Raising capital is one of the biggest decisions a startup founder will face, so what option makes sense and how do you recognize the best fit?
Welcome to a brand new three-part series with Icehouse Ventures Partner, Jo Wickham.
Raising capital is one of the biggest decisions a startup founder will face. If you're a regular Caffeinator, you've probably noticed that venture capital (VC) tends to grab the spotlight. It promises rapid growth, industry connections, high-profile events, and PR buzz around big funding announcements. But here's the thing—VC isn't always the best option, in fact, it’s rarely the best option, especially in the early stages of a startup. So, how can you tell when it’s the right time to go for VC funding? And what other options should you consider if VC doesn’t feel like the best fit?
When VC funding makes sense
Everyone loves the Olympics and a good analogy so, think of raising venture capital as being like competing in the Olympics. If your startup is ready to go for gold—meaning you’ve trained hard, perfected your craft, and are prepared for the world stage—VC funding can be the sponsor that gets you the top-tier coaches, world-class equipment, and access to the best competitions.
If you're still figuring out your sport or honing your skills, raising VC is like entering the Olympics before you're ready— you might end up burning out or missing out on the right opportunities because the timing isn’t right yet or worse, your startup might end up the venture backed equivalent of Raygun.
Perhaps you are a world-class talent with local ambitions, then raising VC funding might steer you towards goals that aren’t aligned with that ambition and may mean you’re training for a competition that you never wanted to enter, let alone win.
So, when does VC funding make sense, and when is a good time to raise?
You Have a Unique Insight & Ambition
Before raising venture capital you should ask yourself, what do you and your founding team know that very few other people in the world know? What is your unique insight or unconventional belief that has the potential to drive transformative innovation? Are you able to demonstrate validation of real-world demand for your proposed solution in some way? If successful, will your solution meaningfully transform the way we live in the future for the better? Raising money too soon, without validation or clear ambition, can leave you with investor pressure before you’re truly ready. Perhaps you are building a groundbreaking deep tech innovation like Halter (a beef and dairy cow pasture management system) that is technically difficult to build but has the potential to change an entire industry, or you have a SaaS product like Tracksuit (beautiful, affordable, always-on brand tracking) that solves a real problem for a clearly validated target market.
You Need to Scale Quickly or Slowly
If your startup is in a high-growth market where speed is essential or a ‘winner takes all’ market where a few players capture most of the value you might need a large influx of cash to expand operations, hire talent, and grab market share. Marketplaces like Partly are a good example. Partly provides car part infrastructure which makes it easy for repairers to find the right parts. Venture capital is perfect for these scenarios because it provides the funding you need to move fast. Equally, if your startup is in deep tech and you require significant upfront investment and long development cycles before you can bring a product to market, venture capital is also well suited for these high-risk, high-reward scenario. Open Star is a great example, working to deliver clean, abundant and available fusion energy to the world.
Your Startup is in a Large and Growing Market
Large and growing markets present the opportunity for exponential growth, which is essential for VCs to achieve their target returns so only look to raise venture capital where you see this alignment. The power law in venture capital refers to the phenomenon where a small number of investments generate the vast majority of returns. In a VC portfolio, most startups may fail or produce modest outcomes, but one or two companies achieve massive success, delivering outsized returns that far outweigh the losses from other investments. This disproportionate success drives the overall profitability of the fund, making the rare, high-impact wins crucial for VC firms. Understanding this dynamic is important for determining whether or not you want to raise venture capital.
You Can Attract Top-Tier Investors & Team
Are you and your team great storytellers? Can you attract top-tier investors and talent to fuel your startup’s growth? Good venture capitalists offer much more than just funding. They bring expertise, mentorship, access to top talent, and networks that can open doors to help your startup succeed. If you have the chance to partner with reputable VCs who share your vision, it’s definitely worth considering. However, this can create a "chicken and egg" scenario—great investors want to see other top investors and talent already on board, and top talent often looks for well-funded startups before committing. The key to breaking this cycle is your ability to sell your vision and become a pied piper, attracting the best stakeholders to your team. This creates a powerful "halo effect" that draws in even more high-calibre investors and talent, positioning your startup for success.
You’re Ready to Give Up Some Control
With venture capital, you’ll need to give up a share of your company in exchange for funding, and investors will expect to have a say in major business decisions. If you're prepared to share control and take on that level of accountability, it might be the right time to pursue VC. One of the biggest shifts founders often mention is the added pressure of being accountable to investors. Before you take that step, consider whether you're comfortable with this responsibility in the long run, as it can significantly change the dynamics of running your business. That said, if your startup and founding team is super compelling you may be able to negotiate more favourable terms.
It’s important to consider the above factors while acknowledging that venture investing is inherently contrarian and driven by outliers. While these factors often hold true, there are always exceptions to every rule!
Alternatives to Venture Capital
Venture capital isn’t the only way to raise money. For many startups, there are more suitable options that align better with their needs at different stages of growth. Venture capital typically emphasizes rapid growth and market dominance, but what if scaling fast isn’t the best path for your startup? Fast scaling isn’t always the best or only route to success. Slower, more sustainable growth funded out of strategies like those set out below might actually create a stronger, more resilient business in the long run. Here are some alternatives to consider:
Bootstrapping
This is the ultimate self-reliance strategy, where founders use their own savings or revenue generated by the business to fund growth. Bootstrapping gives you full control over your company and prevents dilution of equity, but it requires patience and careful financial management. It’s ideal for founders who can grow at a steady pace without needing a huge upfront investment. Vista Group which makes film and cinema exhibitor software was bootstrapped by the founders from incorporation in 2003 all the way to listing on the NZX and ASX in 2014.
