The Rise of Non-Dilutive Funding

By: Gridline Team | Published: 08/04/2022
 | 
Est. Reading Time:
3 minutes

An unfortunate set of dominos began to fall in early 2020. Lockdowns, and ensuing unemployment, compelled central banks to flood the markets with liquidity. As economists predicted to a T, this unprecedented quantitative easing led to 9% inflation. To fulfill the other side of its mandate, The Fed had to reverse course and raise interest rates. The resulting market turmoil caused both public and private valuations to decline sharply.

While private markets have remained fairly resilient, with Q2 2022 seeing VC totals higher than before the pandemic, many founders are looking for alternative, less dilutive forms of funding.

According to the LTSE 2022 Future of Equity Report, over a third of founders are now looking for non-dilutive funding, such as government grants or revenue-based financing. Non-dilutive funding simply refers to capital that doesn’t require owners to give up equity or ownership in their company.

What’s Driving This Shift?

Securing capital becomes more challenging in a downturn, with VCs advising founders to “plan for the worst” and “avoid the death spiral.”

In today’s market, as valuations are coming down, founders and business owners are more interested in flexible capital that doesn’t require them to give up control. Falling valuations also mean that for any given level of funding, founders will have to give up more equity than they would have just a year ago.

Market volatility has forced many startups to reevaluate their burn rates and runway. With the future more uncertain than ever, founders are understandably reluctant to give up any equity or control over their companies.

One Entrepreneur article discusses a founder from Cleveland who used non-dilutive funding to raise $3.2 million for 29.3 percent of the company. Had the founder employed a mix of dilutive and non-dilutive funding, he would have raised just $2.3 million for 42.2 percent of the business.

Of course, dilutive and non-dilutive funding aren’t mutually exclusive. In many cases, combining the two will be the best way to finance a company’s growth. As a CB Insights report explores, a track record of non-dilutive capital “indicates that a company has hit milestones linked to product development and financial performance,” which can make it easier to raise dilutive capital down the line.

Non-Dilutive Funding Options

Government grants are one popular form of non-dilutive funding. The Small Business Administration (SBA) provides several federal grants: research and development (R&D), management and technical assistance, COVID-19 relief options, community organization grants, and more.

For example, the Paycheck Protection Program (PPP) was a type of small business loan created in response to the COVID-19 pandemic. Businesses could apply for these loans, which were forgiven if they used them for qualifying expenses, like payroll or rent.

Another popular non-dilutive funding option is revenue-based financing (RBF). With RBF, investors provide capital in exchange for a percentage of future revenue. SaaS companies often use this financing type, as it’s easy to predict and track recurring revenue.

Further, venture debt is another form of non-dilutive funding that has been gaining popularity in recent years. Venture debt is a loan backed by a startup’s equity. This type of financing can be helpful for companies that need to make large one-time purchases, like equipment or real estate.

The Takeaway

As recent surveys indicate, non-dilutive funding is rising as founders seek to preserve equity and control in their companies. While dilutive funding will still play a role in many startups’ growth plans, non-dilutive options are becoming increasingly popular.

Government grants, revenue-based financing, and venture debt are all popular non-dilutive funding options. As the market continues to evolve, we expect to see more companies take advantage of these financing options.

Download this article for later.
Sed ut perspiciatis unde omnis iste natus error sit voluptatem accusantium doloremque.
Share this Article
Terms of Service | Privacy Policy | GLBA Notice


Disclaimer
This site is operated by Gridline Holdings, LLC ("Gridline"). Gridline does not give investment advice, endorsement, analysis or recommendations with respect to any securities. All securities listed here are being offered by, and all information included on this site is the responsibility of, the applicable issuer of such securities. Gridline has not taken any steps to verify the adequacy, accuracy or completeness of any information. Neither Gridline nor any of its officers, directors, agents and employees makes any warranty, express or implied, of any kind whatsoever related to the adequacy, accuracy or completeness of any information on this site or the use of information on this site. By accessing this site and any pages thereof, you agree to be bound by the Terms of Service and Privacy Policy

Past performance is not indicative of future results. All securities involve risk and may result in significant losses. Investing in alternative investment funds is inherently risky and illiquid, involves a high degree of risk, and is suitable only for sophisticated and qualified investors. Investors must be able to afford the loss of their entire investment. Alternative investment funds should only be part of an investor’s overall investment portfolio. Further, the alternative investment fund portion of an investor’s portfolio should include a balanced portfolio of different alternative investments. Investments in alternative investment funds are speculative and involve a high degree of risk and those investors who cannot afford to lose their entire investment should not invest. Additionally, investors may receive illiquid and/or restricted securities that may be subject to holding period requirements and/or limited liquidity. Investments in Alternative investment funds are generally highly illiquid and those investors who cannot hold an investment for the long term should not invest.

Any specific alternative investments funds referenced on this site are included purely for illustrative purposes and selected based on name recognition. Such examples are only partial, and readers should not assume that the investments identified were or will be profitable or are representative of investments by the alternative investment funds identified on this site. There is no guarantee that any alternative investment fund will achieve the same exposure to, or quality of, investments held by any existing fund referenced on this site.

Nothing on this page shall constitute an offer to sell or a solicitation of an offer to buy an interest in any investment partnership or other security. Any offer to sell or solicitation of an offer to buy an interest in an investment partnership may be made only by way of the partnership's final definitive confidential disclosure document and other offering and governance documents of any given fund (collectively, “Offering Documents”). The information on this site is qualified in its entirety and limited by reference to such Offering Documents, and in the event of any inconsistency between this site and such Offering Documents, the Offering Documents shall control. In making an investment decision, investors must rely on their own examination of the offering and the terms of any offering. Investors should not construe the contents of this site as legal, tax, investment or other advice, or a recommendation to purchase or sell any particular security.

The information included in this site is based upon information reasonably available to Gridline. Furthermore, the information included in this site has been obtained from sources Gridline believes to be reliable; however, these sources cannot be guaranteed as to their accuracy or completeness. No representation, warranty or undertaking, express or implied, is given as to the accuracy or completeness of the information contained herein, and no liability is accepted for the accuracy or completeness of any such information. This site may contain certain “forward-looking statements,” which may be identified by the use of such words as “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated,” “potential,” “outlook,” “forecast,” “plan” and other similar terms. All such forward-looking statements are conditional and are subject to various factors, including, without limitation, general and local economic conditions, changing levels of competition within certain industries and markets, changes in legislation or regulation, and other economic, competitive, governmental, regulatory and technological factors, any or all of which could cause actual results to differ materially from projected results.

© 2023 Gridline Holdings, LLC