Startup school: How to secure capital for your tech startup
In the third part of our Startup School series, we discuss the funding options small business owners and startup founders are using to launch their tech ideas in the market.
Securing funding for a new tech business is one of the most challenging yet crucial tasks a startup founder can undertake. Even with a brilliant business idea, finding a potential investor and raising the necessary startup capital can be a tough ask. Without dependable funding sources, a tech company in the early stage of development is likely to fall behind the competition.
To build a successful startup, entrepreneurs must determine their financial needs, identify funding opportunities, and know which sources to prioritise to raise capital. However, this is easier said than done. Many tech startups try to attract the attention of venture capitalists or an angel investor, but this has led to overcrowding. It now seems harder than ever to get the startup funding you need to execute your big idea.
So how can entrepreneurs raise the capital necessary to get their tech startups off the ground?
In the third part of our Startup School series, we discuss the funding options small business owners and startup founders are using to launch their tech ideas in the market.
Crowdfunding to raise capital
Rather than going the traditional route of securing venture capital or angel investments, crowdfunding offers a unique opportunity to any founder by utilising the power of people to raise funds for startup companies. Many entrepreneurs have turned to this funding option and, as a result, crowdfunding has become especially appealing during the pandemic, as startups face increasing difficulty in securing funding.
However, it’s not as simple as starting a campaign and reaping the rewards. There are four basic types of crowdfunding to consider as a business owner:
- Donation-based crowdfunding is perhaps the most straightforward way to raise capital. This is when a startup asks people to support its business by donating money for nothing in return;
- Debt-based funding is an alternative to donations, in which the startup receives crowd-sourced funds in the form of loans that must be paid back by an agreed-upon date. This is often an option used by companies that need capital but don’t want to give out equity;
- Rewards funding is similar to donation-based crowdfunding; only the startup offers various reward tiers depending on the size of the donation; and
- Equity crowdfunding enables those who donate to the startup to receive shares of the company. This way, backers see their donations as both support for a brand they enjoy and an investment in the future of the company.
Business accelerator for tech startups
The purpose of a business or startup accelerator program is to support the early stage of small businesses and, as its name would suggest, accelerate their growth. On top of valuable guidance and mentorship, these programs also offer financing options and structural support. However, it’s important to weigh the pros and cons of business accelerators before applying to join one.
To help you make an informed decision, here are some of the benefits and drawbacks of these programs:
Benefits:
- You typically receive three to six months of intensive training and education on how to build a successful startup; and
- Accelerator programs often offer varying degrees of funding. However, don’t base your decision on how much capital one offers.
Drawbacks:
- The average accelerator program requires between five and ten per cent equity in your company; and
- After completing the mentorship, you receive less support, while maintaining the same commitment and risks.
Private equity for your startup
In the later stages of your business growth, private equity financing is another option to scale your business further. With private equity, a group of investors will raise the necessary capital to buy either a percentage or all of your business. Private equity funds make a down payment (the equity) and then borrow money via financial markets to finance the full purchase of the business. They tend to target promising startups that lack efficiency and value. That way, the investor(s) can come in and add value, before flipping the business for profit.
While the prospect of giving away equity in your small business might seem like too much of a drawback, this funding option can bring many benefits to the table. For example, a founder might choose to give up some equity in exchange for both capital and additional support, as many private equity firms bring in partners with industry-specific expertise. In this case, private equity can add massive value to a startup, increasing its opportunities in hopes to sell the business for a higher price.
While this isn’t a definitive list of all funding options, these are the ones we recommend to tech startups. Each option has its own pros and cons so we highly recommend you consult your financial adviser prior to raising a funding round, to ensure your decision is the right one for your unique circumstances.
