Alternatives to venture capital

Most of this course is about venture capital. But a venture round is one way to pay for a company, and often not the cheapest one. Before you compare the alternatives, find the cost of the money that you know best.

Predict first

Northwind raises $2M on a SAFE with a $20M post-money cap, so it sells 10% of the company. Years later, Northwind sells for $200M. Ignore later rounds. What did that $2M cost the founders, in dollars at the exit?

Type a guess before you continue. A guess first, even a wrong one, makes the answer easier to remember.

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Venture capital is one tool

Venture funds need a few very large exits to return their money. The lesson on how VC funds work explains why. Thus venture capital fits only companies that can become very large, very fast. A company that can become a profitable $20M business is a good company, but it is often a bad fit for a venture fund.

Non-dilutive funding is money that does not cost equity: customer revenue, loans, and grants. Each alternative below trades a different cost for the equity that it saves.

Bootstrapping

Bootstrapping means that you pay for the company with savings and customer revenue, not with money from investors. You keep 100% of the company. But revenue limits your speed.

Suppose that a company has $30K of monthly revenue at a 70% gross margin. Each month it keeps $30K × 0.70 = $21K after the direct costs of the product. That $21K pays for all growth: new persons, marketing, and product. A competitor that raised $3M for 24 months can spend $125K each month, approximately six times as much. If speed decides the market, bootstrapping can lose. If the market is patient, bootstrapping keeps the whole outcome for the founders.

Revenue-based financing

In revenue-based financing (RBF), a lender gives you cash today. You repay a fixed percentage of each month’s revenue until the payments reach a cap. Sources do not agree on the usual numbers. Gilion gives caps of 1.2x to 1.5x the advance, and H.L. Hunt gives up to 2x. For the revenue share, Gilion gives 1% to 5% in one place and 4% to 15% in a different place.

RBF causes no dilution. But its real cost is easy to misread, because it has no interest rate. Here is the research example:

Total to repay   = Advance × Cap   = $500K × 1.4 = $700K
Monthly payment  = Share × Revenue = 6% × $400K  = $24K
Months to repay  = $700K ÷ $24K                  = 29.2 → 30 payments

If revenue stays flat, the payments cost like a loan at approximately 33% a year. Now suppose that revenue grows 5% each month. Each payment is larger, so the $700K comes back in 19 months. The total is the same, but the time is shorter. Thus the yearly cost increases to approximately 46%. Many founders expect the opposite.

Calculator

What revenue-based financing really costs

A lender gives you cash today. You pay back a part of each month's revenue until the payments reach a cap.

Advance

Repayment cap

1.4x

Total to repay, as a multiple of the advance.

Monthly revenue today

Part of revenue that you pay

6%

Monthly revenue growth

0%

Total to repay

$700K

$500K × 1.4

Months to repay

30

First payment $24K

Effective annual cost

32.7%

The yearly rate of the payments

Effective annual cost at each growth rate

You pay 6% of revenue, $24K in the first month. You repay $700K in 30 months, $200K more than the advance. That cost is like 32.7% a year.

Move the growth up and watch the yearly cost rise: the same total comes back sooner. Many founders expect the opposite.

Venture debt

Venture debt is a loan from a specialist lender to a company that has VC backing. Mercury’s guide (updated February 2026) gives these usual terms:

• Interest of approximately 10% to 14% at non-bank lenders, with light covenants, or 5% to 8% at banks, with heavy covenants
• An interest-only period of 12 to 18 months, and a term of 3 to 5 years
• Warrants, small rights to buy stock. Warrant coverage is typically 10% to 20% of the loan at non-bank lenders and 0% to 5% at banks.

Worked example · step 1 of 5

The cost of a $2M venture loan

1. 1

   Interest-only year

   For 12 months, Northwind pays only the interest, at 12% a year.

   $2M × 12% = $240,000

Show step 2Show all steps

Compare that cost with the Predict at the top of this lesson. The loan costs approximately $600K plus the warrants, whether Northwind sells for $20M or for $200M. The SAFE costs 10% of whatever the exit is. Move the exit value below, and find the point where the two costs are equal.

Compare

A SAFE or a loan: which money costs more?

Raise the same amount on a SAFE or borrow it as venture debt. Move the exit value and compare what each one costs you.

Money to raise

SAFE post-money cap

$20M

Loan interest rate

12%

Warrant coverage

10%

Warrants as a part of the loan amount.

Exit value of the company

$100M

The SAFE sells

10%

$2M ÷ $20M

SAFE cost

$10M

The stake sold, at this exit

Loan cost

$1.4M

$599.53K + $800K warrants

Break-even exit

$6M

Same cost for the two

• SAFE: value of the stake sold
• Loan: interest, fees, and warrants

At a $100M exit, the 10% that the SAFE sells is worth $10M. The loan costs $1.4M in interest, fees, and warrants. Above a $6M exit, the loan is the cheaper money, if the company can make the payments.

