As people begin to make the transition from employee to entrepreneur, one of the most anxiety-producing checkboxes is funding. Not long ago, the primary option was venture capital. Large venture capital firms like Sequoia Capital and Benchmark made enormous returns on investment for backing tech startups like Facebook and LinkedIn.

As startups became more ubiquitous in Silicon Valley, venture capital culture grew. Startups also started appearing in other places across the country, but venture capital became hard to secure outside of the San Francisco Bay Area as most funders were too risk-averse to invest. Within Silicon Valley, venture capitalists were putting more pressure on founders to expand operations quickly and work toward either a sale or an IPO, which were seen as the primary ways of securing a high return.

Many entrepreneurs began flocking to Silicon Valley for more favorable funding choices, but this trend started to increase the cost of living in the area. For many businesses and founders, San Francisco and its surrounding areas were simply too expensive—even if the prospect of funding was only possible in that region.

Changing demographics and interest in entrepreneurship led to high demand for new funding formats. The first shift came with FundersClub and AngelList, which are online equity-based fundraising platforms. Then, legal issues with raising equity online led to workarounds from organizations such as Kickstarter and Syndicates. The democratization of startup investing was a big step forward, but the model was still largely the same as with venture capital and entrepreneurs wanted something different.

Initial Steps toward Nontraditional Funding Models

The revolution in funding options for entrepreneurs started slowly. Many founders who came to San Francisco became disenchanted with the venture capital model, which often demanded breakneck growth rates that most companies could not withstand.

As entrepreneurs looked for other options, the buzz around “founder-friendly” deals started to grow. Y-Combinator and 500 Startups created convertible notes for early-stage startups that provided better terms for entrepreneurs, and financial institutions started paying more attention to the lucrative startup environment. Entrepreneurs began to demand new terms, while many simply avoided traditional venture capital altogether—mainly, they wanted to maintain ownership so that they would not be forced to sell or undergo an IPO before they wanted to.

Soon, the revolution gained momentum as the stories of companies successfully avoiding venture capital began to surface. One of the first success stories was online mattress retailer Tuft & Needle, which sold for $450 million but left the founders with the majority of the company.

Other companies followed suit, and new models started to emerge that offered a viable alternative to venture capital, especially for startups that were not structured for growth on the magnitude of Facebook or LinkedIn.

The Birth of the Alternative Venture Capital Market

One of the first innovative models was Indie.vc, which has a 12-month program that invests money in a startup in exchange for an equity stake and a percentage of gross revenue. This model does not push for IPOs or sales and lets companies focus on growth at their own rate through a model called “permissionless entrepreneurship.”

Earnest Capital offers a similar model—its shared earning agreement employs a combination of equity and annual cash payments. Alternative venture capital models are even expanding overseas, where alternative funding is needed the most.

The new generation of venture capital seeks to attract promising startups that are headed by founders who want to grow their companies without excessive outside pressure while maintaining ownership. These companies do not need to be one of the billion-dollar unicorns for investors to make money, which relieves much of the pressure involved with traditional venture capital.

New models are also arising quite frequently. One of the newest is CircleUp, which uses proprietary artificial intelligence (AI)-driven algorithms to evaluate startups and figure out ideal equity/loan combinations. Meanwhile, Corl uses AI to fund companies with a revenue-based financing model.

What to Expect for Alternative Venture Capital

The future of alternative venture capital is bright. Organizations across the world are experimenting with new models and looking closely at the success of others. These new models may go a long way in repairing the relationship between founders and investors to create a more mutually beneficial partnership through shared trust. The push for new models is essentially an acknowledgment that businesses can grow and realize success in a variety of different ways. Alternative venture capital promises to support founders rather than put pressure on them to move toward a couple of very specific goals.