In some cases, receiving early investment from friends, family or close networks to get the business off the ground and to its initial milestones can also be referred to as bootstrapping—rather than going it completely alone, founders have more support while finding product market fit and initial scale (see the next section for more detail on raising from Friends and Family). *
Many companies start out bootstrapping before securing venture capital funding after hitting significant milestones. For example, Vend, a closed-based retail point of sale software company, was bootstrapped in its early stages before it attracted significant venture capital to expand internationally. Timely, appointment scheduling software, was similarly bootstrapped in its early stages before it attracted venture capital allowing it to grow its platform and customer base across different markets. Bootstrapping can effectively prove a company’s viability, making it attractive to investors later on and potentially at higher valuations than they may otherwise have gotten earlier.
*edited for clarification
Friends and Family
Many startups get their initial funding from friends and family. These investors are more likely to believe in your vision and provide flexible terms, but mixing business and personal relationships can be tricky. It’s important to clearly define the terms and make sure they understand the risks involved. Unfortunately, however, not everyone has the luxury of turning to their close circle for financial support as friends and family may not have the resources to invest.
Angel Investors
Angel investors are typically wealthy individuals who invest their own money in early-stage startups. Angels are often more willing than VCs to take risks on unproven companies. They can also provide valuable mentorship, but you’ll likely give up a smaller equity stake than with venture capital. This option works well for startups looking to raise seed funding before going after larger VC rounds. However, choosing your angel investors should be done with as much care and due diligence as selecting a VC or any other investor. Since you’re entering a long-term relationship with them, it's crucial to ensure they align with your company’s vision, values, and goals, as their influence and involvement can significantly impact your startup’s trajectory.
Crowdfunding
Platforms like Snowball Effect allow startups to raise money from the public in exchange for product pre-sales or small equity stakes. Crowdfunding is great for consumer-facing businesses with passionate communities or products that resonate with a broad audience. It also doubles as a marketing tool to generate early customer interest. Allbirds uses crowdfunding to get started, launching its first wool sneaker on Kickstarter in 2014. The campaign was highly successful, raising more than $100,000 in just five days, far exceeding their initial goal. This crowdfunding success provided Allbirds with the momentum to continue developing its sustainable footwear brand into the globally recognised brand it is today. Another example is Ethique, a sustainable beauty company, which produces solid, plastic-free beauty bars. Ethique raised funds through crowdfunding platforms like PledgeMe and later expanded globally. Ethique’s success story is often highlighted as a model for socially-conscious businesses using crowdfunding to scale.
Bank Loans and Lines of Credit
Traditional bank loans are another way to finance a startup without giving up equity. While banks typically require collateral and can be hesitant to lend to startups without proven revenue, there has been a noticeable shift with NZ banks providing more adventurous lending to startup companies such as BNZ’s contracted receivables financing and revenue-based financing for SaaS companies. Similarly, ASB’s clean tech fund offers loans of up to NZ$5m to companies focussed on reducing emissions. Both banks are actively supporting New Zealand's tech ecosystem with products aimed at helping startups scale while retaining control of their businesses.
Grants and Competitions
Governments, nonprofit organizations, and private companies offer grants and competitions that award money to startups. These funds don’t require repayment or equity, but they can be highly competitive. For startups in specific industries like tech, clean energy, or healthcare, seeking out grant opportunities could provide a great way to raise non-dilutive capital. The Ārohia Trailblazer Innovation Grant is a great example. The Grant is a funding initiative by Callaghan Innovation aimed at supporting innovative NZ businesses with the potential to scale globally. It focuses on co-funding non-R&D related activities such as product and process development, go-to-market strategies and business model innovation. Past recipients include companies like Alimetry – a healthtech company developing wearable medical solutions for gastrointestinal care and Leaft Foods, working on sustainable leaf-derived protein production.
Strategic Partnerships
In some cases, partnering with a larger company can provide both financial resources and strategic benefits. This could involve a joint venture, licensing agreement, or even a direct investment from the partner. Such partnerships are ideal for startups that align well with larger companies’ business goals. Kwetta (formerly Red Phase) has partnered with Z Energy to deploy ultra-fast electric vehicle (EV) chargers across New Zealand. This partnership has enabled the installation of numerous charging stations at Z Energy locations, supporting the shift to low-emission vehicles and enhancing New Zealand's EV infrastructure.
Conclusion: Choosing the Right Path
Like deciding to enter the Olympic Games— timing, preparation, and strategy are everything when it comes to raising venture capital. If your startup is ready to sprint toward rapid growth, and you’ve got a strong, scalable product with a large market, VC funding might just be your golden ticket. But if the pace of VC doesn’t align with your vision, there are plenty of alternative paths to take that still lead to success. Whether you choose to bootstrap, lean on angel investors, or partner with strategic players, the key is to stay true to your vision and choose the funding route that best supports your long-term goals.
In the end, it’s not just about the finish line—it’s about building a company that can go the distance, with or without a VC boost. So, gather your team, map your strategy, and go after the funding model that fits your startup’s unique race!
Decided you’re going for gold? Look out for the next article in this series; ‘Venture Capital 101: The ins and outs of raising an investment round [Part 2]
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