Your cheat sheet to understanding and selecting non-dilutive funding sources to grow your business.
Fundraising is undoubtedly one of the biggest challenges faced by founders. It’s not just about when to raise, how much and from whom – but also how it is going to affect future rounds, board governance, and dilution. There are multiple avenues founders can leverage to raise capital but the two fundamental questions every founder must ask themselves are: how much equity are you willing to give up and how do you minimize dilution as you scale?
As are most things in a founder’s journey, there are pros and cons to consider whether you’re going the equity route, the non-dilutive route or a combination of the two. However, ask any serial entrepreneur and they’ll tell you non-dilutive capital is always a part of their financial strategy to scale their companies. Why?
For one, it reduces your risk of a future downround. With the recent trends of double-digit million seed and series A rounds, it is worth pausing and asking at what valuation is the round being priced at? Financially-savvy founders often opt to raise a smaller (just enough) round and couple that with debt financing to minimize their dilution and manage their valuation. When it comes to raising the next round, they face less risk of a flat or downround as the valuation from the previous round wasn’t inflated too much to the point that it was unjustified. From a funder’s point of view, a diverse debt stack can also be an indicator of resourcefulness. Companies that leverage alternative debt solutions in earlier stages are more likely to have higher valuations compared to their counterparts in later stages of growth.
Another benefit of non-dilutive funding is that it helps founders retain larger ownership of their companies. No founder wants to give up more equity points than they absolutely have to. Non-dilutive funding, by definition, means it doesn’t affect your cap table. But not all non-dilutive funding sources are created equal. There are many forms and each has its own pro’s and con’s.
While most commercial banks are getting more progressive, the majority still require a personal guarantee and/or positive cash flow before they can offer you a loan. This is a good option once you have hit a certain threshold of ARR but not ideal for those who are in the early stages of growth.
If you have consistent revenue growth, it would be beneficial to consider revenue-based financing as a funding option. It provides founders with cash advances that can be paid back from monthly gross revenues. Revenue-based financing is most often reinvested back into the sales and marketing initiatives to acquire new customers.
Another form of debt financing is venture debt. Venture debt is often discussed amongst founders but often misunderstood. Venture debt is a loan designed for fast-growing, investor-backed companies and it is typically used to extend the runway. Venture debt doesn’t replace equity funding, it follows it as it uses VCs as validation and primary yardstick for underwriting the loan. Venture-debt is most founders' go-to option when they secure series A.
Whether your company is based out of the US or Canada, there are grants to help offset your operational costs such as salary, market research, market expansion, product development, etc. Grants are funding allocations that government agencies provide and the value of the grants varies depending on the type of grants you’re applying for.
The problem is, grants are not exactly easy to find, there are different vernaculars that government agencies use that don’t translate easily into the startup ecosystem – and it takes time to apply. If you are successful, there are reporting obligations you will have to comply with throughout the program.
Fortunately, there are companies out there that aggregate and filter government funding. For US-based companies, check out TurboSBIR (use”BOAST20OFF” for 20% off) and for Canadian-based companies, sign up for Pocketed (use “BOASTAIX” for free premium).
R&D Tax Credits
R&D tax credits programs give billions of dollars annually to innovative companies. These programs are often overlooked due to their complicated and cumbersome processes,filed alongside a company’s annual tax.
Founders should take advantage of this government program to recoup a portion of their product development costs such as salary, material and contractor fees. In the US, a typical startup can get up to $250,000 back from the IRS. In Canada, there is no cap to what a startup can get back and it covers up to 70% of the salary cost of your technical team.
At Boast, we automate and streamline the process to claim these tax credits along with other similar government programs. Instead of spending 100+ hours to prepare a claim, our AI platform reduces that time to less than 10 hours annually. In Canada, Boast QuickFund provides an advance on these tax credit programs so founders can leverage their refund as early as one quarter into their fiscal year by investing the capital back into R&D projects or simply scaling sales and marketing initiatives.
No matter where you are at in your startup life cycle, you should always consider non-dilutive capital to fund your growth or extend your runway. OneValley is hosting a webinar on this topic with our partner, Boast on March 23rd. Register now to secure your spot or book your free consultation with Boast here.