When you hear the word “fundraising”, what’s the first thought that comes to mind? Your answer might evoke a mix of emotions like excitement and frustration depending on your experience. There is also a good chance that when you think of fundraising you think of words like “venture capital”, “equity”, and/or “valuation.”

Ines and Melli, founders of Vyld, a German startup creating period products using seaweed. Photo courtesy of Vyld.

Taken a step further, it’s likely that the image that comes to mind when we think about a startup – particularly its path to success – is one where a founder has an idea and starts a business, raises from angel investors, gains traction, raises a couple of rounds with an eye-popping valuation, and in about 7-10 years their company gets acquired or goes public. That’s just how you grow and what you do when you’re a successful startup founder.

But what if it’s not? At least, not necessarily.

There are more ways to fund a business’ growth and even different models to structure a company. While this variation is true for all entrepreneurs, it’s particularly relevant for impact-driven businesses whose path to growth – or path to scaling their impact – is not aligned with the scale, returns, and rate of growth and return expected by venture capital (VC). And yet, many impact-driven businesses try to fit into the “traditional” Silicon Valley VC model – a process that can involve significant contortions and, potentially, compromises. For example, a startup that seeks to provide access to a service for low-income families might find itself pivoting to focusing primarily on high-paying customers to meet investor growth expectations, ultimately reducing their intended impact.

How a company is structured – i.e., who holds economic and governance rights – is important to consider for entrepreneurs who want their business to create wealth-building opportunities for their employees or other stakeholders. For instance, they might consider founding as, or transitioning to, an employee-ownership model (or exiting to their employees). Those who want to ensure the company’s mission is safeguarded throughout time can explore steward-ownership.

When it comes to funding a company’s growth, it’s helpful to differentiate between the funding options themselves and the strategies that surround them. By funding options, we mean the different ways in which capital is structured. In other words, how a capital injection is reflected on the balance sheet and how it is expected to be repaid, or not, to the capital provider. Other funding options that entrepreneurs can leverage aside from equity include redeemable equity, revenue-based loans, and supply chain financing, among others.

The strategies that surround funding options, on the other hand, can include crowdfunding – where founders can raise different types of funding options from their community – or impact-linked financing, where the terms of the agreement are linked to the company’s impact outcomes, among others.

“The world’s first algae tampon”. Photo courtesy of Vyld.

Ultimately, there isn’t a single right or wrong way to structure a company or fund its growth. What’s more, success isn’t necessarily defined by the size of an exit or valuation. It’s arguably better to define success as creating lasting impact on people and the planet. This path towards success can look different for each startup – and that’s ok. Entrepreneurs can leverage a variety of different options at different points in time, depending on the particular needs of their company and their own personal preferences.

Understandably, determining the path forward – including simply identifying what options are available – can be incredibly overwhelming for founders who already have to wear multiple hats and become experts in accounting, marketing, human resources, and IT. Fortunately, there are an increasing number of resources available to help entrepreneurs do just that, like the Adventure Finance book and course, Blueprint Local’s Innovative Finance Playbook, Considered Capital’s Funding School, or Capital Explorer. Capital Explorer, a digital tool we recently co-developed with funding from Wells Fargo and the Catalytic Capital Consortium, seeks to equip entrepreneurs with information to interactively explore the broader spectrum of funding options and make strategic decisions that align with their mission and vision.

Another key to any entrepreneur’s journey is peer-to-peer learning, a core pillar of Village Capital’s work. While online resources can provide helpful guidance and save founders a lot of time, nothing replaces the invaluable lessons learned from other entrepreneurs who have traveled down similar paths. Intentionally seeking out founders who have taken different paths to scale the impact of their business can provide a wealth of insights.

Image courtesy of Glade Optics

Wherever a founder’s fundraising exploration journey takes them, it’s helpful to start with two key questions:

1. How much capital do I need? – Founders should seek only to fundraise as much as they truly need and only when they cannot finance their growth with the resources they have available. This means ensuring that there are predefined activities (e.g., a new hire, purchasing inputs) tied to the full amount of funding raised. Being intentional about only fundraising as much as is truly necessary will help prevent founders from spending too much or giving up too much ownership on funding. It’s important to view fundraising as an activity and a tool and not as a goal in and of itself.

2. What type of capital do I need? – A company’s funding needs typically fall into one of four categories: capital needed for developing a proof of concept, growth capital, working capital, and capital needed for acquiring assets. Growth capital refers to cash spent on activities like hiring people, investing in new product development, putting systems into place, marketing, or anything that helps you build towards the future. Working capital refers to cash spent in the short term to buy inputs, stock, or materials required for your product or service. Funding options are generally suitable for one, multiple, or all these uses. For example, equity is most suitable for developing a proof of concept, growth capital, or purchasing assets, whereas supply chain financing should only be used to cover working capital needs. Identifying what funding is needed for – and understanding what category that need falls under – will help founders seek the most appropriate funding option to avoid spending too much on funding (e.g., covering working capital needs with equity instead of with a less expensive funding option like revenue-based loans). Learn more about which funding options are most suitable for each funding need in Capital Explorer.

Curt Nichols, founder of Glade Optics. Photo courtesy of Glade Optics.

Whatever journey a founder takes, fundraising is undoubtedly one of the most challenging parts of scaling a business due, in large part, to the general lack of funding available. Despite its popularity, venture capital only funds about 1% of small businesses. More innovative funding options are on the rise, but more capital allocators need to include these options in their toolbox for availability to increase. However, entrepreneurs who understand the full spectrum of options and know how to assess them are able to make more strategic decisions aligned with their vision and mission instead of inevitably falling into a rigid mold.

For example, Vyld, a German startup creating period products using seaweed, created a new financial instrument, the Future Profit Partnership Agreement, to raise funding aligned with their mission as a steward-owned company. Or, Glade Optics who, after winning a pitch competition, worked with the investor to structure the investment as redeemable equity which was more aligned with their growth strategy.

For all actors in the innovation system – whether entrepreneurs, capital allocators, or ecosystem builders – understanding that there are different paths to scale and finance that growth is key to unlocking capital and support for startups addressing global challenges.