Startup Funding: When & Why to Diversify Capital Sources

Alternative Funding Options for Startups

While venture capital remains a prevalent funding source for early-stage companies, it isn't the sole option available. Increasingly, startups are exploring debt financing and non-dilutive, revenue-based financing as viable alternatives.

TechCrunch Disrupt 2021 Panel Discussion

At TechCrunch Disrupt 2021, a panel featuring Accel Partner Arun Mathew, Clearco co-founder and president Michele Romanow, and Pipe co-founder and co-CEO Harry Hurst explored diverse capital-raising strategies for startups. (Unfortunately, a power outage limited Harry Hurst’s participation throughout the entire discussion.)

Venture Capital Isn't Always Essential

Both Clearco and Pipe have secured substantial venture capital funding themselves, yet Romanow and Hurst emphasized that venture funding and other capital forms aren’t necessarily “mutually exclusive.” Romanow stated that successful companies often utilize a combination of different capital pools.

She encouraged founders to thoroughly research which capital type best suits their company’s stage and specific needs. Doing so, she believes, can lead to less dilution and greater leverage for faster scaling.

Not All Startups are Venture-Fit

Mathew posited that the majority of startups may not actually be well-suited for venture investment. He explained that venture investment can be costly and often comes with specific expectations.

Romanow highlighted that the decision between venture capital and alternative financing hinges on the intended use of funds. For instance, capital allocated to inventory and advertising isn’t optimally suited for venture dollars.

“Surrendering valuable equity early for repeatable, scalable expenses with a fixed return simply doesn’t make sense,” she explained.

Revenue-Based Financing: A Different Approach

Clearco provides revenue-based financing, structured as revenue-share agreements, which Romanow distinguishes from traditional debt. The company recently raised $215 million, shortly after achieving unicorn status.

A key difference is the approach to repayment: Clearco does not initiate bankruptcy proceedings if repayment isn’t immediately possible. They operate on a flat-fee basis; for example, a $100,000 investment requires repayment of $106,000.

This model has attracted a surge of e-commerce brands, mobile applications, and SaaS companies. Clearco has deployed over $2.5 billion to more than 6,000 companies in the past two years.

Romanow expressed optimism regarding categories historically underfunded, advocating for founders to consider cheaper capital options for repeatable expenses.

Debt Financing and Alternative Platforms

Debt financing presents another option, with firms like Architect Capital offering solutions. Startups seeking credit can also explore companies such as i80 Group. Pipe, a fintech unicorn founded in September 2019, facilitates upfront revenue access for SaaS companies by connecting them with investors who accept a discounted rate for annual contract value.

Pipe’s model has expanded to include non-SaaS companies with predictable, recurring revenue streams. The company achieved a $2 billion valuation after a $250 million funding round.

Considering Market Dynamics and Aspirations

Mathew urged founders to carefully evaluate their ambitions and the market landscape to determine if venture investment is truly warranted. He believes venture funding is appropriate for companies in “the right category, with the right team, pursuing a sufficiently large opportunity.”

He referenced a TechCrunch article, “Understanding the Mendoza Line for SaaS growth,” emphasizing the need for a substantial market size to reach $100 million in revenue and achieve scalability for SaaS businesses.

“Growth typically requires significant investment, particularly at earlier stages—when annual revenue is between $5 million and $20 million—where growth rates exceed those seen at $50 million or more,” he explained. “The aforementioned article provides a framework for evaluating fundraising at different growth stages.”

Maintaining Investor Relationships

Mathew also advised founders not to dismiss investors who initially decline their proposals. Accel prioritizes candid feedback and often revisits promising ventures after they demonstrate further progress.

Addressing Common Misconceptions

Misconceptions surrounding financing options are common. Romanow clarified that Clearco’s approach differs significantly from debt. “Debt holders can claim ownership of your business if you default, which carries substantial risk, typically reserved for later-stage companies,” she stated.

Mathew addressed misconceptions about traction, noting that Accel sometimes invests even before a product launch or demonstrable traction. “We invest based on a business plan and the founder’s vision for a large market opportunity.”