How to Get Funding for App Development: All You Need to Know in 2022
Setting up a business isn’t just about knowing what to do for your ideas and planning on papers alone. You’ll need actual funds to transform your idea into reality. And a lot of that comes from investors. The truth is that you may have to contact many of them before finally getting funding for your startup idea. Also, get to know how to get Funding for App Development.
To assist you, I have prepared a guide describing all the peculiarities of getting investment for a tech startup: from stages to go through to widespread funding sources and creating a minimum viable product.
Startup Fundraising Stages
Entrepreneurs try to drive their idea using their own money. Here are a couple of ways how to get financing at this stage:
- Find a trustworthy partner to develop a startup
- Initiate a crowdfunding campaign
- Attract money on your own website
- Participate in funding battles
- Appeal to angel investors at the early stages
Seed funding entails appealing to so-called angel investors to get funding for your app startup. This sum covers basic business needs such as business plan, team recruitment, rent, development, etc.
At this stage, you already have a proven business model, a good client base, and start generating money. And now, you intend to attract top-rated investors for further growth. Commonly, entrepreneurs deal with venture capitalists who need actual data and progress obtained to decide on further app development funding.
At this stage, you want to finance your company’s scale-up and turn it into an enterprise. You’ve already proved the idea’s feasibility and now intend to enter foreign markets.
You’re not a startup at this round but an established, successful company with $100+ million in revenue. You seek series C funding for further expansion to enhance your existing success.
An initial public offering (IPO) is about selling a private corporation’s share to the public. The transformation from a private to a public company can be an important time for private investors to fully realize earnings from their investment as it typically involves a share premium for current private investors.
Widespread Tech Startup Funding Sources
Before raising money for app development, you should be familiar with common financial sources. Their basics will be clarified below.
Crowdfunding entails funds raising using special services like Kickstarter or Indiegogo. Simply put, users pre-order your digital product before you start building it. Once funds are raised, the app development initiates. The most damaging effect of this method is the risk of idea stealing. But it’s a proper way to launch the startup fast.
Bank loans cover short-term operations. Financial establishments grant different types of loans to give startup companies a steady hand over their business activities. However, this option is associated with a bunch of documentation and legislation compliance along with a developed business plan.
Business Incubators are the establishments that act as mentors for early-stage startups. They not only provide initial capital for app development but also set up lectures and business meetings to share valuable insights with business owners. Moreover, they can introduce you to venture capital firms if you establish yourself as a credible partner.
However, you can’t have the sweet without the sour — the competition among candidates is stiff, and it requires some time to make a solid business relationship.
Venture Capital or VC stands for a form of business investment, especially a digital one (e.g., mobile app startup financing). It implies collective investment on behalf of a group of companies that assigned their money to this fund. A venture capitalist is a responsible party who handles fund money and invests this finance into reliable ventures. VCs collaborate only with startups with a solid business plan, a specialized team, and already gain money.
Angel investors are go-getters that invest money in various ventures, even risky ones. They seek potential IT unicorns and guide them to pay for the risk. Angel investors analyze whether you have product-market fit, along with your dedicated team and initial users. However, before pitching your idea to angel investors, prepare a detailed presentation, ideal business plan, and proof of the idea’s feasibility.
Venture capital and angel investing stand for the most demanded funding sources used by successful tech giants like Facebook, Twitter, and Airbnb. That’s why I decided to dedicate the following sections to these two fundraising options.
What are Venture Capital Firms and How Do They Help Startups?
As I mentioned earlier, VC firms deal with startups that have the potential to refine the markets and grow very fast. The funds provided by the venture capitalists usually come from institutional investors, corporations, insurance companies wanting to make serious investments. So a VC organization is a partnership: there is a group of stakeholders who decide whether or not a business is going to be sponsored.
The strong side of VC firms is high-quality deal flow. It’s based on full-scale business analysis, enabling venture capitalists to determine which ventures are worthy of investment. The drawback for startup owners is that such type of app startup financing entails participation in decision-making in addition to a share of the equity.
Now, let’s discuss the core benefits of venture capital financing for startups:
Venture capitalists are professional investors with deep knowledge. They are experienced in developing and scaling small businesses, addressing business challenges, and scrutinizing financial performance.
When you’re centered on startup development, there is no time to establish connections with entrepreneurs that can assist you in business growth. Instead, venture capitalists devote 50% of their time developing their networks.
Enhanced public perception.
