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Funding Your Startup When Venture Capital Is Scarce


A global analysis of Q1 VC funding published this week by KPMG and CB Insights has confirmed what industry experts have been reporting all along – that the decline in venture capital activity that began in Q4 of 2015 has continued into Q1. Average deal size for US startups fell for the second quarter in a row, while total deal volume has fallen for three quarters running.

If venture capital is retrenching over the longer term as some industry experts have predicted, that obviously means not as many startups will get funding, whether they’re seed-stage companies trying to get off the ground or late-stage companies looking for follow-on funding. What’s a startup to do?

The first order of business is to make sure you’ve crafted your story carefully and honed your pitch to perfection. It’s more important than ever that your business have a clear value proposition and that your product or service address a recognized problem in the marketplace. Investors who have to work too hard to understand your purpose may assume that customers will too. Make sure your pitch is easy to say yes to before you even start knocking on doors.

And given the current VC climate, if you’re looking to raise money anytime soon, you may also want to look beyond institutional VC options and explore any unconventional capital sources available to you:

Equity crowdfunding – When institutional VCs are being stingy with their funds, equity crowdfunding platforms like MicroVentures may still be a viable option, especially when it comes to augmenting traditional VC investment. A given institutional investor may not be willing to drop a quarter of a million dollars to fund your startup today, but with MicroVentures in your corner, you could get 50 individual angel investors to invest $5,000 each and raise the same amount of capital. Once the due diligence process is complete, the rest is up to us, which means less legwork for you.

Venture debt – If your startup is more mature – if you’ve already set your strategy, gained some traction, and even raised some venture capital – venture debt may be a smart way to help accelerate new growth. Startups typically take on institutional venture debt in between or in conjunction with equity funding rounds to fuel spending, buy time to achieve major milestones, or just provide a financial cushion. Securing venture debt is typically a quicker and more straightforward process than a traditional VC funding round, and it can be a relatively low-cost source of capital for the entrepreneur.

University-based funding – If your startup’s technology has been developed in affiliation with a particular university, there may be seed money or non-equity grants available from that institution to help move your startup to the next phase. In fact, more and more universities are now funding innovation centers and even running their own startup incubators. Innovosource’s Mind the Gap Report for 2015 indicates that 51 universities and affiliated organizations have invested $300 million in startup “gap” funding.

Local economic development funding – Many thriving communities have economic development commissions with funds earmarked specifically for backing local up-and-coming business ventures. If your city is angling to be the next major tech hub, your tech startup could be the next spoke. Funding startups can be good business for the community, which can leverage your success for PR purposes and for recruiting future development down the road. Likewise, regional and state-level business development agencies may also offer grants or financing.

Rewards-based crowdfunding – Sites like Indiegogo can help startups – hardware startups in particular – generate and capitalize on early interest from prospective customers. These sites allow startups to leverage their social networks to generate buzz and fundraising activity, and they enable entrepreneurs to monetize the support of friends and family who are devoted to the cause but don’t have the financial reach of institutional investors. In exchange for all those donations, however, you’ll need to offer a reward of some kind to your backers.

Government grants – Dozens of government agencies give grants to startups, especially for development in public sector industries such as healthcare, energy, transportation, and education. You can browse the options currently available at grants.gov. Startups engaged in scientific R&D may also qualify for federal research grants under the Small Business Innovation Research and Small Business Technology Transfer programs offered by the U.S. Small Business Administration.

If you’ve got a solid business idea, there will always be options for bringing investment dollars in the door. It may not be your father’s idea of venture capital, but it could provide the initial infusion you need to get started – or the tailwind you need to get to the next phase.