Seven (7) Alternative Capital Sources:

Exploring Options for Seed and Pre-Seed Companies

Alternative capital options infographic

Introduction

For early-stage founders, securing the right funding can mean the difference between scaling successfully and stalling out before product-market fit.  Multiple studies have researched startup success, and while it's difficult to pinpoint an exact figure, the general findings support that a significant percentage of technology and healthcare technology startups will fail, with estimates ranging from 75% to 90% overall.  

So where is a founder to go to raise the necessary pre-seed and seed funding it needs to reach the next stage?

The good news is that the private markets are growing, and the investment landscape is evolving with the emergence of alternative structures that complement or compete with traditional private equity and venture capital models.

This paper explores seven alternative capital sources that founders can leverage to secure early-stage funding without overly diluting ownership or taking on excessive risk.

The Limitations of Private Equity and Debt

Private equity and debt financing are often not suitable for early-stage companies.  Your typical Angel, Venture Capital, and Private Equity Investor have pre-investment expectations and fund investment guidelines that place a heavy burden on funding.

• Founder Risk: Many institutional investors expect founders to take on significant personal financial risk before seeking external funding. This often includes tapping into personal cash reserves, home equity lines, and even 401(k) loans, alongside raising capital from friends and family. While demonstrating commitment is important, these financial demands can push founders to the brink, limiting their ability to sustain operations and personal finances.

  
  

• Restrictive Guidelines: These funding sources have restrictive investment guidelines requiring companies to generating at least $1M - $5M in annual recurring revenue, or EBITDA, and have minimum investment requirements of $5M - $15M before they even begin a conversation for a capital investment or loan.  This immediately excludes organizations below these thresholds, or that are wanting smaller funding rounds. 

So where does a founder go when they need capital, and their personal resources are already maximized?

Early-Stage Capital Alternatives

At this critical stage of the business, it is imperative for founders to seek investment options that align with the unique needs of early-stage ventures.

• Controlling Interest: Of critical importance is maintaining a controlling interest.  Preserving controlling shares is essential to protecting decision-making power and steering the company’s long-term vision. Giving up too much equity too early can limit a founder’s ability to make strategic choices, leaving key decisions in the hands of investors who may prioritize short-term returns over sustainable growth. It can lead to excessive dilution, reducing the founder’s potential future earnings. By retaining control, founders can focus on innovation, market fit, and scaling at the right pace.
  

• Financial Flexibility: Taking on debt too early can create significant challenges. Premature debt can burden a young startup with fixed repayments before revenue streams are stable, increasing financial risk and limiting flexibility. 
  

• Manage Restrictions: Early investors and lenders may impose restrictive terms or misaligned expectations.
  

Founders must carefully evaluate funding options to ensure they support, rather than constrain, their startup’s trajectory prioritizing funding options that promote sustainable growth without excessive risk.

Seven Alternative Investor Options for Seed and Pre-Seed Companies

The investment landscape is evolving with the emergence of alternative structures that complement or compete with traditional private equity and venture capital models. Notable among these are:

1. Business Development Companies (BDCs):
   

BDCs are specialized closed-end investment entities in the United States that provide financing to small and mid-sized businesses. Established by Congress in 1980, BDCs offer retail investors access to private market investments, traditionally reserved for institutional investors. They are mandated to invest at least 70% of their assets in non-public U.S. companies with market values below $250 million. BDCs distribute a minimum of 90% of their income to investors, thereby avoiding corporate taxation. This structure allows for potential high yields, though it comes with increased risk and limited liquidity compared to traditional investments.

·         Typical Range: $5 million – $100+ million

·         Stage: Middle-market companies, usually post-revenue

·         Note: Focused on debt or mezzanine financing with equity kickers.

Case Study: Xeris Pharmaceuticals. Xeris Pharmaceuticals, a biopharmaceutical company, leveraged funding from multiple BDCs to scale its operations before going public. Unlike traditional venture capital, BDCs provided structured financing that allowed Xeris to retain operational control while funding research and development.

2. Pledge Funds:

Pledge funds represent a flexible investment model where investors commit capital on a deal-by-deal basis, rather than pooling funds into a blind pool as seen in traditional private equity. This approach grants investors greater control over individual investment decisions and the ability to tailor their portfolios according to specific preferences. However, the model may lead to slower capital deployment and requires more active involvement from investors.

·         Typical Range: $500,000 – $10 million+

·         Stage: Varies (early to growth)

·         Note: Capital is pledged upfront by investors, deployed deal-by-deal; flexibility in deal size depending on investor commitment.

Case Study: FinTech Startup Klarna. Klarna, the buy-now-pay-later giant, used a pledge fund structure to attract investors on a deal-by-deal basis before scaling into a multi-billion-dollar company. This flexible funding approach allowed Klarna to raise capital without locking into traditional venture capital terms.

3. Equity Crowdfunding:

Equity crowdfunding platforms enable a broad base of investors to acquire equity stakes in startups and small businesses via online platforms. This democratizes access to early-stage investments, allowing non-accredited investors to participate in funding opportunities previously limited to venture capitalists and angel investors. While it opens new avenues for capital raising, equity crowdfunding carries risks such as limited liquidity and the potential for higher failure rates among startups.

