This is a premium article that originally appeared on Trends.
Venture capital can be deeply complex, but most firms still operate off the familiar model: make smart bets and hope that one pays off in the unicorn hunt. For that very reason, many firms will only bet on businesses that at least have the potential to “be the next Uber” or at least enter unicorn territory.
This “spray and pray” methodology means that it doesn’t matter if one, or two, or most of their bets fail, as long as one can deliver 100x returns. And only now, after the failure of WeWork, are venture firms realizing the importance of profitability (shocking, right?). The emphasis on getting the rare big bet to pay off influences the way that venture-backed companies need to operate: hypergrowth at all costs.
Of course, this VC strategy leaves plenty of small and mid-sized businesses searching for funding. But entrepreneurs who can’t hook a major VC firm shouldn’t fret. Alternative business funding might even be the best strategy: We ran the numbers on our small business database and found that the median profitability of VC-backed companies was 44%, as opposed to the 60% margins on those financed by personal savings.
Since venture capital is so strongly embedded in our response to raising money, we often don’t know where to look outside of that. For example, if you’re a SaaS founder with a profitable business and don’t want to trade your business (and freedom) for a huge check, what do you do? In this piece, we’re giving you the lowdown on alternative financing options.
Micro venture capital typically happens in the seed stage, an alternative business funding with less financing, differing terms, and incentives compared to traditional venture capital.
For a full list of over 900 micro-VC firms across the United States, check out this impressive list by Samir Kaji. He denotes his methodology here, identifying micro VCs as firms where their most recent fund was <$100m. The list gives you the ability to sort by location and identify micro VCs local to your area. Another list of over 600 can be found here.
A few notable micro VCs to take note of:
We recently wrote about Tiny Capital, the tech-focused firm focused on closing deals through a streamlined acquisition process. Andrew Wilkinson, founder of Tiny Capital, announced the launch of We Commerce. Once again, the firm is focused on three pillars: sustainable growth, profitability, and “sticky customers.” Clearbanc focuses on a similar approach dedicated to online brands and enabling them with capital quickly.
Earnest Capital functions as a shared earnings model (SEAL). Similar to a profit-sharing model, “investors earn when founders earn.” This alternative business funding model entitles investors to get a percentage of shared earnings, once the business is paying the founder past the initial Founder Earnings Threshold defined at the outset. The SEAL also defines a shared earnings cap, with optionality for longer-term partnerships. Once again, the eyes are on profitable businesses, and in this case, the alignment of incentives is built into the agreement.
Lighter Capital also focuses on a revenue-based model based on monthly cash flow that doesn’t require business owners to give up capital or the allocation of a board seat. The company offers term loans and lines of credit with capped repayment, essentially as an alternative to traditional bank loans. Other revenue-based financing firms include RevUp, Stripe Capital, Founders First, Vendor Term, and Novel Growth Partners.
There are also many startup accelerators, including IndieVC, Atomic VC, and Tiny Seed, which is dedicated to early-stage SaaS companies. Many of these micro VCs and accelerators differ from the traditional VC approach because they seek to enable founders to retain significant ownership and target post-revenue ventures. In other words, they want to enable successful businesses to be even more successful. Tiny Seed was specifically formed off of the “gap in the ability for non-unicorn startups to raise early-stage funding,” labeling themselves as the “the accelerator for the long tail of startups.” IndieVC outlines a similar approach in its FAQ.
Tiny Capital uses a similar set of values in targeting businesses:
Our small business database was set up to ask if people took funding across the following categories:
I did not incur any costs
Interestingly enough, a myriad of alternative business funding options came through. A few common themes:
Bootstrapping (in some cases, people prepaying for the product in advance)
Cross-promoting from a prior business (i.e., customers from an existing agency or business unit)
Pitch competitions, grants, and accelerators
Moonlighting day job
One company even launched off of the £100 ad voucher!
Selling or Buying Small Businesses
There’s a common misconception among entrepreneurs that they need to build a business from scratch and take it to the moon. But the truth is, some people are good at taking a business from 0 to 1, while others are better at taking businesses from 1 to 100. Both are valuable skill sets.
There’s also potential value in incorporating existing tools into your current business to drive more business. Trends member Tristan purchased an existing site for $750, which has since generated 250 leads with a conversion rate of 30%.
So if you’re looking to sell one of your side projects or are looking to build one into the next rocketship, you might consider one of these sites:
1k Projects: A curated marketplace where makers sell their neglected projects and unused domains. It’s free to post your project, but the site charges to conduct the sale.
Shopify Exchange: This marketplace allows you to buy and sell online ecommerce businesses, clearly mapping out the average profit of the business and whether you’ll get support after the purchase.
Empire Flippers: Empire Flippers is a marketplace that vets seller data to ensure that it’s 100% accurate, complete with a deposit approach that gives the buyer access to the information required to validate the potential purchase.
Micro Acquisitions: If you don’t feel like searching each of these platforms individually, Micro Acquisitions is a recently launched tool that helps aggregate a “deal pipeline” for you, spanning 7 key platforms.
Quiet Light Brokerage: This website vows to do the legwork for you, with an 87% close rate and over $150m in total value sold.
Some of the above platforms help with payments, while others don’t have that infrastructure in place to process the transaction securely. Escrow is a great platform to finalize deals across currencies, while also ensuring assets are transferred alongside the agreement.
A Case Study
Ghost, an open-source publishing platform, is an interesting case study as the founders have chosen to build their company contrary to the traditional template.
Ghost was launched 6 years ago with a kickstarter campaign, raising ~$250k across over 5,000 backers. Since then, it’s done $5m in revenue. Not quite the “success” that a venture capital firm would hope for, but they’ve been able to bootstrap from the very beginning and keep 100% of the business. Ghost maintained independence by building a sustainable business model (premium subscriptions) and has been able to build its company how and where it wants. In fact, Ghost’s entire team works remotely and always has. The product is open-source with over 1m downloads, and Ghost has set up the organization as a non-profit with no capital share allocation (meaning it can never be sold).
We constantly hear of venture-funded firms across our news feeds, but sometimes it’s beneficial to look into alternative business funding options and draw our attention to businesses that are scaling at their own pace and on their own terms. Another case was shared in our Facebook group, where the founder of a company that now has $400m in annually renewable revenue took the slow route and retained 100% ownership. One approach is not necessarily better than the other, but it’s important to know the variety of possibilities.
Now, let’s get hustlin’!
Originally published Jun 21, 2022 8:00:00 AM, updated July 01 2022