4 Proven Ways Of How to Raise Money For Tech Startups

Attracting investment is necessary for startups to ensure their success, development and scaling. In addition to financial support, new businesses can also receive additional valuable assistance from investors. Many investors and advisors share their experience and contacts to streamline business processes.  Our valuable contribution to your success is helping you to learn how to raise money for a tech startup quickly and effectively

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4 Ways to Raise Funding for Tech Startups

These are the four main ways of getting funding for a tech startup.

Business angels

Business angels are private investors who allocate their money to promising startups on an ongoing basis.  

For the vast majority of business angels, the key goal of investing in a project is the returns on the investment they have made via an exit or other substantial liquidity event. They are not particularly interested in dividend proceeds as they provide much smaller returns, and Angels seek returns the size of the risk they are taking investing in unproven startups. Angel investors can be found at startup  events, in organized Angel groups, among your businesses / social acquaintances, or on specialized online platforms like Angel List.

Advantages of business angels

he benefits of business angels:

• Acceleration of project development. Money is the lifeblood of an early stage startup, especially in mass production or scientific developments. Also, as the project grows, business angels can increase the volume of investments, and you do not have to look for additional sources of financing.
• Obtaining important contacts and assistance in sales to drive the high growth of your startup.
• Most importantly, Angels and Angel groups usually apply less rigorous due diligence. Meaning that more startup founders will qualify for investment and money will be in the bank much faster.   

Disadvantages of business angels

The disadvantages of business angels:

• Long search time. Finding a business angel is not easy. You need to come to terms with the fact that you may have to wait for a good deal for many months.
• A new investor no matter the size may see themselves as a critical part of your startup.  They may introduce new rules or ask for business decision-making power.  Think critically about every Angel you bring onto your cap table, as the potential issues they create in the business may outweigh the value of the funds invested. 
• Increased risk of new problems. By working with a business angel, You need to understand that they may come with some difficulties that you would not have encountered by collaborating with hired experts or with teammates who helped you generate your business idea.

Venture capital

Venture capital is money invested in startups and small businesses that often carry high risk but also have the potential for exponential growth. The main investment objective for venture capital firms is to generate the highest returns. In most cases, this is possible through acquiring an equity position in a promising startup and finding a strategic exit through a private acquisition or an initial public offering.  

Often, venture capital firms have multiple general partners who have raised a large amount of money from a group of limited partners to invest on their behalf. These are large institutions, such as university endowments and pension funds, that use venture capital to  extract elevated returns or their money.

Advantages of venture capital

Let’s start with the advantages of venture capital for startups:

• Expertise-Venture capitalists invest in areas where they are experts and, therefore, can bring valuable knowledge to the project. For inexperienced business founders, who have launched a startup for the first time, such a “gesture” can be beneficial.
• Resources-contacts, and personnel. In addition to knowledge, venture capital investors for tech startups also can share with you their contacts: talents, partners, potential clients, and other investors.
• Stable funding: Venture capital is a powerful source of funding that will help your startup grow much faster. Also, you will not have to return the invested money if your project fails.
• Large check size venture investors will on average invest much larger amounts in your startup than an Angel.  Depending on the funding round and maturity of your company, a lead venture investor may invest a check of many millions of dollars into your company.

Disadvantages of venture capital

the main disadvantages of venture capital for startups:

Lengthy investment and diligence process . The time between pitching your startup to a venture scout and getting an investment may be longer than your company can survive. It is essential that you either have other forms of funding or your business is default alive during the VC raise cycle. 

• Mandatory reporting. As with business angel groups, you will have to implement industry standard accounting systems and business practices. .

Crowdfunding

Crowdfunding is a way to solicit investments from your potential target audience to get a product to market. Startup owners register on specialized online platforms like Kickstarter or even Wefunder, where they need to indicate the required amount of crowdfunded money to meet the startup’s product roadmap and the date the fundraising campaign ends. 

After the platform administrators accept an application for crowdfunding, the users can donate their money until the required amount is raised. If the campaign is unsuccessful, the platform can return the money to its original owners or extend the deadlines.

