California might be known for the Gold Rush of 1849, but a newfound thirst for riches has swept across the globe. Modern-day prospectors are more interested in finding a mother lode of venture capital dollars than they are in panning for shiny rocks. VC fever is upon us, as evidenced by the recent mind-boggling US$68 billion valuation of unicorn startup Uber.
The ride-hailing app’s staggering valuation made it the most valuable startup in the world, ahead of powerhouses such as Airbnb, Snap Inc. and SpaceX. Capitalizing on the free flow of VC investment in 2016, Uber took in $3.5 billion from Saudi investors, added a $2 billion leveraged loan, and acquired a Chinese rival in a $35 billion mega-merger.
The streets of Silicon Valley, it seems, are paved with VC gold. But that hasn’t always been the case. In the lean times of the Great Recession (circa 2007) the idea of venture capital investment for startups didn’t have the same luster- bootstrapping was the name of the funding game.
Founders spent time selling rather than pitching investors for big checks. I remember hitting my dad up for help covering my car payments so I could make payroll. We maxed credit cards and waited for that next customer payment to come in the mail.
The VC gold rush dramatically changed the narrative, but this flood of funding has been a blessing and a curse. Lessons from the pre-boom era are worth resurrecting. The shiny gleam of easy VC funding blinds many companies to reality. You might not qualify for or necessarily want this sort of investment. Depending on the company you’ve created, the stage of your growth and your goals, you might not even attract any VC interest. Fortunately, there are other funding options:
1. The wisdom of crowds Crowdsourcing has moved beyond tips for finding the best restaurants. The JOBS Act of 2015 threw open the floodgates of equity crowdfunding in the US Crowdfunding platforms such as SeedInvest, Indiegogo and Fundable have lowered entry barriers for people interested in funding small businesses. Similar options are available in the United Arab Emirates through platforms such as Aflamnah and Eureeca. This option can be risky, as many investors with equity on your books can quickly bog down your corporate operations.
2. Life and debt Debt is a four-letter word, but that doesn’t mean you should strike it from your vocabulary. One powerful advantage of debt is that it can allow you to maintain your equity. If your business is still in the bar napkin phase, taking out loans against your personal credit or business assets might make sense. If your business is beyond that initial startup phase, there are new options available such as venture debt. Unlike a regular loan, venture debt comes in exchange for rights to purchase equity. It can be particularly useful for startups that don’t yet have positive cash flow or assets to serve as collateral. Venture debt can help lengthen your runway and give you the time you need to fully flesh out your plans.
3. Reaping what you sow Seed funding is similar to VC, but with fewer catches. This option typically comes from an angel investor or someone in your personal network. A seed investment transaction involves a cashfor- equity (or future equity) exchange, but you don’t need to pay back the investment or make any sort of personal guarantee. It’s a great option for early ventures that have a large potential upside. AngelList has built a database of angel investors located in and interested in Dubai, offering you thousands of potential contacts.
4. Survival of the fittest There are countless pitch competitions throughout the world that offer prize money to promising startups without taking equity. In my backyard, the Arizona Innovation Challenge offers $250,000 as its gold medaldefinitely nothing to scoff at. Aside from the obvious financial benefit, these contests offer ancillary advantages, such as the opportunity to perfect your pitch, gain feedback from industry experts and network with key business contacts. Dubai’s upcoming STEP 2017 conference includes a pitch competition with cash prizes that could provide the thing your startup needs to surge from a promising idea to a growing venture.
5. A grant adventure The government is literally giving money away- with a few provisos. Nonprofits working in science, technology, education and medicine can seek federal grant money. A quick search of Grants.gov turns up more than 1,000 federal grant programs. The downside? The applications are typically onerous and can quickly become a time suck. The government won’t ask for equity in your startup, but there will still be strings attached in the form of compliance reports. The US-Middle East Partnership Initiative offers grants of up to $150,000 to organizations working to develop independent media organizations; expand opportunities for women and youth; and support citizen efforts to contribute to positive economic, social and political empowerment. Opportunities in the UAE are fairly plentiful, including the Khalifa Fund for Enterprise Development, twofour54 and the Mohammad bin Rashid Establishment for Small and Medium Enterprise Development.
6. The old-fashioned way Bootstrapping might be my favorite funding method. You’re essentially selling your product or service or using a credit card to grow your startup. Negotiate barter or trade deals with other companies. Employ staff in exchange for company equity as opposed to instant cash. Seek out favorable business conditions such as the fabled free zones of the UAE. A lot of founders will take on a side hustle to make enough money to fund their venture. A recent survey of small business owners by American Express OPEN found that about 15% were working a second job to make ends meet. Potential investors and lenders will likely be impressed with what you manage to accomplish through sheer will and a bit of elbow grease.
7. Accelerate your growth Startup accelerators and startup studios are increasing in popularity worldwide. The number of accelerators in the US increased by 50% from 2008 to 2014, according to Brookings. These organizations offer benefits beyond a cash infusion. Startup studios and accelerators gild their investment with a blend of services, product development, capital, space and mentorship in exchange for equity. More than 46 accelerators are spread throughout the Middle East, according to a report from Gust and Fundacity. Entrepreneurs might want to check out accelerators with a proven track record, including in5 Innovation Centre in the UAE, UK Lebanon Tech Hub and Flat6Labs in several MENA countries.
A Midas-like obsession with VC funding isn’t in your best interest. Thankfully, there are plenty of other options available. Once you’ve narrowed your focus, build a plan around your chosen option- an accelerator will want to see very different things from your company than a local angel investment syndicate. Go down too many paths at once, and you’ll fail to do any of them well. By carefully weighing each funding method and strategically choosing your best bet, you’ll be positioned to strike gold for your startup.