Software development is costly. For most people, it’ll be hard to keep a startup afloat on their own funds. Unless they work on the project alone and perform all the functions on their own. That’s why the necessity to attract investors and fund the startup arises quite often.
It’s worth noting that only 30% of all startups exist longer than three years and only 3% of them survive till the fifth year of existence. In most cases, exactly financial problems lead to the end of young startups. That’s why it’s so important for startuppers to find a reliable and constant source of funding before they are able to pay for themselves.
This article is devoted to young startups and their creators who don’t how to start searching for funds.
Different Phases of Fundraising
The first thing you should be aware of is that there are different phases of fundraising that are called rounds. Underneath you can see the most common of them:
#1. Seed Round
The very first round is called a seed round or seed capital. It’s usually the sum of money you have before starting searches of investors and looking for fundraising options. Put simply, this is an amount of money you’re willing to invest in your startup. This can be your own savings or the money your family and friends borrowed you.
If you think the amount of money you already have is enough for you to kickstart your project and you make a decision to avoid dealing with investors, that’s called bootstrapping. This is a process when a startup owner doesn’t attract investments from the outside and develop his/her project on own money or profit the project already generates.
#2. Series A
Series A means that a startup has found first investors who believe in the project’s success and invest a certain amount of money in it to get a return on their investments later.
#3. Series B
Series B may be possible only in the case your startup demonstrated significant results — read as confirmed its viability — and you need some more investments to continue developing the company.
#4. Series C & Further
Respectively, Series C and further ones demand even more considerable results to get investments.
Picking the appropriate strategy for fundraising
It may be difficult to decide where to start your way of getting financing from. Fortunately, there are a lot of options for getting funded nowadays though it’s pretty hard to reach at least one of them. There are several of them and each provides unique conditions:
It’s a person who wants to invest own money in an interesting idea in return for the ownership equity or convertible debt. As a rule, these investments are high-risk which is a good sign for many startuppers. Angel investors can be a good fundraising option to consider for seed capital and Series A. To find the Angel investors, you should attend different conferences dedicated to the industry your startup works in. Or you can go online and search for them on services like Angellist or Gust. Both of these platforms work similarly. They connect entrepreneurs, who are willing to invest their money in promising projects, and startup companies looking for investments.
It’s a firm that disposes of other people’s money and brings them profit. So, venture firms invest money in startups with the intention to get a return on their investment. Venture companies usually invest in companies that are already funded by other major players and rarely fund risky ideas. VCs are quite demanding as a rule and rarely invest their money in risky projects. They prefer investing in small but reliable startup companies. So, if your idea is rather risky it will be hard to get investments from venture capitalists,You can find venture companies and individuals on the internet and try to contact their representatives on your own. However, you’ll barely get any feedback by contacting them directly if they know nothing about you and your company. The better option and much harder option is to be invited to a meeting with individual VC or venture company. There is a third variant — VCs will contact you on their own if your company has already started showing any results.
That’s quite a popular option for getting projects funded nowadays. This brings you additional benefits compared to the above-mentioned ways of fundraising. First, third-parties can’t influence your decisions and the vector of company development. Second, you see the actual demand on your product and the level of interest towards it in potential customers. Third, you actually get money! There are a plenty of platforms like GoFundMe or Kickstarter that allow entrepreneurs launching their crowdfunding campaigns and raise money. GoFundMe is free of charge, while Kickstarter charges a 5% fee from the total amount you got from users and a payment processing fee that ranges between 3-5%. However, there are no fees in case your crowdfunding campaign isn’t successful. Another popular crowdfunding platform called Indiegogo has a slightly different fee scheme. It’s a 5% fee plus payment processing fee equal to 3% of the total transaction amount + $0.30 per each transaction. However, Indiegogo charges its 5% fee from the total amount you’ve raised regardless of whether the campaign succeeded or not.
A business incubator is a company that helps startups and companies gain momentum. Such companies teach you by organizing different meetings and lectures with well-known speakers. In addition, they can provide a seed capital for your company. The most famous business incubator is Y Combinator. Its ‘graduates’ are Reddit, Dropbox, Airbnb, and many others. You can try to apply there through the website or search for other incubators.
This is a quite popular way to get funds without involving investors. Crowdfunding platforms like Kickstarter allow users from around the globe to donate a certain amount of money for your project in case they like your idea.
Initial Coin Offering is just like IPO but with tokens instead of stocks. It’s a more complicated way to get funded since you have to develop those tokens before making them publicly available
Preparing for a meeting with investors
In fact, there are only two things you need to increase your chances to be funded by investors. These things are presentation and prototype
It’s an app having a certain part of the final product’s functionality under the hood. That’s needed in order investors could test the product on their own and make sure you have at least something except for the idea.
It’s a brief presentation created especially for investors. It should consist of comprehensive information about your company, statistics, researches etc. To avoid unpleasant situations with copyrights, put ‘All Rights Reserved’ on the first slide and indicate that it’s ‘Confidential and Proprietary. Copyright (c) by [the name of your company]’.
Fundraising mistakes that kill startups
Let’s now consider the most common mistakes that may kill any young startup.
You should clearly understand what companies are your competitors and who is your target audience. That’s often unclear in case the product is something entirely new to the market and such a niche simply doesn’t exist. In this case, you should work twice as harder to avoid the failure. Carefully analyze your possible audience along with competitors and test the product.
Copied ideas don’t work. And investors aren’t likely to invest money in something non-unique as the chances such idea will ever bring profit are low
Poor product’s quality
Even if your idea is great and promising, bad code and unprofessional developers writing it can ruin everything. Nobody will use a laggy app that causes pain instead of solving it.As you see, the process of fundraising can be hard and long. So, take your time and study the product along with its niche in details. This will help you minimize mistakes that may occur.
Number of founders
It may sound weird but studies show that startups led by one person fail more often compared to others. Another reason is that such people may reject sharing his/her idea with others which is a bad sign for investors who are willing to have a certain control over the company after covering the expenses. As you see, attracting money for young startup companies isn’t so easy. It’s a long and tiresome way to go.