#72 — Alternatives to venture capital | Field Notes

Note: If you haven't already, consider reading our general playbook on raising capital first and then come back to this article.

The big picture: VCs invested $368 billion globally in 2024, with the US alone seeing $209 billion—the third highest total in 20 years. But they're not your only funding option — and often not the right one.

Why it matters: Most founders chase VC money without considering whether it fits their business model, growth timeline, or values. This playbook gives you every alternative to build your startup without traditional venture capital.

The VC reality check

What VCs actually want:

Scalable tech businesses with massive market potential
Proven teams with track records and deep industry knowledge
Clear path to 10x+ returns within 5-7 years
Companies that can stomach rapid growth pressure and quick exits
Proof of concept or market traction beyond just an idea

The catch: This eliminates most startups from consideration. VCs focus on specific sectors, investment stages, and geographic regions. They also bring equity dilution, pressure for rapid growth, and potential misalignment with your long-term goals.

7 funding alternatives that work

Angel investors

What it is: High-net-worth individuals who invest their own money, typically $25,000-$500,000.

Why founders love it: More hands-on mentorship, faster decision-making processes, and less dilution than VCs. Angels often bring industry expertise, network connections, and management guidance.

Best for: Early-stage startups needing both capital and expertise. Particularly effective when angels have relevant industry backgrounds.

How to attract them: Develop a compelling business proposition, build a thorough business plan, create a solid team, and network actively at startup events. Prepare for due diligence and maintain open communication throughout the process.

Bootstrapping

What it is: Growing with personal funds and revenue — no external investors.

The upside: You keep 100% control and ownership, avoid lengthy investor processes, and develop disciplined spending habits.

Success stories: Mailchimp sold for $12 billion after bootstrapping from day one. Basecamp grew from an in-house tool to a profitable project management solution.

Best practices: Focus on cash flow generation, maintain lean operations, implement customer-centric approaches, stay flexible and adaptable, build strong networks, and reinvest profits strategically.

Revenue-based financing

How it works: Get capital now, pay back a percentage of monthly revenue until you hit an agreed cap.

The appeal: No equity dilution, payments scale with your success, and you retain full decision-making power.

The requirements: Consistent revenue streams and transparent financial records. Works best for startups with predictable income patterns.

The downside: More expensive than traditional loans and challenging for businesses with unpredictable or seasonal revenue.

Government grants and loans

What's available: Non-repayable grants, low-interest loans, tax credits, and competition prizes.

Examples: Tesla received $465 million from the Department of Energy; Moderna got $955 million for vaccine development.

The process: Research appropriate programs, check eligibility criteria, prepare detailed proposals with financial projections, gather required documentation, and be prepared for follow-up queries.

Types include: Industry-specific grants, R&D funding, social impact initiatives, and regional development programs.

Crowdfunding

The numbers: Oculus raised $2.4 million on Kickstarter before Meta acquired it.

Three types:

Rewards-based: Backers receive products or perks (Kickstarter, Indiegogo)
Equity-based: Investors receive company shares
Debt-based: Multiple lenders contribute with repayment expectations

Success formula: Compelling storytelling, realistic funding goals, attractive tiered rewards, effective marketing, and regular backer engagement.

Best for: Consumer products, creative projects, and businesses that can offer tangible rewards.

Accelerators and incubators

The trade-off: 3-6 months of intensive mentorship for 6-8% equity.

What you get: Office space, expert guidance, investor networks, demo day exposure, and structured development programs.

Top programs: Y Combinator (Dropbox, Airbnb), Techstars, 500 Global, and Plug and Play.

Consider the intensity: Fast-paced environments with pressure for rapid development and highly competitive selection processes.

Peer-to-peer lending and microloans

How it works: Borrow directly from individuals through online platforms like Prosper.

Advantages: Faster approval than banks, competitive rates, no equity dilution, and accessibility for startups with limited credit history.

Microloan benefits: Smaller loan amounts ($5K-$100K), community building opportunities, and often include business training or mentorship.

Best for: Early-stage funding needs without traditional credit requirements.

Advanced funding strategies

Strategic partnerships

The opportunity: Collaborate with established companies for access to resources, customer bases, and distribution channels.

Value beyond money: Industry expertise, market validation, and potential acquisition pathways.

Invoice financing

How it works: Receive immediate funding by selling outstanding invoices to third parties at a discount.

Best for: B2B companies with established customer relationships and predictable payment cycles.

Asset-based lending

The concept: Free up capital through accounts receivable or inventory for revenue-generating startups.

