Everything you need to know about non-dilutive funding in 10 minutes.
There are plenty of funding options for early-stage startups and SMEs. Yet 32% of European startups face difficulty accessing funds.
Finding the right option for your small business needs can be overwhelming. Non-dilutive funding is an attractive option with numerous upsides.
In this article, we’ll explain non-dilutive funding and expand on its positive and negative aspects. We’ll also share the top sources to secure this type of funding for Swiss startups.
What is non-dilutive funding?
Non-dilutive funding is a financing option for businesses. You receive capital without giving up a share of your startup’s equity (diluting ownership).
The founders remain in charge, and the leadership structure stays intact. But other strings can be attached, such as regular reporting requirements, loan payback and interest payments.
Royalties, crowdfunding, business loans, grants and winning money in startup competitions are a few different types of non-dilutive funding.
Non-dilutive funding is best for small to midsize businesses in the early startup stages because it enables them to grow without outsiders’ input or sharing the profits forever.
That’s usually the go-to choice for businesses whose founders want to maintain control and independence.
The pros and cons of non-dilutive funding.
Funding options for startups are never one-size-fits-all. Non-dilutive funding has advantages as well as drawbacks.
Pros of non-dilutive funding.
- The most significant benefit of non-dilutive funding is that founders stay in charge of the business. You’re not obligated to follow investors’ recommendations. You can make independent decisions and stick to your vision for the company.
- Non-dilutive funding is easier and quicker to acquire than dilutive funding. It usually requires fewer negotiations and less due diligence than securing investments from an angel investor or a venture capital firm.
- Non-dilutive funding involves less personal risk than traditional bank loans. You usually don’t need personal collateral for these funds. Many non-dilutive funding providers offer funds based on potential business growth and current revenue.
- Non-dilutive funding gives businesses a short-term financial push to scale rapidly. It can fill the gap between your goal and your current place, especially if you urgently need cash or working capital.
- Interest payments on loans seem like a drawback. But your interest payments on non-dilutive loans are tax-deductible in Switzerland.
Cons of non-dilutive funding.
- The money received through non-dilutive funding is usually insufficient for bigger expansion projects.
- Acquiring non-dilutive funding can be a time-consuming process. You may have to secure funds through different sources to meet your requirements. You’d need time and resources to research the best providers and apply for their funds.
- Non-dilutive funding is competitive. Awards, startup competitions and funding providers receive hundreds of applications. You must pass multiple rounds to win funds.
- You may need to guarantee that you’ll be able to repay the loan or return the debt. Young startups with little to no collateral and income statements may struggle.
- Inability to repay the loans, deviating from the agreement or delayed payments may result in heavy fines and put your business at risk.
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Sources of non-dilutive funding for Swiss startups.
Crowdfunding, loans, investments from family and friends, R&D tax credits and venture debt are popular types of non-dilutive funding.
Here are the top non-dilutive funding sources in the Switzerland startup ecosystem:
1. Research and innovation funding
Innosuisse is the Swiss Innovative Agency. It’s a government body that supports entrepreneurs in various ways.
Innosuisse funds R&D costs for startups and small to medium businesses that apply directly to its programs. It also funds startups participating in the Eurostars program.
The Swiss government funds national projects directly through Innosuisse’s programs. The amount of non-dilutive funds they offer varies between programs. This organization supports various industries.
Startups and SMEs find additional support for innovation, market entry or partner search on the Euresearch platform. Note: Swiss companies and organizations can currently only participate as associated partners. The costs are covered by the State Secretariat for Education, Research and Innovation.
How to acquire funding for research and innovation?
Go through The Innosuisse Guide to find the perfect funding opportunity based on your requirements. Fulfill the eligibility criterion and fill out the application forms for the specific funding programs.
Find programs within the EU framework program “Horizon Europe” that could suit your needs. The programs are presented on the Euresearch platform.
2. Swiss accelerators and incubators for startups and SMEs after market entry.
Accelerators and incubators either provide direct funding and mentorship or help you find investors. Apply for accelerators during seed funding rounds because you can benefit most during this time.
Some top Swiss accelerator programs for securing non-dilutive funding are:
Most Swiss accelerators and incubators are industry-specific, meaning they only welcome startups from specific niches.
—> Read our article on Swiss accelerators and incubators to find more funding options for your startup.
3. Startup awards and competitions.
Funds from awards and competitions are enough to ease your entry into competitive markets or provide you with money for specific business expenses.
Some excellent awards and competitions as a source of non-dilutive funding for Swiss startups are:
- Swiss Medtech Award.
- Startup idea competition by St. Galler Kantonalbank.
- Innovation by Design Challenge.
Some organizations, such as Innosuisse and The Swiss Startup Factory, offer training to prepare you for fundraising events and competitions. Consider applying there if you must polish your pitch before applying for the awards.
4. Government grants and loans.
Government grants are non-repayable funds. Various public Swiss entities issue grants based on specific criteria and objectives.
Some examples of Swiss grant providers are:
- Stiftung Finanzplatz Basel.
- The Gebert Rüf Foundation.
- Innosuisse grants – Funding for national projects.
- The Swiss National Science Foundation.
- BRIDGE.
- Economic promotion of the canton Jura and “Nouvelle enterprise innovate NEI”.
