What is non-dilutive funding?
Non dilutive funding is a term used to describe funding that does not require the recipient to give up equity in their company. This type of funding is particularly important for startups, who want to build their companies with external capital at the same time as minimizing dilution on their path to profitability.
Startups face a number of challenges when it comes to raising capital. One of the most difficult is dilution, which refers to the loss of equity that occurs when a company issues new shares. This can be a major problem for startups, as it can reduce the founders' ownership stake and give investors more control over the company.
Fortunately, there are a number of ways to raise capital without diluting equity by raising capital from venture capital firms. One is to use convertible debt, which allows investors to convert their investment into equity at a later date. Another is to use revenue-based financing, which allows startups to sell a portion of their future revenues in exchange for capital. These are just two of the many options available for non-dilutive funding, which can help startups preserve their equity and maintain control over their companies.
The alternatives of non-dilutive capital for startups
Debt financing
Debt financing is one of the most common sources of non dilutive funding for startups. This type of financing can come from a number of different sources, including banks, credit unions, and online lenders. Debt financing is typically repaid with interest.
Historically, a very few financial institutions have been able to do this over the past decades for young companies. But with today's technology and data that companies collect, there are also new ways for these companies to get debt funding earlier. At Gilion we connect to your analytics stack with our platform to be able to provide our debt Growth Loan for this purpose.
Government grants
Another way to monetize an app is through subscriptions. With this model, users pay a recurring fee to access content or features within the app. This is a great option for apps that offer regularly updated content, such as news or weather apps.
Crowdfunding
Crowdfunding is a relatively new way of raising capital that has become popular with startups in recent years. Crowdfunding platforms like Kickstarter and Indiegogo allow startups to solicit small donations from a large number of people, typically in exchange for rewards like discounts on products or access to exclusive content.
Venture debt
Venture debt is a type of financing that allows startups to borrow money from investors without giving up equity in their company. This can be a good option for startups that have already raised equity funding and are looking for non dilutive capital to help them grow but are only availible for startups that have in the past been taking in equity from venture firms.
Merchant cash advances (MCA)
An MCA is a type of non dilutive funding that is repaid using a percentage of the borrower's future sales. This can be a good option for startups that have difficulty qualifying for traditional loans but are confident in their ability to generate sales. Non dilutive funding can be a great way to get your startup off the ground without giving up equity. However, it's important to research the different options and make sure you meet the eligibility requirements before applying for any type of funding.
Revenue based financing
Revenue based financing is a type of business funding in which investors receive a percentage of a company's monthly revenue, instead of interest payments, until their original investment is repaid. This funding model is becoming increasingly popular with SaaS companies and startups, as it provides a more flexible repayment structure than traditional loans. Revenue based financing can be used to fund a variety of business expenses, including marketing campaigns, inventory purchases, and employee salaries. While this type of financing does carry some risks, it can be an excellent way for businesses to access the capital they need to grow and scale their operations.
Pros of non dilutive funding
There are a number of advantages to non dilutive funding, including the ability to preserve equity and maintain control over your company. However, there are also some disadvantages to consider. One is that non dilutive funding may not be available for all startups, particularly those that are early stage or have yet to generate revenue.
Despite these drawbacks, non dilutive funding can be a great option for startups that meet the eligibility requirements and are looking for an alternative to equity financing. If you're considering non dilutive funding for your startup, be sure to research the different options and compare them to see which one is right for you.
Pros:
– Obtaining funding based on your expected revenue is realistic and achievable. You can use your current or predictable revenue to attain the required financing.
– There's no need to give up partial ownership of your company to get funding.
– You can gain financing without needing to put up personal security or establish credit-worthiness.
– You can repay your loan on a schedule that works better for you.
– Your funding will be more affordable since the cost of selling equity can be quite high compared to borrowing.
– There may be more funding available to a wider range of founders and business models.
– Non-dilutive funding acts as a 'bridge' for private companies who cannot raise money by borrowing it.
What to keep in mind when looking for non-dilutive funding
Do your research – There are a number of different non dilutive funding options available, so it's important to do your research and find the one that's right for you.
Be prepared – When you're applying for non dilutive funding, be sure to have all the required documentation and information ready. This will make the process go more smoothly and increase your chances of being approved for funding.
Have a solid business plan – Non dilutive investors will want to see that you have a well-thought-out business plan before they provide funding. Make sure your plan is clear and concise and includes financial projections and other relevant information.
Be confident in your ability to repay – When you're taking out non dilutive funding, you'll need to be confident in your ability to generate revenue and repay the loan. This means having a strong understanding of your business model and market.
How it helped startups to minimize dilution
Non dilutive funding has helped a number of startups succeed while they at the same time minimized equity dilution. One example is AppDirect, a cloud-based marketplace that helps businesses manage and sell digital products and services. AppDirect was founded in 2009 and raised $200 million in non dilutive funding from a number of investors.
Another example is Udemy, an online learning platform that offers courses taught by experts in a variety of subjects. Udemy was founded in 2010 and has raised $173 million in non dilutive funding to build the future of online learning while keeping maximim equity ahead of their IPO.
These are just a few examples of startups that have used non dilutive funding to help them succeed, but most important keep equity in the startups along the journey.
