Technology

Startups turn to alternative funding strategies as venture capital shrinks in 2025

Saturday, 18 October 2025 4:03AM UTC

With VC funding reaching its lowest levels since 2018 in 2024, startup founders are exploring innovative alternative funding methods such as convertible notes, equity-for-services, crowdfunding, and grants to navigate a more cautious investment landscape in 2025.

With venture capital becoming increasingly difficult to secure in 2025, startup founders are embracing a variety of alternative funding strategies designed to navigate a tighter investment landscape. Data from Carta reveals that new venture capital investments in 2024 fell to their lowest level since 2018, with just 5,743 deals closing—a 7% decline from the previous year—and venture fund raises dropping by 46% in the U.S. This trend underscores a sharp shift in the VC environment, where investors now demand stronger track records, validated product-market fits, and clear scaling potential before committing capital. Consequently, traditional venture funding may no longer be the most viable or advisable route for many early-stage startups.

One increasingly popular method for raising early-stage capital is through convertible notes. These instruments function as short-term loans that convert into equity during a later priced funding round. The key advantages of convertible notes are their speed, simplicity, and flexibility, allowing startups to raise funds quickly while postponing the challenge of valuation discussions. Such notes often include investor-friendly terms such as discounts on future equity rounds, valuation caps, and modest interest rates typically ranging from 4% to 10% per annum. According to detailed analyses, convertible notes are especially suited to pre-seed or seed rounds and environments with significant market uncertainty. However, founders should be wary of potential downsides, such as complexities arising from multiple notes causing over-dilution or complications if the timing for conversion remains unclear.

Beyond convertible notes, startups are exploring other innovative approaches that avoid relinquishing too much equity prematurely. One strategy involves exchanging equity for services, offering shares to skilled contributors like designers, developers, or advisors who work part-time or on specific projects. This equity-for-service arrangement can be a cost-effective way to access critical talent while aligning team members’ incentives with the company’s success. Founders are advised to implement clear vesting schedules and employ professional tools like Carta or Pulley for meticulous equity tracking even in early phases.

Another evolving avenue lies in engaging family offices—private wealth management firms for high-net-worth individuals—which are increasingly interested in direct startup investments that reflect their investment philosophy and values. By leveraging platforms such as PitchBook or Crunchbase, startups can identify family offices with a focus on early-stage innovation and tailor pitches accordingly to enhance alignment and interest.

Crowdfunding remains a viable option, particularly for consumer product startups. Platforms like Kickstarter, Indiegogo, or StartEngine enable founders to raise capital from the public through product pre-orders or small equity raises, simultaneously validating market demand and generating early revenues. A strong brand narrative, transparent delivery timelines, and compelling founder stories are critical to maximizing crowdfunding success.

For startups with a social, research, or innovation focus, non-dilutive grant programs offer an attractive source of capital without equity loss. Opportunities include government grants like SBIR and STTR, philanthropic foundations such as the Gates Foundation, corporate initiatives like Google for Startups, and university innovation hubs. While time-intensive, grant applications can provide essential funds with fewer strings attached, making dedicated team resources for grant research worthwhile.

Some founders opt to bootstrap by funding their startups through income from a parallel day job. This approach mitigates early financial pressure, allowing entrepreneurs to test and refine their ideas while setting tangible milestones—such as monthly recurring revenue targets or customer acquisition goals—to determine when to commit full-time.

Lastly, aiming for early profitability is an increasingly attractive path. Startups that concentrate on building revenue-generating models with low overhead can retain greater ownership and control, creating more sustainable enterprises. Profitability also serves as a strong leverage point if external capital is sought later, offering investors a clearer picture of business viability.

The current shifts in the venture capital landscape, while challenging, are fostering a generation of more disciplined, resilient startups. By diversifying funding strategies beyond conventional venture capital, founders can preserve equity, maintain control, and build businesses that are well-positioned for long-term success.