The loan payments are $94.15K a month after the first 12 months. You must make them also when the business goes badly. A SAFE has no payments.

The comparison has one more side that the chart cannot show: risk. You must repay debt, also when the business goes badly. The payments continue in a bad quarter. Debt extends runway, but it does not replace equity for a company with no revenue.

Grants: SBIR and STTR

SBIR and STTR grants are US federal research and development awards for small businesses. They take no equity. SBIR is the Small Business Innovation Research program. STTR, the Small Business Technology Transfer program, also requires a research institution as a partner. Their rules changed several times in 2025 and 2026:

• September 30, 2025: the legal authority of the two programs stopped, and new awards stopped too.
• April 13, 2026: the President signed the Small Business Innovation and Economic Security Act (S. 3971, P.L. 119-83). It reauthorized the two programs through September 30, 2031.
• October 16, 2026: agencies can give up to $335,937 for Phase I and $2,239,578 for Phase II without an SBA waiver.
• From FY2027: each agency will set a limit on the number of proposals from one company.

The money comes from set-asides. Each agency with $100M or more of external research spending must set aside 3.2% of it for SBIR. Agencies with $1B or more must also set aside 0.45% for STTR. The Congressional Research Service cites the SBA report for FY2022, the most recent year. In that year, the awards were $4.4B for SBIR and $662.3M for STTR. Each agency has its own topics and deadlines, so read the rules on SBIR.gov before you apply.

Crowdfunding: Reg CF and Reg A+

Crowdfunding is money from many members of the public. Reward crowdfunding sells pre-orders, so it sells no securities. Equity crowdfunding sells securities, and it uses one of two exemptions.

Regulation Crowdfunding (Reg CF) lets anyone invest:

• A company can raise a maximum of $5M in each rolling 12-month period.
• The sale must go through an SEC-registered funding portal or a broker-dealer.
• The company files Form C with financial statements. Up to $124K, the CEO certifies them. Up to $618K, an independent accountant reviews them. Above that, the accountant must audit them. A company that uses Reg CF for the first time can use reviewed statements up to $1.235M.
• Accredited investors have no limit. Non-accredited investors have a limit for 12 months, across all Reg CF offerings together.

The investor limit has two rules. If income or net worth is less than $124,000, the limit is the greater of $2,500 or 5% of the greater of the two. If income and net worth are each $124,000 or more, the limit is 10% of the greater of the two, with a maximum of $124,000. Try the jump at $124,000 below.

Calculator

Your Reg CF investment limit

Under Regulation Crowdfunding, a non-accredited investor has a limit for all Reg CF offerings in 12 months.

Annual income

Net worth

Accredited investor?

NoYes

Limit for 12 months

$10,000

Rule that applies

5% rule

Greater of the two

$200,000

Net worth

Limit at each income, with a net worth of $200,000

Your income is less than $124,000, so the 5% rule applies: the greater of $2,500 or 5% of $200,000. The limit is $10,000.

Look at the chart at an income of $124,000. The limit jumps there, because the rule changes from 5% to 10%.

Work it out

A non-accredited investor has an income of $60,000 and a net worth of $40,000. What is the Reg CF limit for 12 months?

Your answerCheck

Work it out

A non-accredited investor has an income of $150,000 and a net worth of $300,000. What is the Reg CF limit for 12 months?

Your answerCheck

People often call Regulation A+ (Reg A+) a “mini-IPO”. Tier 1 has a maximum of $20M in 12 months, and state review applies. Tier 2 has a maximum of $75M in 12 months. It needs audited financial statements and ongoing reports, but the states cannot ask for their own registration. In Tier 2, a non-accredited buyer can invest a maximum of 10% of the greater of income or net worth. This limit does not apply when the stock trades on a national exchange.

Compare the paths

Each path trades one cost for another:

Path	Dilution	Must you repay?	The main cost	Fits when
SAFE or priced round	Yes	No	A share of every future dollar	The company can become very large
Bootstrapping	No	No	Speed	The market is patient, and revenue comes early
Revenue-based financing	No	Yes, from revenue	A high yearly cost, higher with fast growth	Revenue is steady
Venture debt	A little, from warrants	Yes, on a schedule	Interest, fees, and warrants	You have VC backing and want more runway
SBIR or STTR grant	No	No	Time, proposals, and research topics that an agency sets	The work is research that an agency funds
Reg CF or Reg A+	Yes	No	Filings, a long list of small holders, and legal cost	Your customers want to own part of the company

Quiz · question 1 of 5

Test what you learned

An RBF deal has a fixed total to repay. What happens to its yearly cost when revenue grows faster?

• AIt stays the same, because the cap is fixed
• BIt increases, because the same total comes back in less time
• CRBF has no cost, because it has no interest rate
• DIt decreases, because the payments are easier to make