Startup school: Raising capital, rapid expansion, and how to navigate business challenges
This five-part series — published each Wednesday for the next five weeks — aims to explain the lifecycle of a tech business, starting with raising capital.
There is no doubt that the tech industry has become an increasingly competitive space. Now more than ever, securing funding for a startup company takes more than just a tech-savvy entrepreneur with a good idea. You need to attract investor attention with a loyal customer base, a strong business model and a realistic plan for growth.
With that in mind, this five-part series — published each Wednesday for the next five weeks — aims to explain the life cycle of a tech business from forming a startup idea to creating its exit strategy in the current market.
This first article provides some helpful advice on what to consider when starting a tech business.
Tech business startups
Today, the tech industry is a booming space full of innovation and investor potential. According to a Gartner forecast, global spending on information technology (IT) is expected to reach $4.4 trillion by the end of the year. With so many lucrative opportunities, countless entrepreneurs want to bring their tech business ideas to a potential customer base. But how do they get started?
Building a successful startup requires a lot of moving pieces. As a result, founders have a variety of crucial responsibilities, from gathering a team with deep technical knowledge to developing a minimum viable product (MVP). Perhaps the most vital job is formulating a business plan that attracts capital and paves the way for success.
Raising capital
Funding your venture is critical to starting a tech business.
While it’s often one of the most challenging aspects, there is good news.
As previously reported in SmartCompany, startup funding more than doubled in Australia and New Zealand from 2020 to 2021, reaching over $10 billion.
As more investors flock to the tech industry, entrepreneurs will hopefully be able to secure funding more easily.
But before they go out asking for money, it’s important for them to understand the basic types of funding.
When you’re looking to raise capital for your tech startup, there are three basic categories to keep in mind:
- Donation-based funding: In this common funding tactic for non-profits and other social enterprises, you receive gifts or grants. While this might sound nice, grants often come with rigid requirements and additional oversight;
- Debt-based funding: In this case, a company receives capital in the form of debt or loans. The lenders can be anyone, from family and friends to banks and corporations; and
- Equity-based funding: This is when an investor offers money in exchange for a percentage of ownership in your business according to market value.
Each of these funding types comes with benefits and downsides. Companies often use multiple different funding methods to balance their debt and equity in a way that best supports the business’ future.
Expanding the business
Once you have proven the value of your product and the efficacy of your business model, it might be time to consider expanding your tech startup to maintain the momentum of success. But how do you know when the right time is to push for rapid growth? Here are five industry measures that your business is ready to take off:
- You have a growing customer base.
- You maintain consistent profits.
- You’re in a developing industry.
- Your customers are pushing you in that direction.
- You’re bringing in too much business to handle.
In addition to these signs, you’ll want to take an honest look at your tech business’ structure and staff. Can it support a rapid expansion? Is your team ready to take on the extra work? To answer these questions and map out a plan of action, you’ll want to develop a thorough expansion strategy. Determine what additional resources you might need to scale, how you will obtain them and how you’ll use them efficiently and effectively.
Navigating business challenges
It would be naive to think that starting a tech business is as simple as developing a product, securing the funding, and creating a business plan. Founders face innumerable challenges before and even after achieving a successful tech startup.
Starting from the very beginning, it can be incredibly challenging to find a winning idea upon which to base your tech business. It’s helpful to think of the ideation process as the origin rather than the destination. In other words, don’t attempt to sit down and brainstorm a finished product, as the idea will likely evolve over time.
Tech startups often start out with shoe-string budgets and limited resources. Funding is one of the biggest barriers to entry for entrepreneurs. A common route for many new businesses is to secure venture capital or an angel investor. Founders then use a lean startup model to save money where they can reinvest it back into growing the business.
