In the process, this has typically left female-led, minority-led, and socially-driven businesses discriminated against and floundering. Those that actually gain funding frequently find themselves losing control of the companies they’ve fought so hard to build. So, with the investment landscape changing, might it not be time to rethink the overall viability of the current funding system?

The problem with VC funding

VC funding has been the norm for such a long time now that its faults have become almost accepted. The fact that it rewards speed and scale to the detriment of sustainability and inclusion may be acknowledged but rarely challenged. The problem is that this forces startups to mould themselves to fit a very specific narrative. To gain funding, they must present themselves as having fast growth, providing tech-driven disruption, and multi-million-pound potential. But this only works for a tiny percentage of startups. It doesn’t mean that the other entrepreneurs are less worthy of support – in fact, for most impact-driven startups, the reverse is true. It simply means that they don’t fit the very distinctive shape of the VC cookie cutter. So, regardless of the founder’s talent or the viability of their business, these startups often find themselves left out of the funding ecosystem entirely.

As for those who do secure VC funding, they do so at a premium. Founders find themselves giving up large equity stakes in exchange for capital, and losing significant control over the businesses they’ve poured their lives into building. The dream of entrepreneurship can quickly disappear. It’s little wonder that startups want more. So, how can startups raise capital without losing control of their assets?

The changing funding landscape

While startups are growing weary of the discrimination and loss of control associated with VC capital, the funding landscape is also changing. Increasingly volatile, with market corrections, higher interest rates, and growing scrutiny, VC funding is harder to come by. So, what alternatives are open to startups seeking a more satisfying growth path?

Revenue-based financing (RBF) has emerged in recent years as a flexible, funding option that does not require the business owner to give up any equity or ownership. Instead, startups agree to share a percentage of their monthly revenue until the loan is repaid, often with a capped return. This keeps ownership intact and aligns investor interests with actual performance.

Strategic angel investors offer another route. Typically operating with longer time frames and more tolerance for experimentation than VCs, if chosen well, they can also offer invaluable sector expertise, contact networks, and mentorship.

Crowdfunding is another option growing in credibility and scale. This model enables startups to raise money directly from their communities, often in exchange for early access to products or small equity stakes. This democratises investment and lets founders build loyal customer bases at the same time.

Bootstrapping is nothing new, but it can provide the opportunity for sustainable growth, albeit at a slower pace. While not as headline-grabbing as securing a high-profile investor, it allows entrepreneurs to build on their own terms, keeping full control and focusing on creating real value instead of chasing rapid, artificial growth.

And then there’s blitzscaling. Blitzscaling may have fallen out of fashion after Silicon Valley’s hyper-growth heyday, but it’s now being re-examined. While scaling prematurely can be more damaging than helpful, if you have a market fit product and a clear path to profitability, it can carry benefits for businesses not suited to the VC route.

Lastly, we come to impact-driven funding. In this model, investments are made with the intention of generating both financial returns and measurable positive social or environmental impact. Unlike traditional venture capital, impact-driven funding deliberately supports startups or businesses that aim to solve real-world problems. Whether that’s in climate, education, health, or social equality. In many ways, it’s a win-win funding solution, benefitting startups, society, and investors through enhanced green credentials.

Should impact or sustainability influence funding decisions?

For decades, there have been glaring disparities in funding. Women-founded startups received just 2% of all VC investment in 2023. For minorities, the figures are even more concerning. Between 2009 and 2019, only 0.24% of venture capital funding went to black founders, and black female entrepreneurs typically experience the poorest outcomes in terms of funding. This not only implies inherent bias in how startups are evaluated, but underlines the fact that not enough attention is being paid to what really makes a successful business. Shifting the focus to take in impact and sustainability could help to address this.

When you factor impact and sustainability into investment decisions, you move away from the VC cookie cutter. Companies that prioritise environmental, social, and governance (ESG) outcomes, tend to focus on the long-term, manage risk more effectively, and create lasting stakeholder value. And that creates an appealing proposition for investors.

VC funding will always have its place, but we’ve now moved beyond the time where it could or should be treated as the default or gold standard. Startups deserve a funding ecosystem that not only offers real choice, but supports multiple business models. Because not every business can hope to become a multi-million unicorn. Some are quite happy being workhorses, scaling slowly and quietly while serving their communities in one way or another. And while they might not hit the big returns as rapidly as some that fit the VC funding model, they offer something better – sustainability, in all senses of the word.

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