How to Finance an IT Start-up?

«What to do if there’s an idea you can’t afford?» is the most difficult question for quite a number of those who are planning to start up. Thanks God we, nowadays, have a plenty of answers to this concern.

How can you get money for hiring people, IT product development and sponsorship of marketing campaigns? Now we’ll look into what we need to save up for the pre-launch. Of course, each case is individual, but here we will highlight the most famous methods of collecting money.

1. Bootstrapping


Behind the intricate term hides the simplest solution: to do without external financing and manage on your own. If you want to create a small company and have 100% control over it, there is a reason to limit the funds from, for example, the sold car or FFF (Friends, Family, Fools). Where to look for the first and second is understandable without much explanation. The latter are rather friends of friends, and they are difficult to recommend. In addition to their lack of experience, there is a risk of co-owning companies with people far removed from your values or understanding the risk of investing.

Behind the intricate term hides the simplest solution: to do without external financing and manage on your own. If you want to set up a small business and have 100% control over it, there is a reason to limit the funds from, for example, the car you sold or FFF (Friends, Family, Fools). Where to look for the friends and family is clear enough and can be left without any explanation. The latter can be considered as friends of friends, however, it may not worth it to recommend «fools» as prospective co-owners. These candidates are likely to be less experienced. In addition to that, there is always a danger to share a company with people who are not supporting your values or who are not ready to invest into the business which is a known risk. 

The upside of bootstrapping is independence and complete freedom in decision-making. The only responsibility is a customer service you provide. If you have no capital, you will not lose it. What is more, there aren’t many start-ups which receive a meaningful investment they are wishing for. But the time spent on developing a selling business plan and finding investors can be devoted to developing the idea. 

As for the cons, you’ll have to sacrifice (bootstrapping means to tighten the straps on the shoes). There will likely be a lack of funds and resource constraints along the way. Moreover, bootstrapping implies slow growth. For beginners, this is not so bad: smart use of venture capital is not always possible, and learning while moving is ok. However, for those who expect rapid scaling, a lack of investment will be hold back.

2. Crowdfunding


This is a fundraiser for a project implementation from a large number of investors interested in your product. In other words, every little bit helps. There are designated platforms on which you can post your project description and their audience will take a closer look into it and decide whether to finance a start-up or not. Some of those portals: Kickstarter, Indiegogo, Fig. Each crowdfunding website has its own benefits and attractive features, so carefully study all the options to choose the most suitable for your brand strategy.
The advantages are evident: you get the funding, you don’t lose control of the business, and what is mostly important you receive feedback from the target audience. If the money comes - the product is interesting, if not - maybe it makes sense to modify it before launching. A successful campaign would also be good PR.
And now about the disadvantages. Create selling photos, videos, skillfully tell your story – not just and not quickly. To reach the required amount of €10-20 lots, you need to attract the attention of the audience, which means you have to work with the media and invest in marketing. Their percentage of the raised money will require a crowded marketplace. An alternative option is to throw a cry around the world through social networks and blogs. If you have a lot of loyal followers, it might work.

3. Business Angels


Professional or aspiring private investors are called business angels. They invest personal means and do this, as a rule, at the early stages of the project development process. The biggest of them you can find simply by searching for a ranking of business angels. It is also a common practice for business angels to leave their contact information via social media, so don’t hesitate to check them out. The rest can be found in startups’ exhibitions, hackathons and other thematic events. Here, it’s essential to be able to quickly and efficiently present the project.

Every business angel aims to understand how the company is planning to promote itself, how much it will cost to attract each prospective customer. Therefore, we’d recommend to ensure that you are 100% ready to answer the following questions:
•    What profit is each customer going to bring?
•    How do you plan to advertise? Where and when? What is your PR strategy?
•    What will be a typical sales cycle from the very first contact with a client until the moment a transaction is concluded?
•    What is your social media strategy?
•    How much will it cost to attract a customer?

The advantage of «angelic» investment is that you are not just given money. These people literally follow your step, prompt and direct, and what is most valuable, they share contacts and introduce you to business community. The main drawback of such funding is the partial loss of control over the project.

4. Launch grants


Start-up development grants are funds that are donated to projects to cover basic costs. They allow one to pay for team search and training, purchase of equipment or office rental. Grant-makers are usually state-owned business support funds that get nothing in return. 

The main advantage of this financing is that the recipient does not share a part of his company with the fund. And being a grantee is doubly advantageous because grantees trust each other’s choices. So, when the 1st grant is received, the probability of receiving the second one doesn’t reduce, but increases instead.

One of the drawbacks deserving to be highlighted is accountability. It is impossible to avoid the planned programme, even if the advantages of another direction are obvious. Please also don’t forget that to win a grant you must compete, and it indeed takes a long time.

5. Venture capital (VC)


VC is an investment into developing business or a start-up. These investors are completely different from private angels, for example, these are foundations that are not much inclined to take risks, and they have to be convinced with clear figures. It’s good to note that venture capitalists require to share a startup or a project with them. Thanks to VC investments and capitalists’ advices, such companies as Amazon, Apple, Facebook, Gilead Sciences, Google, Intel and Microsoft have developed.

It’s critical to have an understanding of how venture capitalists learn about the companies they invest in. Around one third of their investments goes through professional networks: venture capitalists communicate with other colleagues, lawyers, financiers, professors of the top universities. And they recommend some talented people or promising startups.

Do not be upset if you haven’t received any offers from investors and even if you are severely refused to get financed several times in a row. This simply means that you have not yet found a suitable investor for you that fully meets your goals and needs. Try over and over until you find an ideal one.

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