Tech is everywhere we look, making life easier and more convenient and opening up new possibilities. If you have a tech idea to take to the market, a start-up could be the most profitable way.
Being an entrepreneur can be hard work but rewarding if you’ve got a real passion for your business. The hardest part can be securing the funding at the start, but thankfully, plenty of individuals have walked the path before. The available options depend on how much control you’re prepared to relinquish and the level of risk with which you feel comfortable.
Tech firms tend to need more funding than other start-ups because of the cost of technology. However, as a forward-looking business, the investment at the start will pay dividends in the longer term.
Below are some ideas of how to raise money for a tech start-up to give you the best chance of success. Remember: you don’t need to pick a single solution! As a tech start-up, you might opt for a combination of different funding sources to maximise the revenue available.
Venture capital firms may seem like the obvious pick as they exist to invest in new start-ups and seek out investment opportunities. However, if you want a VC firm on board, you’ll need to ensure you have watertight figures and are particular about what your requirements are.
Venture capital firms can provide significant funding and have the added advantage of being able to provide business experience and expertise. They can identify potential mistakes, helping your start-up be more successful than it might otherwise be.
Venture capital firms have extensive expertise across all areas of business, including in managing investments. This means they can help with anything from share trading analysis to building a portfolio, areas which may be vital to building future revenue streams.
They are an excellent choice if you’re looking for a hefty sum and also want to take advantage of their knowledge. Be prepared for the fact that they negotiate aggressively, and the terms may be tougher than you ideally want.
An alternative to venture capital firms is an angel investor, a less aggressive option that can still provide a good source of funding. Angel investors don’t typically offer as much financing as VC firms, so this option may not give you all the cash you need.
It is usually simpler to get an angel investor on board. While you can expect some due diligence, the process isn’t generally as agonising as going through the scrutiny of a venture capitalist. You can expect them to take a hands-off approach to their investment, but they can offer contacts through their personal network.
You won’t usually get as much help setting up your business for a more expansive, corporate market, but that may not be a problem in the early days. If you don’t need lots of help with governance and you already have a good network established, an angel investor could be the perfect investor.
There are many business incubator programmes available, each one typically specialising in a particular sector. This means that it’s possible to access incubator funding which is set up specifically for what a tech firm needs.
An incubator funding scheme may not directly provide you with money, but it can offer a wide range of services to save you spending elsewhere. These might include a co-working space, access to reduced cost services, networking opportunities and learning environments, such as workshops. They can also provide seed funding in some cases as well as link you up with potential investors.
The downside is that not every business will be automatically accepted onto an incubator scheme. This is because although the support sounds altruistic, incubator schemes are looking for a return on investment. This means they usually ask for an equity share of your business, something that you may not be willing to accede.
Issue Preferred Stock
If you like the idea of issuing shares but don’t want to give up control of your business, an alternative option to explore is preferred stock. This provides the financial benefits of investment while you stay in control of decision-making.
Stock can broadly be split into two different types: common stock and preferred stock. The latter is more akin to a bond that shares because they come with no voting rights but a better rate of dividend.
Preferred stock receives their dividend payment before other shareholders, typically have a higher dividend yield and should your business go bankrupt, they have a higher claim for being repaid. All of this makes the preferred stock attractive to investors, provided they’re not seeking to control and influence the company. Investors who want voting rights will seek out common stock but as a small start-up, issuing preferred stock leaves you in control while still receiving the much-needed investment.