Requirements: Tangible assets and established revenue streams.

Building your comprehensive funding strategy

Assess your true funding needs

Calculate your runway requirements by dividing total cash reserves by monthly burn rate. Current market conditions favor 25+ months of runway versus the traditional 15-18 months.

Key components:

Gross burn (monthly cash expenses)
Net burn (monthly cash sales minus expenses)
Growth-related investments
Market condition buffers

Match funding to your development stage

Pre-seed ($25K-$500K): Personal savings, friends and family, angel investors, crowdfunding, government grants, accelerators.

Seed ($500K-$5M): Angel investors, early-stage VCs, accelerators, revenue-based financing.

Growth stage: Traditional VCs, larger loans, strategic partnerships.

Set milestone-based funding goals

Each funding round should provide 12-18 months of runway and help increase company value 2-3 times through tangible business developments.

Effective milestones include:

Product development goals
User acquisition targets
Revenue measurements
Strategic collaborations
Market expansion plans

Diversify your funding sources

Most successful startups combine multiple funding sources to reduce risk and maintain flexibility. This approach, known as capital formation strategy, creates a specific mix based on your unique circumstances.

Prepare for different scenarios

Have backup plans for various funding outcomes, including expense reduction strategies and accelerated revenue generation tactics.

Investor outreach mastery

Research and targeting

Use Crunchbase to identify funds that led seed rounds for similar startups. Check VC websites for typical check sizes and stage preferences. Find the right partner at each firm who specializes in your industry.

Leverage your network

Activate existing investors, mentors, and fellow founders for warm introductions. Founder referrals to their VCs are particularly valuable.

Qualify your prospects

Research potential conflicts (direct competitors), investment criteria (stage, geography, check size), and track record with companies like yours.

Track interactions systematically

Monitor which investors show genuine interest versus those who drag their feet. Incorporate feedback from quick rejections and circle back when relevant.

Pitch materials that convert

Core narrative elements

Progress and traction: Show what you've accomplished since your last funding milestone. Even small numbers count if they're trending upward or demonstrate learning.

Product demonstration: Include screenshots, demo videos, or live demonstrations. Make your solution tangible and real.

Business model clarity: Explain how you'll make money sustainably with unit economics data (CAC, LTV, gross margins) even in nascent form.

Competitive positioning: Address competition head-on and articulate your differentiation and moat.

Financial projections and use of funds

Create realistic financial projections based on thorough market research. Clearly state your funding amount and break down allocation (e.g., 50% product development, 20% marketing, 30% operations).

Show the path forward: Demonstrate how this funding gets you to the next major milestone or funding round.

Team and hiring plans

Highlight key team members and planned hires with the new funding. Investors bet on teams, so showcase A-players on board or lined up.

Legal and compliance essentials

Documentation requirements

Prepare comprehensive due diligence materials including financial statements, legal contracts, market analysis reports, and intellectual property documentation.

Regulatory considerations

Understand compliance requirements for your chosen funding sources, from shareholder agreements for equity funding to loan terms for debt financing.

Valuation and negotiation

Balance attractive valuations for investors with realistic assessments of your business potential. Consider how much equity you're willing to give up at each stage.

Managing your fundraising process

Timeline and momentum

Start building relationships with potential funders early, before you need the money. Maintain momentum by managing multiple conversations simultaneously.

Communication best practices

Provide regular updates to interested investors, maintain transparency about progress and challenges, and set clear expectations about decision timelines.

Closing strategies

Create urgency through multiple interested parties, clearly communicate terms and expectations, and be prepared to make quick decisions when opportunities arise.

Red flags to avoid

Common fundraising mistakes

Overvaluing your company early
Giving up too much equity too soon
Neglecting due diligence on investors
Focusing solely on valuation over strategic value
Underestimating time and effort required

Investor warning signs

Pressure for unrealistic growth targets
Lack of relevant industry experience
Poor references from portfolio companies
Unclear decision-making processes
Misalignment with your company values

The long-term perspective

Building sustainable growth

Focus on creating value rather than just raising money. Efficient use of resources extends your runway and makes you more attractive to future investors.

Maintaining optionality

Keep multiple funding paths open and avoid over-dependence on any single source. Stay informed about funding trends and emerging platforms.

Exit planning

Consider how different funding sources affect your eventual exit options. Some funding types may limit future strategic choices or acquisition possibilities.

The bottom line: The best funding isn't the most prestigious — it's what aligns with your business goals, timeline, and values while giving you the resources to build a sustainable, successful company.