An Insider’s Guide to Non-Dilutive Funding for Early-Stage Startups

In much of the startup press, discussions of fundraising are almost always discussions of venture capital. Closing a round has its own cachet beyond the immediate financial reality of making business growth possible.

But venture capital isn’t the only option available to early-stage founders. In fact, if you’re in at the very beginning of your journey, you may be better served by non-dilutive funding sources – that is, money that doesn’t give anyone else ownership in your startup.

I discussed this recently in an interview with Leen Bnyat, senior development officer at P33, a nonprofit focused on driving inclusive growth in Chicago’s tech sector.

Read on for her insights on how non-dilutive funding can benefit early-stage startups – plus tips on where to find non-dilutive funding sources that match your vision!

Q: When does non-dilutive funding make the most sense for founders?

A: In my personal experience [Leen was careful to note she’s not a founder herself], having worked in the VC space and been a grant writer, founders should consider non-dilutive capital in the earlier stages.

When you’re in that phase – building the foundation, validating your business model, doing customer discovery – non-dilutive funding can help you cover upfront costs without giving up equity, especially when you don’t yet know the full value of your business.

Venture capital and other dilutive funding sources become more relevant in later stages: when you're ready to scale, for example, you may need a more substantial investment. That’s when you see rounds in the millions of dollars.

Non-dilutive funding sources like grants can help you pay yourself for the time you put in early on, especially when you’re the only one working on the startup – and, often, working day and night.

Q: What are some misunderstandings you see among founders when it comes to VC?

A: VC is a great source of funding in many circumstances. But founders often underestimate the implications of dilutive sources, including the extent of control or profit you’re giving up in exchange for access to capital.

Especially in underrepresented groups, structural racism has intentionally created lack of access to and knowledge of venture capital – which includes not only a full understanding of VC and its implications, but also what it means for a business to be scalable and “venture backable.” 

And more than that: underrepresented founders also have less access to generational wealth, which means they’re less likely to be able to raise that “friends and family” round so many startups do before they consider VC. That’s the non-dilutive funding that can really make a difference when you’re going from zero to one.

If you are considering VC, it’s so important to get professional expertise and especially legal insight. Founders should be doing their own due diligence into their potential funding sources just as the investors are doing into the startup.

Q: So are non-dilutive funding sources lower-risk for founders?

Absolutely.

One way to think about it is that seeking capital can be really emotional. You’re looking for a way to fund your startup, which in most cases is something you’re really personally (and emotionally) invested in. You have a dream, right? But it’s really risky to make business decisions based on emotions. It can make you vulnerable.

Your goal as a business owner may be to change the world or to make the lives of your customers better. And you’re willing to give up a lot to do that. You’re probably already giving up all your free time and maybe whatever spare money you have and maybe also calling in a bunch of favors to make things work.

But venture capitalists invest with the explicit goal of a return, whether it’s purely financial or impact-related (as with ESG investors). That means they may push you to make decisions that lead to such returns – and those decisions may not align with your original mission.

Seeking non-dilutive funding during the early stages may give you more freedom early on to pursue that mission.

Q: What about time? Aren’t some grant applications really labor-intensive?

A: It depends. I often see the misconception among founders that the time it would take to prepare a grant proposal is much greater than the time it would take to meet with a VC – and for a much smaller check. That’s a big deal. When you’re an early-stage founder, and you’re maybe working a nine-to-five in addition to pursuing your venture, time is money.

In some cases – with federal grants, for example – that may be true. Federal grants tend to be cumbersome and extremely competitive. So they do take time.

But for most early-stage founders – and especially for those still validating the business model and all of that – it’s more likely that the opposite is true: it’s more time-intensive to secure VC than non-dilutive funding.

You have to take investor meetings, which take time. Driving or flying to those meetings takes time (and money). You may have to take time off your nine-to-five for these meetings. You have to put your pitch deck together. You have to go through the due diligence process, which means attorney fees.

And then you look at some of the non-dilutive funding sources out there, and you start to see how much less time they take and how they also let you retain control. And you start to see how that can be really advantageous in the early stages.

Q: What about the non-financial benefits that VC has? Expertise, connections, that kind of thing?

A: Totally. Those are one of the big advantages of venture capital. These people are now fully committed to the financial success of your startup, so they’re going to make sure you have all kinds of resources at your disposal.

The good news is that there are plenty of free support services available to founders, regardless of their fundraising status. These include mentorship programs, incubators, and pre-accelerator programs designed to help give you the type of guidance that VC investors might provide in a different context. There are also programs and organizations that offer (free!) marketing help, accounting support, legal guidance, and so on.

And there's a clear benefit to doing this, not just for the founders who receive the support. Startups – and especially startups in the tech sector – are known employment amplifiers. On average, startups generate 15 to 20 net-new jobs, while established companies generate closer to zero. So it makes a ton of sense to make sure startup founders have access to resources that will help them succeed, because that means more economic opportunity for the community and the region.

Q: What are the benefits of non-dilutive capital?

