Finding the balance between unconventional tech funding routes

Derek Schoettle is the CEO of Cloudant.

There seems to be a never-ending stream of news and opinion about startups’ shocking valuations, the latest multi-million dollar rounds of funding for companies yet to turn real profits, and the potential for another tech bubble. Just to name a few recent examples:

• An app with the purpose of sending a “Yo” notification to friends received $1 million in seed funding (and perhaps more importantly, the backing of Marc Andreessen).
• Uber garnered a $17 billion valuation after completing a round of financing last month.
• Foursquare took on yet another round of funding in previous months to avoid essentially running out of cash.

Much of what we hear about is startups getting giant checks from well-known VC firms who seem to have endless supplies of cash to throw at an idea, regardless of its feasibility, profitability or risk.

Many young entrepreneurs are programmed to think that getting an enormous payday from a VC is the only way to move their startup forward, and they choose to focus on the dollar signs instead of building a company that can last and thrive within its means.

The VC pipeline can often be clogged and demanding, taking entrepreneurs’ attention away from their core mission. But there are other – sometimes better – funding avenues available for those who start a business with a dose of reality and a sound business strategy.

The (funding) road less travelled

In earlier stages of funding, there are more risks than funding options available. But as a company moves up the curve, the options increase because it’s less risky. Here are just a few of those funding options:

Crowdsourced – Crowdsourcing is an interesting model. Plenty of startups, including Oculus VR and Pebble, got their starts on outlets like the ever-popular Kickstarter.

For software companies and startups in longer cycle markets (such as storage and computing appliances which can take over $50 million of capital to effectively bring to market) however, crowdsourcing could be difficult. But if you’re just looking for a small amount of money to build your product and determine if you really have something or not, crowdsourcing is a great option, especially for categories like hardware and mobile apps.

Crowdsourcing limits your capital exposure early on while allowing you to research your market and demographic.

Venture debt – For startups that already have some funding and have been able to prove their success, venture debt is a no brainer. Sometimes called venture lending, venture debt is a type of debt financing provided to venture-backed companies by specialized banks to fund capital expenses.

Unlike traditional bank lending, venture debt is available to startups and growth companies that do not have positive cash flows or significant assets to use as collateral. For CEOs looking for low-cost capital to run their business, it’s a great avenue because it doesn’t require you to give away any equity.

Banks that offer venture debt are relatively risk averse and they won’t invest until they see other investors in your business, but if you have success and partnerships as leverage, it could be well worth it.

Corporate investors – Corporate investors often come about through strategic partnerships. Benefits of this type of investment can include, but are not limited to, more control over infrastructure, better pricing, influence over product roadmap and even more access to a sales channel.

Although many corporations have their own investment arm, a strategic partnership can often be a foot in the door, as was the case for Cloudant with Samsung Ventures and Rackspace during our Series B.

Government funding – There are many government investors and federal grants available for startups. In-Q-Tel, for example, is a non-profit that identifies and partners with companies developing cutting-edge technologies to help deliver these solutions to the CIA and the broader US Intelligence Community.

Though not easy to secure, these types of investors have access to capital and valuable customer segments that most investors don’t have.

Striking a Balance

I wish I could tell you there was a formula for success or a magic way to strike the right balance between funding options and investors, but that just isn’t the case. I’ll state the obvious, but ultimately what you’re shooting for is the funding you need while maintaining the most control of your company. 

I can’t stress enough the importance of only taking the funding you need. Every dollar you raise should have a corresponding value associated with it.

Whether you’re looking to be acquired or to go public, funding raised is not a sign of success, but rather only taking one you need and spending your money wisely will look great to acquisition targets. If you over-capitalize, you run the risk of setting expectations far above what your company can actually achieve.

Many young entrepreneurs make the mistake of buying the brand by partnering with a mega firm and thinking the VC will carry some weight – this isn’t always the case. The partner operating the fund is extremely important.

Mega firms are active and make lots of investments, so you’ll be a tiny fish in a big pond, often times with little or no support. There are a lot of smaller funds today that are partner led, and offer high touch, high value, and I’d recommend working with one of these.

These firms offer more flexibility because they don’t have associates and overhead is low. They can invest based on relationships and they’ll be there for you as a real partner.

In terms of partners, it all comes down to doing what’s right for you and your business. It’s easy to get folks to the table, but finding the right folks is the challenge.

It’s important to have a ton of alignment since these people will be on your board, so get to know them and build a relationship before signing the dotted line. If you take your time, find the right partners and the right mix of funding, it will pay off and your partners will help with the heavy lifting.