Non-dilutive financing: What it is and why you should consider it

One of the biggest challenges for startups is raising capital. Starting a business can be expensive, and many entrepreneurs find themselves relying on traditional financing sources – like bank loans – to fund their operations. While these sources may offer a significant influx of cash, they also come with the risk of diluting the company’s ownership and control.

Fortunately, there are non-dilutive financing options available to startups that don’t require giving up equity or taking on debt. Primarily targeted to small and medium-sized businesses and startups, non-dilutive financing is an alternative (and somewhat novel) funding option that offers increased flexibility and control for growing companies. It refers to any capital a business receives that doesn’t require the recipient to give up equity or ownership. Let’s take a closer look at some types of non-dilutive financing and why they might work for your SME.

Grants and Awards

The most common form of non-dilutive financing is grants and awards. There are many organizations that offer grants specifically designed to help startups get off the ground. These grants come in all shapes and sizes, ranging from small amounts to larger ones that can provide enough money to fund entire projects or initiatives. For example, Google offers grants for Canadian businesses through its Startup Accelerator program. And the Canadian government maintains an extensive list of grants and financing options for medium-sized businesses online. This is just scratching the surface; there are dozens of public and private organizations offering grants and awards that could help fund your startup if you qualify. It’s worth taking some time to research what’s available so you don’t miss out on a great opportunity.

Angel Investors & Incubators

Another common source of non-dilutive financing is angel investing and incubators or accelerator programs run by venture capitalists (VCs). Angel investors are individuals who invest their own money into businesses they believe have potential for growth. They may offer advice or mentorship along with their investment, although these investments typically come with more strings attached than other forms of non-dilutive finance such as grants or crowdfunding campaigns since angel investors usually want more control over how their money is used within a company than other types of investors do. VC incubators and accelerators provide similar benefits but can in some cases require companies to give up some equity in exchange for funding and resources they need such as office space, mentorships or connections. This can make VCs less attractive than the other forms of non-dilutive financing, though they may provide additional benefits that make it worth giving up some equity stake in return (such as connections with potential partners or customers). According to wealth management firm Saratoga Investments, “angel investors typically require a return of 25 percent from fledgling companies with unicorn potential, while venture capitalists typically focus more on companies believed to demonstrate long-term growth potential.”

Crowdfunding

Crowdfunding has quickly become a popular way for startups to raise funds without giving up equity in their companies. With crowdfunding platforms such as Kickstarter and Indiegogo, businesses can reach out directly to potential investors who donate money in exchange for rewards or products from the company instead of equity stakes. This type of financing is particularly attractive because it allows startups to build a network of loyal customers while also raising funds at no cost other than providing rewards or products in return for donations. It also allows entrepreneurs to test out their ideas before investing too much time or money into them since they can gauge interest by seeing how many people contribute funds towards their campaigns. Crowdfunding is a great option if you have an idea or product that resonates with customers but don’t have access to traditional forms of financing like venture capital or bank loans yet.

Revenue-based Funding

Though somewhat less popular than the above options, revenue-based funding (RBF) is another non-dilutive financing tool in which investors provide capital in exchange for a percentage of monthly revenues on an ongoing basis. Typically, revenue sharing only continues until the initial capital amount plus an agreed upon premium is repaid – usually over the course of 3-5 years, depending on the size of the investment and the success of the startup.

Other non-dilutive funding options

There are other, less common financing arrangements that don’t require a startup to hand over equity but as they are generally less available to smaller startups we won’t cover them in detail here.

They include:

• Venture Debt – only available to venture backed companies, venture debt has been used successfully during the startup stages of extremely successful businesses like Uber and AirBnb.
• Annual Recurring Revenue Lending – similar to venture debt but designed to put a value on the worth of a company’s monthly or annual subscription base.
• Structured Equity Products – pre-packaged investments that include a mixture of assets linked with interest, derived from securities, commodities or an index.

Non-dilutive financing options such as grants, awards, crowdfunding campaigns, angel investments and VC incubators and accelerators offer startup owners an alternative way to secure funding without having to give away equity stakes in their companies just yet – something that could potentially be very valuable down the line. Researching different potential sources of funding will help entrepreneurs find the best fit for their needs while still allowing them maintain control over their startups until they’re ready to take on outside investment down the line if desired.