Term loans are repayable funds borrowed from a lender at a specific interest rate and duration. Nearly one-third (32%) of Swiss startups rely on bank financing and loans. Some of the top loan providers for Swiss startups are:
StartupBL supports entrepreneurs from the canton of Basel-Landschaft with free coaching and space. They are also involved in the initiative “100 fürs Baselbiet”: Companies and startups receive a loan of 100,000 to 500,000 Swiss francs to get to their next stage. Further, StartupBL helps to set up guarantees for bank loans.
5. Tax credits.
Tax credits are reductions or refunds of taxes the government allows for certain business activities or expenses related to innovation. Some examples of non-dilutive funding through tax credits in Switzerland are:
6. Revenue-based financing.
Revenue-based financing involves trading an investment for a share of the monthly or yearly revenue until the investment is paid off. You can decide on the payment terms with your investors.
This form of funding is still new in Europe. Round2 Capital Partners offers revenue-based financing for Swiss startups.
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The alternatives of non-dilutive funding.
Dilutive financing, also called equity funding, is another way to fund your startup. You give the funding providers a share of the equity and dilute your business ownership in exchange for an investment.
You don’t have to pay back the investment, even if the company operates at a loss or fails.
Along with the money, you also get access to people with experience in business to help your startup grow. The investors’ primary goal is to see your business flourish so they can also get a good return.
Your business can benefit in multiple ways from dilutive funding. But you sacrifice your decision-making power.
Dilutive funding providers usually offer much larger funds than non-dilutive funding. Your business can grow exponentially fast and for an extended period.
Here are some popular dilutive funding options for Swiss startups.
1. Angel investors.
These individuals fund startups in exchange for equity and sometimes mentorship or advice.
Investment from angel investors is also referred to as private equity financing. That’s because all the company shares are in the hands of a few individuals (private), not the public.
You can find angel investors for dilutive funding for Swiss startups at:
- Business Angels Switzerland. They are a group of people who support young companies. They organize 20 meetings a year where you can pitch your business proposition to them.
- SICTIC. They connect early-stage startups and investors. The community counts more than 500 investors. Entrepreneurs can deliver their pitches at the SICTIC Investor Days.
- Startup Nights.
- Swizz Fintech Fair.
- Swiss Health Angels.
How to win over an angel investor.
You need an outstanding pitch deck, a solid business plan and a potentially highly profitable startup to get funding from angel investors.
2. Venture capitalists (VC).
Venture capitalists are individuals or firms that invest in your business in exchange for an equity stake. Your business can be new or mature to get VC funding.
Usually, you need to demonstrate high growth potential to win large amounts of funds.
More and more venture capitalist firms are investing in Swiss startups. VC funding in Switzerland quadrupled between 2017 and 2022. Swiss Private Equity & Corporate Finance Association (SECA) provides an overview of private equity firms. They represent the interests of professionals and organizations in the private equity, venture capital, and corporate finance sectors in Switzerland.
Some VC firms that offer dilutive funding for Swiss startups are:
How to secure venture capital.
You must submit a business plan, pass due diligence interviews and show high profitability potential to get VC funds.
3. Convertible loans
Convertible loans provide a flexible pathway to secure capital. Unlike traditional loans, convertible loans don’t immediately translate into equity ownership but offer the potential to convert into equity at a later stage.
Startups often use this financial instrument in their early stage as an interim step before a full equity round. Convertible loans can be used to fund critical growth initiatives, allowing your startup to achieve key milestones.
How to secure convertible loans
Convertible loans involve borrowing capital from investors, typically with a predetermined conversion price and a conversion trigger, such as a future funding round or specific business milestones.
BaseLaunch offers convertible loans to biotech ventures of up to CHF 500,000.
4. Public equity capital.
Issuing public shares by listing your company on the stock exchange to raise funds is called Initial Public Offering (IPO). That takes away some of the equity from the founders and distributes it amongst the public investors.
The ease of gathering funding from many external investors is why most SMEs go public.
How to secure public equity capital.
Your company can issue public securities or shares openly traded in the markets to secure public equity capital. To reach that stage, you must compile business financial information and meet the governmental IPO requirements.
5. Business crowdinvesting.
Business crowdinvesting is a form of crowdfunding. Investors are awarded participation rights, a share of the profits or equity for their investment. Individuals, as well as institutions, can invest.
Dilutive funding of this type is raised through dedicated crowdfunding online platforms. Some platforms for Swiss startups are:
- Cashare – Crowdlending.
- Conda – Crowdinvesting.
- Progettiamo – Crowdfunding.
According to the Crowdfunding Monitor Switzerland 2020, business crowdinvesting in 2019 increased by approximately 381% since 2016.
Source – The Future of SME Financing by SIX
—> Learn about more startup funding options by reading our in-depth article on the topic.
Need help finding the right funding provider for your startup?
Over one-third of startups fail due to a lack of capital. Funding options for startups are constantly changing. Staying updated on financing and networking opportunities can be a challenge for founders.
We regularly organize events to provide updated information about funding sources for Swiss SMEs. You can learn more about it on our Events page.
If you need more information about non-dilutive funding for Swiss startups or require help choosing the best source, talk to our experts. Sign up for our newsletter to receive updates on events and valuable insights from industry leaders.
”Switzerland's focus on deep tech and innovation, coupled with a robust startup ecosystem and a diverse funding landscape that includes government grants, angel investors, venture capital firms and corporate partnerships, provides ample support initiatives for startups to thrive and succeed in their respective industries.
Adrian SprengerManager Entrepreneurship at Basel Area Business & Innovation
