There are alternatives to raising money from the usual suspects, namely angels and VCs. And since you probably won’t get money from them, you should focus on these alternatives.
Those sources of cash might not be what you had in mind. They might not fit with your long term strategy and they might not be scalable. They might force you to do stuff you would rather not do and they might not be as sexy as a term sheet from Sequoia Capital.
But guess what? You’ve got to do what you’ve got to do if you want to win at the startup game.
You’ve got to be willing to do silly stuff, risky stuff and desperate stuff. You’ve got to find your cereal.
Sell, sell, sell
For those of you who don’t know the story, Airbnb’s initial funding came from three sources: credit card debts (not sustainable), renting the apartment of the founders (not scalable) and selling cereal (not strategic).
It was during the presidential election when the founders of Airbedandbreakfast.com were so desperate they decided to sell presidential cereal. That’s right: they were called Obama-O’s and Cap’n McCain’s, and the founders printed out 1000 cardboard sheets and ended up folding and gluing each box by hand. At $39 a piece, those cereal boxes sold like hot cakes thanks to media attention. The stunt allowed the co-founders to keep the business alive while they were figuring out how to build a scalable startup.
They ended up raising a bunch of money from VCs later on, but the main point here is that they were not scared to look for money in odd places.
In my case, my cereal was an online course called Not Another Boring Course About Investment. I launched a crowdfunding campaign to pre-sell this online course before it even existed and ended-up raising $67,880.
We also recently accepted to do some contractual work for a client. It’s not what we want to do over the long term, but it’s what we needed to do over the short term.
The important thing is never forgetting what the mission of your startup is, and what are your priorities. At Hardbacon, our priority is helping self-directed investors through our app, and we’re willing to refuse a lucrative contract if means neglecting our users.
It’s a trap a lot of startups doing contract work fall in. They start like us with a few contracts to pay the bill, then they start to make real money, and in no time they end up as a digital agency with a pet project that used to be a start-up.
Raise money from people you know
The cool thing about selling stuff or borrowing money to finance your startup is that you’re not losing your equity in the process. However, it might not be enough to finance your startup. If it’s your case, don’t worry. Angel investors and venture capitalists are no longer the only ones who can invest in your company.
For those who are not familiar with the regulations regarding fundraising, private companies in North America cannot sell their shares to anybody. They can only sell their shares to accredited investors (aka angels, venture capitalists and anyone with at least one million in liquid assets). These folks are deemed “sophisticated enough” to do those types of investments.
However, there are a few exceptions. One of them is that you can sell shares to your partners, employees, friends and family members. That’s the easiest way to sell shares if you don’t want or can’t raise money from professional investors. But even if those people legally CAN invest in your company no matter how rich they are, they might just not have the money.
Launch an equity crowdfunding campaign
There is another exception. It’s called the Start-up Crowdfunding Exemption. It allows you to raise money from regular people on registered platforms such as Gotroo and FrontFundr. However, it comes with a few strings attached. You can’t accept investments of more than $1,500 per person, and you can’t raise more than $250,000 per campaign.
Also, you can’t raise in provinces whose regulator did not recognize this exemption, such as Ontario and Alberta. Ubios, a Montreal-based startup that sells a water leak detection system to real estate developers, raised $156,500 from 179 investors though this exemption. It gave them the cash they needed to survive the long sales cycle of their industry. This is also the exemption we’re going to use for our upcoming crowdfunding campaign.
There is another exemption called Regulation Respecting Crowdfunding and it comes with a few advantages. It allows you to raise up to $1.5 million per campaign, and $2,500 per person. And it works in both Ontario and Quebec. That’s the good stuff.
The bad stuff is that you are required to provide audited financial statements, which is quite expensive. Impak Finance, the a Montreal-based startup that intends to launch a chartered bank, used this exemption to raise $1,039,869 from 1,000 investors all over Canada.
Print your own money
If crowdfunding is not for you, you could also think about doing an Initial Coin Offering (ICO), which involve creating your own crypto-currency and selling it to the public. In 2017 alone, 5.6 billion USD were raised through ICOs, and the trend is accelerating. Since January 2018, startups already raised $6.3 billion through ICOs.
Before doing that, however, make sure what you are planning is legal, as ICO’s are often considered by North American regulators as a security offering, and doing a public offering without the proper registration is illegal. Impak Finance managed to get its own ICO approved by the AMF, and they ended up raising a million dollars. The Canadian messaging app Kik, on the other hand, decided to avoid the regulatory issued by only selling its coin to non-Canadians, and ended up raising a cool 100 million dollars.
Go public before you’re ready
Going public cost a lot of money. You need to pay lawyers, accountants and exchange fees. among other things. And you need to publish a bunch of press releases. You also need to implement a bunch of processes within your companies to make sure you’re complying to securities laws, which could be a distraction for a startup whose focus should be growth, growth and growth.
For all those reasons, and because the appetite of retail investors for money-losing tech companies has diminished following the dot-com crash, most startups have waited as long as possible before going public since the 2000s. However, the appetite for high-risk stocks seems to be back in Canada, as evidenced by the popularity of marijuana stocks listed on the TSX Venture (TSXV) and the Canadian Securities Exchange (CSE).
While going public is a very cumbersome process, startups have found an easier route. It involves buying a controlling interest in a publicly listed company that is not currently operating, and then getting acquired by this company. Then, you will typically change the name of the public company, and voilà, your startup is now listed on the stock market. Montreal-based Goodfood Market went public through a reverse merger only three years after its foundation. It allowed the company to raise $20 million from the public in 2017, and it just announced it raised another $10 million through another offering.
Voleo, a fintech startup from Vancouver, recently announced it’s going public through a reverse merger later this year. And Outgo, a marketplace for trips and experiences from Quebec City founded in 2016, is actually planning a plain vanilla IPO; they expect to be able to list on the TSX Venture in 2020.
I’m not saying you should go public, do a crowdfunding, an ICO, or sell cereal. But you should at the very least be aware that there are alternatives to venture capital. And the funny thing is that not needing their money might actually make your startup more attractive to venture capitalists.