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YEC Members Offer Four Alternatives to Venture Capital

“The VC route is all about the exit. VCs want a more than 10X return on their investment,” says David Ehrenberg, Founder and CEO of Early Growth Financial Services. A startup financing expert, Ehrenberg has helped founders figure out VC funding, seen them use personal assets as debt collateral and worked with entrepreneurs to navigate the complicated crowdfunding space.

There’s no one solution for everyone. Below, we asked four YEC members about their own experience researching and trying different options. Here, they share their best advice as well as what to watch out for.

Charge Cards | Brittany Hodak, Co-Founder at ZinePak

"Unlike credit cards, charge cards do not come with a pre-set spending limit. They also must be paid back much quicker; you can't roll the money over for several months or pay periods like you can with credit cards. At ZinePak, we often have $100,000+ invoices we need to pay off during projects, although we aren't getting paid in full by our customers until a project is complete. Charge cards are a fantastic tool for us, because we're able to stretch our cash flow (and earn points or cash back for purchases) between the time we pay our vendors and when we get paid by our clients.”

Brittany-Hodak Brittany Hodak, Co-Founder at ZinePak

BUT THEY HAVE TO BE PAID BACK QUICKLY

"They aren't a great solution if you're looking for long-term funding. They're great to help stretch cash flow while you're waiting to be paid by a client or customer. It's a bad idea to use charge cards if you aren't 100 percent sure when you'll be getting paid.”

BEST TIP: EQUITY IS EXPENSIVE

“Treat [equity] as if it's worth the value your company will someday have, not the value it's worth today. Lines of credit, charge cards and friends-and-family loans can all be good options that allow you to keep your equity.”

Pre-Sales & Early Bird Discounts | Syed Balkhi, Co-Founder at OptinMonster

Syed Syed Balkhi, Co-Founder at OptinMonster

"Think of it as pre-orders that you would receive on crowdfunding campaigns. We did this with OptinMonster by offering unlimited plans for a limited amount of time which were 2.5X our Pro Plan. Our Pro Plan was $199 / year, or you could get unlimited access for a $499 one-time fee. By having this limited- time special, we were able to get more value per customer upfront and grow our product team without needing to give out equity.”

BUT DON’T OFFER UNLIMITED IF YOUR OVERHEAD IS HIGH

"Instead, think of alternative ways such as a two- or three- year plan versus a one- year plan at a highly discounted price. The worst thing you can do is fail to deliver on your promise and have to turn back.”

BEST TIP: BE CREATIVE

“Think of creative ways to get pre-orders or early-bird signups because they are a great way to get early funding. Try to work with influencers in your niche and give their users heavy discounts.”

Traditional Bank Financing | Fan Bi, CEO at Blank Label

Fan Bi Fan Bi, CEO at Blank Label

"We raised our debt financing from Lending Club and it was carved out specifically for marketing expenses. Now having been in business for six years, we have a pretty deep understanding of our marketing costs, customer lifetime value and the payback period for an upfront customer acquisition cost. This gave us the confidence to accelerate our marketing spend more aggressively through a term loan.”

BUT YOU HAVE TO BE CERTAIN

“If your business takes a downtown and you don't [have the cash flows to support the repayments], you could be in a lot of trouble fast. It's not that different than having a monthly mortgage and losing your job.”

BEST TIP: UNDERSTAND YOUR OPTIONS

“You need to understand the different options between a line of credit, term loan, cash advance, SBA loan, etc. Qualifying will mostly depend on your credit score, how long you've been in business, balance sheet, revenues and cash flows.”

Debt Financing | Vishal Shah, Founder at NoPaperForms

Vishal Shah 1 Vishal Shah, Founder at NoPaperForms

If structured right, debt can be significantly cheaper than equity for startups with predictable future cash flows. It's quite simple -- the cost of debt is a fixed interest expense that you would need to pay through the term of the debt… If your business is profitable with consistent cash flows and predictable growth, you can calculate the interest expense and evaluate whether you are in a better position paying the fixed interest than to share your profits over time.”

BUT DEBT ISN’T FOR EVERYONE

“It usually doesn't work unless you have substantial revenue and profits. This is because you are stacking up yet another fixed expense on your income statement that will add to your monthly cash burn rate.”

BEST TIP: KNOW YOUR BUSINESS

“The key is to know the stage your business is at and how much capital you will need to get to your next milestone.”

 

This feature originally appeared in our Winter 2016 issue of YEC Quarterly, our print magazine for YEC members. If you’re a YEC member, feel free to download all previous issues of YEC Quarterly here.