Startup fundraising is a matter of concern for all tech entrepreneurs.
In fact, most tech moguls consider adequate funding to be an essential ingredient to the recipe of building a successful startup in addition to having a groundbreaking idea and the right mindset to transform the idea into a profitable reality.
While the latter two elements are more to do with individual capabilities and market understanding, startup fundraising is an imperative component that determines the success of a startup to a great extent.
Think about it, without a generous and reliable funding source, you will struggle to achieve significant traction, hire the best talent, invest in innovation, build next-generation products or services, provide a confidence-inspiring environment, indulge in productive research, and more.
5 Startup Fundraising Methods
Let’s start the article by first understanding the various ways in which startups can raise funds.
Here are 5 startup fundraising methods:
Crowdfunding is a smart way to go about startup fundraising.
Typically speaking, crowdfunding is a startup fundraising method that involves raising capital through contributions from individual people or communities or a collection of individual investors.
The biggest advantage of opting for crowdfunding is that none of the contributors or ‘investors’ are actual shareholders.
However, the downside to crowdfunding is that there’s no clarity on the amount of money you will raise.
In any case, crowdfunding offers tech startups a unique opportunity to raise funds without having to take many risks or part with equity.
Kickstarter, GoFundMe, Indiegogo, to name a few, are popular websites through which crowdfunding campaigns are initiated.
2. Angel Investors
Ideally, you should look for an angel investor to kickstart your startup fundraising journey.
Angel investors are individuals with a high level of income looking to fund early-stage tech startups with a groundbreaking product or idea in exchange for a relevant share of the profits or for equity.
Most angel investors are high-risk takers and they don’t mind investing significant amounts of money in tech businesses as early as in the idea/conceptual stage.
However, the downside of indulging in startup fundraising through an angel investor is that it’s a time-consuming process and you may have to part with equity.
When it comes to finding the right investor, it is imperative to prepare a winning pitch deck and to negotiate the investment terms and simultaneously align all other terms and conditions.
Also, equity distribution is a major reason why many tech startups are dissuaded from seeking angel funding.
Which is why it is important to clearly establish the percentage of profit or shares that you are willing to part with.
The unfortunate reality for most entrepreneurs with a lucrative idea is that they don’t have the funding to execute that idea to its fullest potential. Despite the wide array of available funding sources, most startups struggle to make the cut.
3. Private Equity Firm or Bank Loan
Turning to a private equity firm is also a viable startup fundraising avenue.
A private equity firm is an investment management company that raises significant amounts of capital to distribute to promising young tech businesses.
The advantage of raising funds through a private equity firm is that the firm often adds value by bringing in partners with relevant expertise to your industry.
Alternatively, you can also to choose to opt for bank credit to support your expenses and keep the wheels in motion.
However, using plastic money comes with severe interest charges.
And taking a hefty bank loan will require you to mortgage your assets or offer collateral against the sum borrowed.
This can make things very stressful if you are unable to make timely repayments.
If you have surplus funds or if you’re a first-time risk taker, the best way to indulge in startup fundraising for your tech startup is to put in your own money.
It makes sense to begin your entrepreneurial journey with the money you’ve saved over the years.
The biggest advantage of doing this is that you eliminate the risk of getting into a debt trap or losing equity to an investor.
Investing your own money means you can be stress-free and focus on building your product or service.
5. Business Accelerator
Accelerators offer support to up and coming tech startups through education, mentorship, and financing.
They also offer startups with a pool of resources such as access to investor meetings, industry experts and influencers, and coworking spaces.
Typically, accelerator programs include investment opportunities through connections to high-value mentors.
4 Questions To Answer Before You kickstart Your Startup Fundraising Journey
Answer these questions before you go about kickstarting your startup fundraising process:
1. What Are Your Funding Goals and Objectives?
The first question to answer in the startup fundraising process is to chalk out (broadly and definitively) your funding goals and objectives.
Typically, your tech startup’s funding goals and objectives should be documented as part of your overall business plan and then imbibed into your investor pitch deck.
Where will you use your investors’ funds? How will this allocation help your startup grow? Why should funds be used for the particular function that you have in mind?
These are questions that most successful tech startups have answers to because they work on these details beforehand.
Defining what you want to do with the funding you aim to raise will help you scale faster whilst keeping focus on achieving your startup’s funding goals and objectives.
Moreover, without a definite plan, your investors will find it hard to understand where exactly their funds are required or how they will be allocated.
2. What Is Your Forecasted Budget?
For early-stage tech startups, creating a budget is particularly challenging since there’s not much data or past experience to make an estimated prediction.
Having a clear budget in place will better answer your investors’ queries on how you plan to distribute the funds.
Consider the following startup expenses before creating your forecasted budget:
- Equipment: As a tech startup, you’ll need to forecast your budget to include the cost of computers, servers, paid licenses for software, and all other necessary hardware required to develop and test your product.
