Solutions to Early Stage Funding Gap for Startups
I was speaking with an entrepreneur recently who was lamenting the challenges of raising money given they are in a funding gap. There are many articles such as these written on the topic. Part of the premise is as venture firms raise larger and larger funds, they have more money to put to work and start looking for companies to have a larger size/scale before considering investment (i.e. prefer to make $5-10M investments vs. $1-5M investments). Angel investors are often capped by the amount of money they have to invest and limited by their specific expertise. This creates a gap where a company with some traction but still not to a VC threshold is left with either taking smaller/more dilutive/unsophisticated money, continuing the course without raising, or putting more money than desired into the business (which comes at more dilutive terms). What to do?
As David Cummings has written before, raising money is not for everyone and may not be the best strategy. Consider what level of control you want, what growth path, and the market opportunity/timing of moving quickly (i.e. is this a land grab market or not). If you have managed the business well to this point you still may be able to fund future non-dilutive growth, even if it means moving at a slower pace. Stay focused on creating passionate, loyal customers and let that be your growth engine.
Get Customer Money
One of the best sources of funding is from customers/partners. Not only is it non-dilutive, it can be paid up-front and you know they see real value in your solution. Furthermore, future investors often view it positively that customers have invested in your business (assuming there are no crazy terms or provisions).
Take less Now for More Later
Another idea is to take less than you desire now, but enough to get you to the required threshold of your desired investor. This can give you some growth acceleration but can also engage your future investor to support you now until you reach their stage. If they believe in you and your company, they will often help now as well.
There are a variety of other creative options, but these are a few to consider if you find yourself in an early stage funding gap.