform, which has since become a foundational blockchain for numerous applications.

Pros of ICOs:

• Global Reach: Attract and access funds from a global pool of investors.

• Quick Liquidity: Funds raised are typically available almost immediately for use in project development.

Cons:

• Regulatory Scrutiny: ICOs are heavily scrutinized and subject to evolving legal frameworks.

• Market Volatility: Funding amounts can fluctuate significantly due to crypto market volatility.

5️⃣ Direct Public Offerings: Equity for the People

Direct Public Offerings (DPOs) allow companies to sell shares directly to the public without intermediaries, often to foster community involvement and raise capital for growth.

Focus on Ben & Jerry's: 

In the 1980s, Ben & Jerry's conducted a DPO that allowed Vermont residents to invest directly in the company, increasing community involvement and loyalty while securing funds for expansion.

Why DPOs?

• Community Engagement: Enhances connection and loyalty with local investors.

• Public Participation: Enables everyday people, not just accredited investors, to invest in a company.

Challenges:

• Regulatory Hurdles: Navigating complex securities regulations can be challenging.

• Market Risks: Companies are exposed to market fluctuations and investor sentiment.

Why is this important:

As we explore these alternative funding routes, it's crucial for founders to remember that each method carries its own unique benefits and challenges. Choosing the right path depends on your startup's specific needs, your industry dynamics, and how much control you want to maintain over your business. These options open up a wide array of possibilities beyond traditional venture capital, allowing you to tailor your fundraising strategy to best suit the pace and growth of your startup.

Remember, whether you're bootstrapping with your savings, rallying a community through crowdfunding, leveraging your sales via revenue-based financing, exploring the cutting-edge avenues of ICOs, or engaging your local community with a DPO, the goal remains the same: to fuel your business in a way that aligns with your vision and operational philosophy.

Resources

If you enjoyed this week’s newsletter - feel free to check out some of our past articles:

• How to Start Angel Investing

• Risk vs. Reward: The Realities of Startup Investing

• Deep Dive: SAFEs vs. Priced Rounds – What Founders Need to Know About Fundraising Options

📈 Start-Up Investment Opportunities

Please keep this confidential. If you are an accredited investor and interested in expanding your start-up portfolio, we have provided some investment opportunities that are currently active through the Red Beard Ventures Syndicate. The minimum amount to invest per deal is $1k! Please reach out if you have any questions.

xMarkets: Creator-Focused Prediction Market Platform | Polymarket ($1B Valuation) Competitor 

• xMarkets is revolutionizing prediction markets by enabling verified X users with 1,000+ followers to create markets on any topic using AI-driven tools for clarity and efficiency

• AI agent for market creation, $100 fee for quality curation, multiple resolution methods (LLMs, market creators, pricing oracles), and seamless X integration

• Secured KOLs with 10M+ followers, planning September launch ahead of presidential election. 

• Competitor Polymarket valued at ~$1B

• Led by experienced team: Co-founder AJ, MIT CS grad and former Microsoft ML Engineer, previously founded DeFi projects reaching $50M TVL and $1.1B market cap. 

• Backed by notable investors: Wes Cowan (Juice.finance), Paul Taylor (BlackRock), OneFlow Digital founder, Rahim Noorani (Satori.finance), Peter Huo (Whampoa Digital), and Eckhardt Capital. 

• Raising $1.5M Pre-Seed with $15M post-money valuation cap SAFE + $XMKT token warrant. 

• Link to invest

Matternet: Drone Delivery with Impressive Traction & Only Company with FAA Type Certification

• A16z, Sony, and Mercedes-backed Matternet is revolutionizing the instant delivery market by enabling ultra-fast, sustainable, and affordable delivery solutions for e-commerce, food, and medical items. 

• With an impressive 50k flights across 10 cities globally, Matternat is the first and only company to receive full FAA Type and Production Certification for its drone delivery system. Has also secured 135 strategic partnerships including UPS.

• Link to invest 

Antaris: The Red Hat for Satellite Missions | Revolutionizing Satellite Design, Simulation, and Operation

• Lockheed Martin and Streamlined Ventures backed Antaris Space is the first advanced platform for Designing, Simulating, and Operating satellites, reducing lifecycle costs by 10x and cutting time to orbit in half.

• Launched first demonstration satellite, Janus-1, in February 2023, built in just 10 months with 75% cost savings over comparable missions.

• Projecting $15.8M TCV Bookings this year with customers including Almagest, Spectral, ST Engineering, and government contracts.

• Strong financial projections: $9M in contracted ARR EO24 → $25M ARR EO25 → $50M ARR EO26, with recognized revenue of $5M EO24 → $10M EO25 → $20M EO26.

• Led by an experienced team: Co-founders Tom Barton (CEO) and Karthik Govindhasamy (CTO and President) previously served as CTO and COO of Planet Labs ($600M raised).

• Link to invest

👋 That’s all for now friends! See you next week.

Next week I am going to dive into syndicate and fund returns and why sometimes it is important to take the risk because the reward can be far greater!

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Disclaimer: The Cap Table DOES NOT provide financial advice. All content is for informational purposes only. The Cal Table is not a registered investment, legal, or tax advisor or a broker/dealer.