Let’s imagine you’ve recently started an e-commerce business. Thanks to some hard work you’ve put in on your brand, sales are picking up nicely. You’re noticing, however, that a direct competitor has advertisements everywhere you look. They’re getting plenty of engagement on social channels and plenty of your potential market share.
You wonder how you can step up to their level. Your cash reserves aren’t sufficient for larger ad spend, and you’re not ready to give up equity or the time required to raise venture capital.
Thankfully you have more options. In this situation, non-dilutive funding might be the ticket to increasing your ad spend and gaining competitive advantage.
Let’s explore this further.
Non-dilutive funding vs. dilutive funding: What’s the difference?
Non-dilutive funding is any kind of funding that doesn’t require you to give up equity in your business. Founders are able to maintain complete ownership over their businesses, which means they can operate with more autonomy.
Revenue-based financing (RBF), for example, is a type of non-dilutive funding that provides founders with instantaneous cash advances to be paid back as a percentage of sales. In our scenario above, RBF would allow for an influx of cash to be spent on boosting digital ads on Facebook, Google, etc.
Other types of non-dilutive funding include loans, grants, crowdfunding and tax credits. None of these require the recipient to give up business equity in exchange for capital.
This is in contrast to dilutive funding, or equity financing, which requires founders to give up equity. Traditional venture capital is dilutive funding: founders must think hard about what type of investors they attract, and they must be willing to sacrifice a portion of their company – both in terms of shares and overall control.
Dilutive funding is what you often see in the headlines, and in that sense, it tends to be more sensationalized than other financing methods. While it can be tempting for founders to close a funding round and imagine the possibilities for growth, it’s also important for them to understand what they give up in exchange for capital. Venture capital is usually acquired in larger amounts and therefore connected with long-term expectations for company strategy and spending.
For these reasons, non-dilutive funding has become increasingly more attractive to founders.
Who should consider non-dilutive funding?
Non-dilutive funding is especially attractive for new companies who want to retain full control of their ventures. It’s also useful for companies that depend heavily on digital marketing spend, or who need an instantaneous flow of working capital to achieve sustainable growth.
E-commerce, subscription models and marketplaces frequently fall under these categories. SaaS companies can also benefit from non-dilutive funding with a longer and more predictable payback period from their marketing efforts.
Founders in these sectors can easily take advantage of non-dilutive funding to boost their efforts in digital ad campaigns, which are a recurring expense with measurable ROI and short payback.
It’s also worth mentioning that 50% of every euro of equity raised by these types of companies during a traditional VC round goes towards funding Google and Facebook campaigns. This means that companies who spend money in these areas often do so while giving up equity – perhaps unnecessarily.
There are plenty of use cases where non-dilutive funding is superior to other means of financing. These include introducing a new product, expanding into a new market or postponing the next funding round while increasing valuation. It can also be used in tandem with equity funding to reduce the overall amount of dilution.
The rise of revenue-based financing for startups
Revenue-based financing is non-dilutive and is part of a new movement helping spur fast-paced startup growth. Founders require more creative financing solutions that match their specific needs (e.g. if they are not yet profitable), and are therefore turning to these flexible cash advances.
Let’s think back to the example at the start of the article. After considering your financing options, you apply for a cash advance through RBF to increase your marketing budget. You’re granted funding through a quick, data-driven decision-making process. With a pre-approved virtual credit card, you’re able to spend an incremental €100,000 on Google and Facebook ads. Within a few months, you’ve nearly quadrupled your sales rate.
It’s easy to see why founders are increasingly turning toward non-dilutive funding. With access to instantaneous cash advances, they can put sharp focus on sustainable growth while maintaining full ownership of their company.