Alternative funding sources for startups

Getting funding is one of the main challenges for startups. A brilliant idea, an effective business model, and a strong entrepreneurial vision are not enough without capital. For startups in Italy, accessing funding through traditional channels such as bank loans can prove very difficult. However, there are several alternative funding sources for startups that can offer greater flexibility, easier access, and more advantageous terms for young or fledgling businesses.

In this article we will explore some of the most interesting options among the alternative financing options available to startups, analyzing their pros and cons to help you understand how to incorporate them into a medium- to long-term financing strategy.

Public funds and subsidized finance

On the borderline between traditional financing and alternative funding sources we find the facilities and economic resources that government agencies make available to startups to support business development, especially innovative ones but not only.

These instruments can come in the form of grant financing, low-interest loans or other ways-our article on subsidized finance delves into the most common ones in Italy.

Typically, subsidized finance targets both early-stage and growth-stage entrepreneurs to meet the need for capital for investment in research and development, personnel or machinery.

The type of companies involved are mostly identified with innovative startups that operate in strategic sectors for the economy. However, facilities often also target companies that are not innovative startups when they operate in geographic areas or economic sectors that are particularly relevant to the national economy or involve fragile demographics.

How it works: Startups submit an application for funding to the relevant agencies, providing all the required documents, starting with the business plan.

Pros: Favorable interest rates, flexible repayment time.

Cons: Strict entry requirements, long bureaucracy and waiting times, complex directions, variability of opportunities over time.

Startup Incubators and Accelerators

Startup Incubators and Accelerators are facilities that offer support to early-stage startups, providing mentorship, coworking space, training and even funding in various forms.

The difference between incubators and accelerators is subtle and not always the same, but usually incubators are interested in nascent startups in the pre-seed stage and provide support and shared resources for defining the idea and business model, while accelerators target startups in the seed stage and also provide capital.

These opportunities are useful when the startup has an innovative idea but needs support to develop and validate it before going to market.

Accelerators and incubators cater to various types of startups, with a special focus on innovation and technology.

How it works: Startups submit their idea to a selection process, and in case of admission participate in an incubation or acceleration program with a predefined duration.

Pros: Comprehensive support for startup development, network of contacts and potential investors.

Cons: High competition for access, possible loss of control over the startup.

Some examples: 

• in Italy, many accelerators and incubators are linked to university institutions, for example, the PoliHub of the Politecnico di Milano
• H-Farm is an accelerator that combines training and investment
• Y Combinator is one of the world's best-known accelerators, is based in the United States and has a portfolio that includes Airbnb and Dropbox.

Business Angel 

Business Angels or Angel Investors are private individuals who invest their capital in startups with high growth potential, in exchange for an equity stake. They also often bring expertise and networks, offering added value in addition to funding.

Business angels are an alternative financing option to the banking channel that is useful at the seed or early stage, when the startup has an innovative idea, business model, and team, but does not yet have a significant track record.

How it works: Angel investors can be identified through referral networks, industry events, dedicated online platforms, for example Italian Angels for Growth.

Pros: Capital without immediate repayment charges, mentoring and strategic support.

Cons: Dilution of startup's controlling stake, long search and negotiation time.

Venture Capital

Venture capital companies are investment funds that raise capital from institutional and private investors to fund high-growth startups.

They represent an alternative funding opportunity in the expansion phase, when the startup has already demonstrated market traction and a validated business model and needs significant investment to scale.

Venture capital's target audience, in fact, are startups with strong potential for scalability and return on investment.

How it works: Startups submit a detailed business plan to venture capital funds, which evaluate the investment opportunity.

Pros: Significant capital, strategic support and network of contacts.

Cons: Massive dilution of startup's controlling stake, very competitive selection process.

Examples in Italy:

• P101 Ventures
• United Ventures

Alternative funding sources: Crowdfunding

Of all the alternative sources of financing to the bank loan and financial market listed so far, crowdfunding is the most "alternative" of all.

Because it is a collection of capital that takes place online, through dedicated platforms that host crowdfunding campaigns.

Crowdfunding is especially useful at the seed or early stage, when the startup has moved beyond the embryonic stage and has an interesting product or service that has an effective audience. Our article on the right time to do crowdfunding explains in detail when it is most effective to use this alternative funding source.

All types of businesses can do crowdfunding, although some are more advantaged than others: specifically, startups with strong audience appeal, that can tell an engaging story, that have innovative technology, and that have a good online and/or offline following.

How it works: The startup creates a crowdfunding campaign on an online platform, setting a collection goal and offering rewards to investors. This is an extreme summary, which you will find in depth in our blog articles, starting with the basics: how to start a crowdfunding campaign?

Pros: Ability to raise capital from a broad audience, market validation, and creation of a community around the project.

Cons: Need for an effective communication and marketing strategy, fees charged by the platform. To learn more, read our full article about pros and cons of crowdfunding.

How to choose alternative funding sources for startups

Alternative funding sources for startups, then, are many. Choosing the one best suited for your startup requires careful analysis of your needs, your business plan, your corporate structure and your target market. Professional advice from an experienced startup accountant can be very helpful.

Finally, it should be remembered that one choice does not exclude the other: the most effective strategy is one that builds a medium- to long-term financing path that integrates various sources to make the most of each, making capital raising a business asset.