·         Typical Range: $50,000 – $5 million

·         Stage: Seed to early-stage

·         Note: Regulated under platforms like SeedInvest, Republic, or Wefunder; caps depend on whether offerings are under Reg CF, Reg A+, or Reg D.

Case Study: BrewDog. The craft beer brand BrewDog raised millions through equity crowdfunding by offering shares to everyday investors. Their campaign allowed them to scale operations without relying on institutional investors, preserving control while building a dedicated community of supporters.

4. Impact Investing:

Impact investing focuses on generating measurable social or environmental benefits alongside financial returns. Investors allocate capital to ventures addressing issues like renewable energy, affordable housing, and healthcare. This approach appeals to those seeking to align their investments with personal values, though it may involve trade-offs between financial returns and social impact.

·         Typical Range: $250,000 – $10 million+

·         Stage: Varies (seed to growth), mission-aligned

·         Note: May include concessional capital or favorable terms; returns often balanced with social/environmental impact.

Case Study: Beyond Meat. Beyond Meat attracted impact investors focused on sustainability, securing funding from groups that prioritize environmental benefits alongside financial returns. This alignment helped them scale rapidly while maintaining their mission-driven approach.

5. Industry-Focused Accelerators and Incubators:

Industry-focused accelerators and incubators offer a valuable alternative to traditional capital options by providing not just funding, but also mentorship, networking, and industry-specific resources. These programs help startups refine their business models, connect with key industry players, and gain early traction without the pressure of immediate financial returns. This approach allows founders to build a stronger foundation in a supportive environment before seeking larger investments, preserving equity while increasing their chances of long-term success.

·         Typical Range: $25,000 – $250,000

·         Stage: Idea to early-stage

·         Note: Often includes mentorship, space, and networks in addition to funding.

Case Study: Health Tech Startup Tempus. Tempus, a health tech startup focused on AI-driven precision medicine, benefited from accelerator support before securing large-scale investment. Early mentorship and resources helped Tempus refine its technology and attract the right investors.

6.       Structured Capital Strategies:

Structured capital strategies provide customized financing solutions, blending elements of debt and equity to meet specific needs of companies, particularly in sectors like healthcare. For instance, RA Capital Management launched a structured capital initiative to offer flexible financing options to healthcare companies, addressing funding gaps and supporting growth.

·         Typical Range: $1 million – $20 million

·         Stage: Growth-stage or pre-exit

·         Note: Flexible structures designed for non-dilutive or hybrid capital, often used in expansion or pre-IPO stages.

Case Study: RA Capital Management & Healthcare StartupsRA Capital Management provides structured capital to early-stage healthcare companies, allowing startups to access non-dilutive funding and bridge gaps between venture rounds. This approach helped multiple biotech startups sustain operations without premature dilution.

7.       Networking and Industry Events:

Startups in health tech and technology sectors can significantly benefit from attending targeted networking events, industry conferences, and startup pitch competitions. These events provide opportunities to connect directly with potential investors, industry leaders, and other founders.  Some notable events include:

•      HLTH Conference – A major healthcare technology networking event featuring investors and startup showcases.

•      TechCrunch Disrupt – A technology-focused event offering startup pitching sessions and investor meet-and-greets.

•      JP Morgan Healthcare Conference – A prestigious event where health tech startups can engage with institutional investors.

Many incubators and accelerators also offer structured networking opportunities, allowing startups to build relationships with mentors and funding sources before actively seeking capital.

·         Typical Range: $10,000 – $500,000

·         Stage: Seed to early-stage

·         Note: Typically leads to angel or small group syndicate investments; value is often more in connections than cash.

Case Study: BioTech Startup ModernaModerna made key investor connections at major healthcare industry events like the JP Morgan Healthcare Conference, which played a crucial role in securing early partnerships and funding that fueled their rapid growth.

The following chart provides a high level overview of the average investment ranges provided by each investor type, helping to further illustrate where you might look depending on your capital requirements.

Average investment ranges by investor type

These emerging investment structures offer diverse avenues for capital allocation, catering to varying risk appetites and investment horizons. They provide alternatives to traditional private equity and venture capital, enabling investors to tailor strategies that align with their financial goals and values.

When approaching potential investors, tailor your pitch to highlight how your company addresses specific challenges, demonstrate a clear business model, and showcase any early traction or pilot results. Building relationships within your industry and leveraging networks can also enhance your chances of securing seed capital.

Where to go for more information:

Your network is your most powerful funding tool.  Nurture your network and tap into it strategically.  

1.       Identify and speak with founders who have raised funding through some of these alternative methods. 

2.       Connect with your board advisors, trusted partners and vendors develop a strong pitch deck and effective story of your company. 

3.       Take your updated pitch deck and company narrative and get connected with accelerators and incubators in your region, at your alma mater, or in your focus area. 

4.       Research upcoming industry events and pitch competitions and register to compete.

For more on hand assistance, work with a trusted finance professional, like NextStage CFO who can help with targeted assistance in each of these areas.

Example of upcoming events in 2025:

Upcoming alternative investment events

Alternative Funding Sources Comparison:

Alternative Funding Sources Comparison