Advantages of crowdfunding

 Let’s start with the benefits of crowdfunding:

• Ready-made client base. When you raise funds for the development of your startup in this way, you get ready-made clients proving demand, thereby reducing the risk that no one will be interested in your product.
• Effective marketing. If you want to get funding for a tech startup through online crowdfunding platforms, we have good news for you: they gather millions of visitors around the world! Therefore, you receive massive promotion of your business online.
• Ease of implementation. Unlike the previous two investment models, oversight is automated by the crowdfunding portal of your choice. The portal will ensure you comply with global crowdfunding regulations.Disadvantages of crowdfunding

This model is not without some drawbacks:

• Initial financial contributions. As a rule, crowdfunding platforms are not free and can be very expensive. For example, Kickstarter charges startups a commission of 8-10%.
• Fraud. Some crowdfunding platforms are literally “teeming” with scammers who steal other people’s business ideas.

Self-funding or Bootstrapping

You probably already understand what self-financing is. At first glance, this model does not seem viable, since you may not have enough money to hire at least 3-5 developers for your project. However, to raise funds for a tech startup, you can try to raise money from friends or family. Also, you may take your own cash savings and invest them as a way to convince other investors of the seriousness of your venture., A bank may offer a small business loan but this option should be avoided.  Seeking debt based options from a platform like Paintbrush Financial may be a better option than a traditional bank. Although this option is rather limited, it may work in your particular case.

Advantages of self-financing

Let’s take a quick look at the main benefits of this model of raising capital for tech startups:

• Predictability. By investing your own money in the project, you will be able to understand the exact technologies available to you, how many specialists you can engage in work, and when to launch the project.
• Time savings. With self-financing, you do not have to spend months searching for potential investors, signing a contract, and preparing reporting tools.
• Rationality. When you spend your own money, you treat the development process as disciplined as possible, which speeds up its release in the long run.

Disadvantages of self-financing

If we talk about the main disadvantages of self-financing, we can highlight the following ones:

• Lack of expertise. If you have not previously worked on a startup, you may not have enough knowledge to do it as efficiently as possible and reduce the risks of its failure.
• Lack of funds for scaling. At some point, your own money may not be enough to continue working on the project.
• High risk of complete loss of your own funds. Using money from outsiders not only increases the pool of money available to your startup, it serves to mitigate the risk of losing only your own funding.  

How to Increase Your Chances of Getting Funding for a Tech Startup

When you want to find investors for a tech startup, you have to understand that there are millions just like you around the globe. At the same time, much fewer potential investors are interested in developing your business niche. That is why it is so important to not just blindly look for those who are ready to sponsor your business ideas, but to have a clear strategy. Below we have put together a few tips to help you.

• Find out which startups are most interesting for potential investors. Before you start looking for investors, find out if there is a need to “adjust” the positioning of your startup to existing market trends and investment theses. Implementing a buzz word or hyped innovation that has real value to your startup, will give you more chances that investors will feel excited about your project. Unless it’s clear the tech used has little value outside of hype for your product.  This will repel smart investors and is a red flag. 
• Identify existing risks. Along with all the benefits that your startup promises to bring in the future, you should be able to describe the possible business risks to your potential investors.
• Try to sell your product on your own without outside investment to show traction.. If you show a strong product market fit to your investors, this will give them confidence that your startup can sell to its target market.
• Formulate a viable sales model. One sale is not yet a success.  Showcase the strength of your product market fit to describe to investors an effective sales model for your product.
• Prepare to communicate with investors. Before meeting with investors, find out more about them: what projects are in their portfolio and what is their investment thesis., Consider Aleph1 Your Trusted Partner

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If you want to get the best ratio between the quality of services and their price, don’t hesitate to contact us! Also, you can learn more about projects we developed in our portfolio.

Conclusion

We hope now you know how to get funding for a tech startup and can choose the options that suit you best. If you are looking for experts who will help you implement your project with minimal investment without sacrificing the quality of their services, please contact us. Fill out the contact form on our website, and our specialists will give you feedback on your project as soon as possible.

FAQ

Consider the answers to the most frequently asked questions related to raising capital for tech startups.