By: Kacie Goff
It usually takes a while (read: years) for a tech startup to start turning a profit. But that hasn’t stopped plenty of entrepreneurs from turning a good idea into a revenue-generating business. The issue becomes bridging the gap between developing the idea and becoming an established, profitable business.
That means financing. And, fortunately, your financing options for a tech startup extend well beyond those for, say, buying a car or a house. In addition to loans, you have a broad range of paths you can foray to get things off the ground. Let’s look at some of the top options available to you.
We’ll level with you: this is probably the most challenging way to get a tech company started. But it’s also the most rewarding, and not just because of the satisfaction you’ll get from knowing you’ve gone it alone. When you bootstrap, you protect your equity in your company. You don’t need to worry about shares going to outside sources or ties pulling you in a direction you don’t necessarily want to go.
When you bootstrap, you rely on your own savings in the early days. Then, the moment you make any profit, you turn that around and put it back into your startup. That makes this a bad option for people who need an income in the early stages of their business. But if you can weather the dry season, bootstrapping can set you up with a thriving business — and one over which you have full control.
Tapping your circle
What if your startup doesn’t make any profit for a long time? You’ll need to find another way to keep things afloat.
If your personal well runs dry, you can explore expanding your reach just a bit by asking friends and family to supply some funding. By borrowing or taking money from people you trust, you reduce the risk of an un-allied party getting involved in your company at its critical early stages.
Before you solicit funding from your circle, though, review some best practices. The last thing you want is to ruin a relationship and your startup’s shot at success at the same time. Make sure you capture everything in writing, set realistic expectations, and communicate regularly with anyone who helps to finance your business.
Finding an angel investor
When you’re in the early stages of your startup, an angel investor can be just that: an angel. But because these individuals use their personal money to fund business ventures, they want to know that their investment will be a sound one. You’ll usually need to demonstrate the ways you expect your business to be successful and give them some equity. That might come in the form of shares at the outset, or convertible debt.
An angel investor gives you a way to secure the cash infusion your startup needs. But it also means essentially adding a member to your founding team. Your angel investor can — and probably will — require a sizeable stake in your venture. Be ready to give them regular updates and, in some cases, decision-making power.
While you may lose some control with an angel investor, you stand to gain something beyond financing. Many angel investors earned their money founding tech startups themselves, and they will probably be willing to pass some of that business knowledge onto you to help your startup succeed.
Obtaining venture capital funding
While angel investors use their own money to finance startups, venture capitalists pull from a pool of money at their firm. That means they’ll need a lot more than a good gut feeling to invest in your business. In most cases, they’ll want to see verifiable proof that you’re on the track to success.
While VC funding for startups in their earliest stages is rare, it’s not impossible. We’ve compiled a list of things venture capitalists look for in early-stage founders.
Getting non-dilutive funding
Angel investors and VCs mean giving up a share of your equity in exchange for funding. If you’re not particularly keen on that, you should explore non-dilutive funding. That includes loans, which we’ll explore in a minute, but it could also mean getting money you don’t need to pay back, like a grant, prize, or R&D tax credit.
Non-dilutive funding can be a huge boon to tech startup founders hunting for financing that doesn’t diminish their control over the company. We have a guide to help you explore these options more deeply.
Securing a loan
While a loan is an option for non-dilutive funding, it does come with longer-term ramifications insofar as you’ll need to pay it back — with interest. In many cases, you’ll also need to put up some collateral to back the loan.
If your startup is too young to be eligible for a business loan and you don’t have any collateral to offer, you can explore an unsecured personal loan. These loans come with relatively high interest rates and generally max out at $100,000. But if you’re extremely tight on cash and confident that you could keep up with the amortization schedule for the loan, it can be a straightforward way to secure funding for your startup.
Financing is usually one of the most complex pieces of getting a tech startup off the ground. The decisions you make now will likely impact your business for years, if not decades, to come. Take the time to research your options before you jump into one funding channel or another.
If you’d like to talk to a team of experts in tech startup financials, we can help. Our team at ShayCPA offers a broad range of services for tech founders. Don’t hesitate to get in touch with us.