Non-dilutive funding: how to access capital without giving up control of your business

When it comes to getting their project off the ground, entrepreneurs can draw on their own savings, rely on the support of family, friends and fools, opt for innovation awards or access various grants and incentives, such as non-refundable loans or tax credits. But in order to grow their business, sooner rather than later they will have to turn to private capital and then ask themselves a fundamental question: dilution or non-dilution.

Dilutive vs non-dilutive funding

Some of the traditional funding options for a startup involve dilution of the founders’ ownership of the startup, with new investors and partners taking a stake in the company. This is the case with business angels, venture capital funds, corporate venture capital or the crowdfunding formula of crowdequity, which allows multiple investors to become shareholders in a company in exchange for providing capital.

Debt models, on the other hand, involve non-dilutive funding opportunities. This formula is offered by both public and private organisations and has evolved in recent years to adapt to the needs of entrepreneurs, as in the case of growth loans, a solution developed by BBVA Spark and focused on scaleups in advanced stages of development. In addition, other types of loans and credit lines such as crowdfunding, performance-based funding or factoring, allow entrepreneurs to increase their liquidity while maintaining control of their business.

Types of non-dilutive funding

In addition to their own funds, grants and financial support from their environment, entrepreneurs have increasingly sophisticated solutions that allow them to access funding without giving up equity:

• Debt is characterised by the fact that the capital provided by investors must be repaid with interest over a specified period of time (either long-term, as in the case of mortgages or bank loans, or short-term, with a maturity period of less than one year). Many banks offer products specifically designed for entrepreneurs and self-employed people, such as such as BBVA’s business loans or the aforementioned BBVA Spark growth loans. Public bodies such as the National Innovation Company (Enisa) and the Centre for the Development of Industrial Technology (CDTI) also offer credit lines and repayable grants.
• Venture debt is a debt solution specifically designed to help startups and scaleups grow. This model is a hybrid between debt and equity, as the loan clause usually includes an equity kicker, which allows the lender to acquire shares in the company. The investor thus reserves the option of converting a percentage of the total amount borrowed into equity in the startup, although venture debt involves less dilution than venture capital investments.

• The revenue-based funding model provides a flexible and non-dilutive way for entrepreneurs to access capital. Investors fund a startup or scaleup in exchange for a fixed percentage of its gross revenue, so the amount to be repaid varies in proportion to the performance of the business.
• Factoring is a collection service offered by banks that advances the amount of invoices issued to businesses, allowing them to have liquidity before they are due. Not to be confused with confirming, a payment service whereby a financial institution takes over the management of a company’s financial obligations.
• Collective funding also includes non-dilutive options, such as crowdfunding, which allows users to receive rewards in exchange for contributing capital, or crowdlending, which provides repayable micro-loans with interest.

Benefits of non-dilutive funding

• Lower dilution. The main and most obvious benefit of these funding formulas is the non-dilution (or the reduction thereof), not only of the entrepreneurs’ shareholdings, but also of the capital (which is not diluted, as no new shares are issued) and of the company’s valuation (which also remains stable).
• Quick access to capital. At a time when venture capital is slowing down, non-dilutive funding options are seen as a real and effective alternative to raise the funds that every startup needs to get off the ground or continue to grow.
• Independence and authority for the founders. The entrepreneur does not have to give up shares in their company to qualify for capital, which allows them to retain greater control over the business decisions that will determine the company’s future.

In addition, many non-dilutive funding models are designed specifically for startups and scaleups, and therefore include benefits that encourage entrepreneurship, such as target investments, payments linked to the company’s revenue, less stringent conditions for access to funding, and valuations or due diligence of companies that take into account the stage of growth they are in.

A solution to the funding problem?

Access to funding remains one of the biggest obstacles to entrepreneurship. According to the Global Entrepreneurship Monitor 2022-2023 (GEM Spain), most entrepreneurs start their projects with little funding, usually their own (known as bootstrapping): on average, the personal savings of Spanish entrepreneurs represent more than 50% of the startup capital. Moreover, problems in obtaining funding are behind the 8.7% of business failures in Spain in 2022.

The fall in venture capital investment increases the difficulty of accessing funding: the decline was 46% in the first half of 2023 compared to the same period last year, according to data from SpainCap, the Spanish association of venture capital and private equity funds. Venture capital also leads to the dilution of the entrepreneurs’ stake in their own project. Therefore, the accessibility and flexibility of non-dilutive funding, combined with the great advantage of retaining ownership and strategic control over the company, make it the ideal solution for many entrepreneurs.