Startups (especially tech startups) are constantly in need of funding. Luckily, there are many different types of funding available for startups today; here’s a list of the five most popular, realistic, and reliable ones. Then, we’ll go over each one individually.
Here are 5 most realistic and reliable ways to get your tech startup funded (and the top 3 most surefire ways).
Most Common Types Of Tech Startup Funding:
1) Initial Public Offering (IPO):
When a startup decides to go public, they are releasing ownership shares of the company on the open market for anyone to purchase. If you are considering this route, make sure you have everything in order first! The last thing you want is your company’s IPO being delayed because of minor details that could’ve been caught beforehand. There are major costs with having an IPO as well. You’ll be paying underwriters, legal fees, marketing fees, etc.. Investors also tend to invest more heavily into companies that already have successful IPOs; these types of companies are deemed “safe investments.”
Angels are typically very wealthy individuals who have made their own fortunes and are now looking for exciting new opportunities to invest into. They often find startups rather than the other way around, because it is much less risky- they only invest their money in ventures that they believe will be successful. Generally speaking, angels tend to make smaller investments (in terms of dollar amount) but make larger returns on those investments. One thing to remember is that angels generally do not like to lose money; if your company isn’t doing well or falling apart quickly after receiving an angel’s investment, you might be facing a lawsuit from the angel investor.
3) Venture Capitalists
Venture capitalists are another group of investors that will invest their money into your company, but the difference between angels and venture capitalists is that VCs tend to be very large companies (think Google Ventures, etc.) who have deep pockets. This means they can afford to put a lot more money into your company than an angel investor or even IPO investors, as long as the investment agreement involves a pro rata clause. They too tend to look for safe investments with high returns, so if you pitch them on your idea and it doesn’t gather interest from other sources after having done so, you might want to re-evaluate the viability of the business model before seeking funding from them.
Crowdfunding has been popularized by sites such as Kickstarter and Indiegogo among others; entrepreneurs pitch their product and if it gets funded, they receive the funds necessary to start their business. However, it is important to note that receiving funding through crowdfunding means you will likely find yourself struggling for more once your campaign funds run out- you’ll need to keep finding ways to fund your startup on your own. There are also rules and regulations with sites like Kickstarter; one such regulation is that companies must charge backers’ credit cards when a campaign reaches its deadline (even if the project was not successful), meaning that while some people might be excited about your idea, others will simply wait until your campaign ends before pledging their money.
Incubators and accelerators provide startups with more than just funding- they also give guidance and resources. Incubators provide office space, advice, business connections (and sometimes even mentors) to their startups. One of the most popular incubators is Y-Combinator; they accept a tiny percentage of applicants each year into their program and play a huge role in getting those startups off the ground.
“So What’s The Catch? “
Now that you know what types of startup funding there are, you’re probably wondering about the catch. Well, as with any type of investment, both from angels and VCs as well as from crowdfunding sites like Kickstarter or Indiegogo etc., they all expect returns on their investments . In other words, if your company gets funded through one of these means- whether it is through an angel who invests $25,000 or through an IPO that provides the company with millions- they want their investment back (and then some!) The bottom line is you need to be able to deliver on your promises, both good and bad; if your investors don’t believe in you or your project, why should they invest?
“What About Grants?”
Grants are usually funded by local organizations who wish to invest into certain projects for various reasons. The catch with grants is that it often takes a very long time for them to award funding after receiving proposals. Furthermore, there are many internal politics involved when it comes to the decision making process of whether or not someone will receive grant money; sometimes even though an applicant clearly has more talent than others, they don’t receive the grant because another applicant had a stronger political connection. In other words, you might want to seek out other types of funding rather than gamble on getting a grant from an organization that takes months , if not years, to decide whether or not they will fund your project.
So hopefully this article has helped you learn more about startup funding and what it entails- both the good and bad. The best course of action is really going to depend on your specific situation; while crowdfunding sites may seem like a great way to get started quickly, remember that once your campaign ends you likely won’t be able to continue without finding ways to fund yourself. If you’re looking for money from investors, remember that VCs are looking to make money while angels are looking for a return on their investments. Finally, you may want to consider taking your chances with getting grants instead of trying your luck with crowdfunding or other alternatives- remember however , that there is no guarantee that you will receive grant money either!