- Human Resources: Your budget should include the total estimated expenses on human resources. This includes employee recruitment costs, payroll, training costs, benefits, and more.
- Marketing: Keep a dedicated budget for your marketing activities. Ascertain your social media expenses, costs for website development, advertising campaigns, and more.
3. How To Search For The Perfect Investor?
Once your funding goals and budget are in place, it’s time to hunt for an investor. However, you need to search for investors who are qualified to understand your tech business and add value to the business.
One of the most effective ways to find a competent investor is to come recommended to them.
Networking with industry leaders, influencers, enthusiasts, mentors, peers, and connecting with people who have already negotiated their way through the startup fundraising landscape is a great way to look for investors.
Another way to search for investors is to take advantage of popular online research tools like Crunchbase, Gust, and SeedInvest. These online tools make for a great source for accessing investor information.
Innovation is attractive, especially to VCs looking to invest in tech startups. If your novel idea promises to build the future on tech, investors are likely to have you on the radar. In other words, the greater the disruption you can create, the more capital you can raise.
4. How To Perfect Your Pitch?
The next phase involves perfecting your pitch. This includes creating your pitch deck that spans your business plan and forecasted budget.
However, the primary aim of preparing a pitch is to address the question of why your tech startup is worth the investment?
Include your core competency and how you are solving a major problem.
Couple your USP with some hard-hitting numbers and facts about how fast your industry is growing and how profitable it has been.
This will help you perfect your pitch and drive investor attention.
5 Things Investors Want to See Before They Make An Investment
Here’s what investors like to see before they invest in funding a tech startup:
1. Overall Financial Performance
The business of startup fundraising is risky for investors.
Which is why the first thing an investor or bank or any other fund provider will look at is the overall financial performance of your tech startup.
The volume of sales, cost of creation, monetary traction, and net profits achieved thus far are of primary importance.
The best way to go about presenting this is to create a comprehensive financial report which should categorically shed light on the following:
- Sales Forecast
- Expense Budget
- Cash-Flow Statement
- Income Projections
- Assets and Liabilities Statement
Overall, this report should highlight and emphasize considerable growth metrics.
This report will help you answer hard-hitting questions about the financial stability of your tech startup.
Investors want to know if your tech business is showing consistent signs of growth and if you plan to issue shares or borrow money or partner with new people to accelerate growth.
Also, include a solid debt repayment plan to justify that your business is proficient enough of handling all its financial obligations.
2. Competitive Advantage
Startup fundraising is all about showing your investors that you are offering something unique and building something sustainable.
This means showcasing your startup’s unique core competency and its competitive advantage, with concrete evidence, that your product’s potential is worthy enough for a sizeable investment.
Investors, especially angel investors and venture capitalists, are strongly influenced by unique or innovative product characteristics that they think will serve well as a competitive advantage.
Investors constantly look for nifty nuances that distinguish a business from its competition.
From a distinctive product feature to intellectual property protection to exclusive licenses or exclusive marketing and distribution relationships, anything that can prove to be advantageous to your business will help investors to favor your startup.
3. Effective Business Model
When it comes to startup fundraising, having an effective business model in place is supremely important.
Typically, investors would like to delve deep into understanding the business plan and address the ‘how’s, what’s, and why’s’ your tech startup’s business model.
The business model outline should explain exactly how the startup makes its money.
For a tech startup such as yours there are three notable business models to follow:
- Subscription Model: This model includes selling a product or service on a weekly, monthly, or annual basis.
- On-Demand Model: This model involves offering a product or a service instantly. The business is crafted to offer immediate and effective solutions to customers. For instance, Uber offers an easy and convenient platform for users to book a cab.
- Freemium Model: This model means offering a great product or service for free and then charging for additional features. Just like LinkedIn offers a free platform for professionals but up-sells users to use opt for the premium model which has advanced features.
4. Large Target Market
Angel investors prefer investing invest in businesses that solutions that take on the challenge of addressing major problems for significantly large target markets.
A large and stable target customer base means your tech business will enjoy having the upper hand when pitching to investors.
A sizeable customer base also serves as evidence that your tech solutions have created a significant impact on the overall target market.
While this is a parameter that only established tech businesses will be able to full-fill, if you’re an early stage startup you should consider creating a working prototype and test it with a sample audience to gauge the effectiveness of your competency.
Alternatively, you should plan the perfect go to market strategy along with a prototype.
5. Clear Investment Structure
Your startup fundraising journey is incomplete without giving your investors a clear picture of the investment structure you have in mind.
This means giving them a clear plan that precisely defines how much money is required, where it will be used, when can investors expect their money back, and how much equity are you going to offer your investors.
Also, your investment structure should clearly highlight at what stage the investors can expect to exit the investment after they’ve recovered their investment.
Startup fundraising is a grueling process for tech startups since there are so many young and lucrative tech businesses that investors can invest in.
For investors to write a cheque for you, your tech startup needs to offer an innovative product or a brilliant new service that is profitable and scalable.