A: There are so many, especially for early-stage startups:

1. Preservation of equity. You continue to have full ownership of your company.
2. Preservation of control. When you give up equity, you often also give up control. That may mean IP or being able to make decisions about the direction your company is going. Maybe you need to build out your engineering team, but your investors think your marketing is lagging. They may force you to hire the marketing person.
3. Protection from market fluctuations. It’s an interesting time for VC. We saw an overvaluation of startups, and now we’re seeing a correction, which means (among other things) that funding is really tight right now. With non-dilutive funding, you're not forced to commit to the valuation-driven dynamics in the ecosystem, which can be helpful.
4. Ability to innovate and pivot without limits. Sometimes, in startups, things aren’t working well. Maybe you need to add or sunset a product. These are difficult conversations to have with investors. When you accept non-dilutive capital, you preserve your creative freedom to pivot without obligations to or opinions of investors driving your decisions.
5. Less risk. There's less risk associated with economic uncertainty but also less risk of other things that exist in the world of VC: fraud, investor disagreements, etc.
6. So much opportunity. The types of non-dilutive funding available are diverse: government grants, corporate funding, industry competitions, research initiatives, and so on. There's a lot of opportunity for a lot of different kinds of startups.

Q: Let’s get into that. We’ve talked about the “why” a fair bit – what are some sources of non-dilutive funding available to founders?

A: There are opportunities available from the local level to the federal and international, funded by various public and private groups. Here’s an overview.

1. Local grant opportunities

I usually suggest starting here. There are many grant opportunities available at the local level, typically ranging from $5,000 to $50,000. One big benefit: there's usually less competition for these local awards, so you can familiarize yourself with the process of applying for grants and hone your messaging with decent odds of getting funded.

For example, West Side United provides $10,000 grants to businesses creating wealth and job opportunities on Chicago’s West Side.

2. Foundation- and nonprofit-sponsored opportunities

These come in a variety of flavors:

• Place-based organizations looking to support SMBs in their local community
• Industry-focused groups looking to further work in a particular field (e.g., climate change)
• National or international foundations looking to fund transformational projects (think: Bill and Melinda Gates Foundation)

Again, the smaller local organizations tend to be the least competitive, so those are a great place to start your journey.

3. Competitions and challenges

These tend to focus on a specific industry, location, or demographic. TechRise, for example, is a weekly pitch competition awarding $25K to $50K in non-dilutive capital to overlooked founders in the Chicagoland region.

The Workers Lab Innovation Fund is another example: it provides $200,000 to the best idea of a worker-led solution, plus several week-long programs for training, mentorship, customized support, and more.

Innovation is kind of a buzzword in the philanthropic community, by the way. There's a lot of money available for ground-breaking ideas.

4. Corporate funds

Pearl Milling company, for example, has a grant program for Black women founders. Comcast Rise works in partnership with NBC to support small businesses.

Again, looking for opportunities specific to your industry, identity, or region will probably yield the best results.

5. Federal grants

Federal grants can be great if your startup requires heavy R&D, has significant commercialization potential, and needs more non-dilutive funding than some of these other opportunities might offer (think: hundreds of thousands to millions of dollars). Perhaps the best-known federal grants are administered by the SBA via the SBIR / STTR program.

These grants are very competitive. They have the most cumbersome application I’ve ever seen. Startups going after this money typically employ grant writers and / or technical experts to support their efforts.

If you’re a good candidate and don’t have resources to hire, though, every state has an office designed to provide resources to help startups with these applications.

In addition, there are federal grants available based on industry: the Department of Defense, Department of Energy, NIH, National Science Foundation, NASA, USDA, etc. Each department offers grants and other funding opportunities to support startups in those industries. I highly recommend looking there, especially if you’re interested in government contracting.

6. Crowdfunding

Wefunder and other platforms let you raise money from a lot of individual investors without diluting your equity. The caveat here is that if you don’t have a personal network of people with wealth to give, crowdfunding may not work.

Q: Where should founders look to find non-dilutive funding opportunities?

It depends on what type of opportunity you’re going after:

• Hello Alice is a great resource that routinely posts SMB grant opportunities. It also offers $10,000 grants itself. Ladies who Launch has open grants for women and non-binary entrepreneurs.
• Community resource groups like incubators, pre-accelerators, and founder Slack channels do a great job of connecting founders to funding opportunities.
• City, county, and state economic development agencies and their websites post opportunities.
• Look to government agencies that represent your industry – e.g., if you’re a health startup, look for resources on NIH’s website.

There are also some paid grant-seeking tools available, but note that some are designed for nonprofits and community organizations and some are designed for startups. Before investing, be sure you’re choosing one that matches your needs.

Q: What else should founders know if they’re seeking non-dilutive funding?

If you’re writing a grant proposal or application for the first time, ask someone to review it. Ideally, you’ll work toward a strong narrative that you can reuse for future opportunities.

Even if you’re strapped for time, it’s important to be very involved in your first grant. The application will require a lot of information that only exists in your head. Until it’s down on paper, nobody else knows it. So invest the time in getting it down or talking with a writer who can get it down for you. Your local Small Business Development Center would be a great place to start.

Generally, know that there are many free resources available to small-business founders. There are often community-based, federally funded SMB resource centers where someone can, for example, review your business plan. They can look over your grant materials and help you improve them so you have the best possible chance at getting that funding.

And the last thing: any time you’re applying for funding through a foundation or philanthropy, look to build relationships with the people there. Any connection will help you make sure your application materials hit the right notes and resonate with the funders.

For more insight on resources for founders in the Chicago area, follow Leen on LinkedIn!