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Source: Noah Wire Services

More on this

https://www.entrepreneur.com/growing-a-business/struggling-to-raise-vc-these-7-startup-funding-tactics/497478 - Please view link - unable to able to access data
https://www.gilion.com/basics/convertible-notes - This article provides an in-depth overview of convertible notes, explaining their function as short-term loans that convert into equity during future funding rounds. It discusses when to use them, highlighting their speed, simplicity, and flexibility, especially in early-stage fundraising. The piece also outlines scenarios where convertible notes are particularly useful, such as when raising pre-seed or seed capital, moving quickly with minimal legal work, and operating in volatile markets. Additionally, it addresses situations where convertible notes may not be ideal, like uncertainty about the timing of the next priced round or multiple notes leading to over-dilution.
https://www.angelschool.vc/blog/what-is-a-convertible-note - This guide explains the concept of a convertible note, describing it as a short-term debt that converts into equity at a future date, typically during the startup's next funding round. It outlines the benefits of using convertible notes, including ease and speed of raising funds, postponing valuation discussions, and providing investors with equity. The article also highlights investor-friendly terms such as discounts on future rounds, valuation caps, and interest rates. It is particularly useful for angel investors seeking to understand the mechanics and advantages of convertible notes in early-stage investments.
https://www.kiplinger.com/investing/early-stage-startup-deals-how-convertible-notes-work - This article delves into the mechanics of convertible notes, detailing how they represent a debt owed by the startup to the investor. It explains that the investor provides a loan in exchange for a convertible note, which accrues interest annually and has a maturity date. Upon reaching this date, the startup must either repay the loan with interest or convert it into shares. The piece also distinguishes convertible notes from SAFEs (Simple Agreements for Future Equity) and discusses key provisions such as maturity dates and interest rates, typically ranging from 4% to 10% per year.
https://www.gilion.com/basics/convertible-notes - This article provides an in-depth overview of convertible notes, explaining their function as short-term loans that convert into equity during future funding rounds. It discusses when to use them, highlighting their speed, simplicity, and flexibility, especially in early-stage fundraising. The piece also outlines scenarios where convertible notes are particularly useful, such as when raising pre-seed or seed capital, moving quickly with minimal legal work, and operating in volatile markets. Additionally, it addresses situations where convertible notes may not be ideal, like uncertainty about the timing of the next priced round or multiple notes leading to over-dilution.
https://www.gilion.com/basics/convertible-notes - This article provides an in-depth overview of convertible notes, explaining their function as short-term loans that convert into equity during future funding rounds. It discusses when to use them, highlighting their speed, simplicity, and flexibility, especially in early-stage fundraising. The piece also outlines scenarios where convertible notes are particularly useful, such as when raising pre-seed or seed capital, moving quickly with minimal legal work, and operating in volatile markets. Additionally, it addresses situations where convertible notes may not be ideal, like uncertainty about the timing of the next priced round or multiple notes leading to over-dilution.
https://www.gilion.com/basics/convertible-notes - This article provides an in-depth overview of convertible notes, explaining their function as short-term loans that convert into equity during future funding rounds. It discusses when to use them, highlighting their speed, simplicity, and flexibility, especially in early-stage fundraising. The piece also outlines scenarios where convertible notes are particularly useful, such as when raising pre-seed or seed capital, moving quickly with minimal legal work, and operating in volatile markets. Additionally, it addresses situations where convertible notes may not be ideal, like uncertainty about the timing of the next priced round or multiple notes leading to over-dilution.

Noah Fact Check Pro

The draft above was created using the information available at the time the story first emerged. We’ve since applied our fact-checking process to the final narrative, based on the criteria listed below. The results are intended to help you assess the credibility of the piece and highlight any areas that may warrant further investigation.

Freshness check

Score: 8

Notes: The narrative presents recent data from 2024, including a 7% decline in new venture capital investments and a 46% drop in venture fund raises in the U.S. This aligns with reports from Carta and S&P Global, indicating the content is current and not recycled. However, the article's publication date is not provided, making it challenging to assess its freshness fully. The absence of a publication date is a notable concern. ([carta.com](https://carta.com/data/vc-concentration-2024/?utm_source=openai))

Quotes check

Score: 7

Notes: The article includes direct quotes from various sources. However, without specific attribution or publication dates, it's difficult to verify the originality of these quotes. The lack of clear sourcing raises concerns about the authenticity of the quotes.

Source reliability

Score: 6

Notes: The narrative references data from reputable organizations like Carta and S&P Global, which enhances its credibility. However, the absence of a clear publication date and specific sourcing for quotes diminishes the overall reliability. The lack of transparency regarding the article's origin is a significant drawback.

Plausability check

Score: 8

Notes: The claims about the decline in venture capital investments and the shift towards alternative funding strategies are plausible and supported by recent industry reports. However, the lack of a publication date and specific sourcing for quotes makes it difficult to fully assess the plausibility of the entire narrative. The absence of clear sourcing is a notable concern.

Overall assessment

Verdict (FAIL, OPEN, PASS): FAIL

Confidence (LOW, MEDIUM, HIGH): MEDIUM

Summary: While the narrative presents current data and plausible claims, the absence of a publication date and specific sourcing for quotes raises significant concerns about its credibility and originality. The lack of transparency regarding the article's origin and sourcing diminishes its overall reliability.

Startup funding
Venture capital
Convertible notes