Venture capital firms enhance a startup’s reputation due to the credibility confirmed. It simplifies financing from other investors, especially if the venture capital fund is a renowned brand.
Professional venture capitalists hedge their interest rates risks and prefer to unite their investment with other experienced VC firms and engage in deals if they are invited to join trustworthy syndicates.
Venture capital firms pool experts with a thorough understanding of the business game’s rules. Years of experience based on a pilot approach supported by well-developed market instincts proves VC firms’ privilege over other market players.
What is Angel Investing and Reasons for Its Popularity
Simply put, the angel investor is one person who wants to invest their own money in a startup. However, often angel investors create groups where participants decide to fund your venture as a syndicate. Angel investing is an excellent choice for early-stage startups.
As the two most famous sources of app development funding, VC firms and angel investors have some similarities. They both give a push to innovative business ideas and are willing to deal with technology companies. But, there are some essential differences to know to understand all the specificities of app startup financing. These features will be explained below.
The main difference is the amount of business capital invested. Venture capitalists prefer catering to deals in millions since they invest money deployed from different corporations. In contrast, angel investing focuses on relatively modest sums because angel investors manage their own savings. For instance, the average venture capital deal is about $27,7 million compared to $15,000 and $250,000 for angel investment.
Most angel investors pay little attention to due diligence. It’s because they invest their own capital, and they shouldn’t report to other investors. Venture capital implies more due diligence because VC firms are fiduciary responsible to partner organizations. Venture capitalists can spend a tidy sum for startup analysis or market research before investing money.
VC firms are constantly involved in investment activities, so they foresee a higher return on investment than angel investors. Venture capitalists’ returns vary between 25% and 40%. In turn, angel investors can expect 20% to 25% ROI.
Role in the business.
Both angel investors and venture capitalists want to have fair business equity to guarantee a high return on investment. But venture capitalists are enough to have a seat on a Board of Directors, unlike angel investors seeking complete rein over the startup.
Angel investors are go-getters, emotional, and competitive. They are just going to invest in risky ventures relying on their intuition and overall product vision. Besides, angel investors use a personal approach, are ready to dedicate their time engaging with founders, and strongly believe in the startup business.
On the other hand, venture capitalists are highly suspicious of everyone and everything and don’t believe groundless facts, as a rule. They prefer scrutinizing the business from all directions and evaluating all the risks. Hence, VC companies invest only incredible projects, handling a competitive gain and a talented team.
Pros and Cons of Angel Investing
Angel investors might be one of the important figures you will appeal to when it comes to needing funds for app development. So let’s look at all the benefits and risks of angel investing.
Advantages of Angel Investing:
- When you attempt to understand how to get investment for software development, it’s challenging to find the point to begin with. Also Angel investing aims not only to fund the startup but submit support and expert advice.
- Angel investors prefer cooperating with a low number of startups to be entirely engaged in product development and establish trust relationships with business owners.
- And Angel investing is associated with significant risks due to an emotion-based decision approach. That’s because most “angels” are former startups and know all the possible risks and ways to avoid them.
- Taking out a bank loan entails that you’re forced to refund it regardless of startup success or failure. Angel investing works in a different way. Angel investors offer you the money needed to develop a startup in return for an ownership stake in your company. If the business grows, you’ll both get financial rewards. If the business fails, the “angels” won’t require paying the money back.
Disadvantages of Angel Investing:
- Angel investing implies leaving the startup fast. If a startup takes off and business owners can repurchase its share, it plays into their hands. Otherwise, there is a risk of losing the startup’s credibility to other investors.
- Angel investors often give startups surreal estimates, which may be confusing for founders. Ownership equity in the business should be defined in advance. However, the Simple Agreement for Future Equity (SAFE) presented by Y-Combinator addresses this issue.
- Typically, angel investing implies a large share in a business, causing their founders to lose control over the venture. It’s harmful to early-stage startups since they drop the value for venture capitalists. Even if they give you more freedom, you will still need to account for decisions made. Thus, before starting collaborating with angel investors, make sure you’re comfortable somebody unaware of your business will impact your decision-making flow.
How to Calculate Investments for Tech Startup
It’s critical to properly plan the app development budget to deliver a successful digital product and engage investors. This way, you’ll determine what spending can be cut on and whatnot. I have prepared several tips on how to outline your budget for creating web or mobile apps:
Pick up a platform.
The choice of a platform is a considerable factor impacting the budget to make an app. The price will differ whether you plan to build an app for just one or several platforms.
Estimate your product’s functionality.
The features you want to integrate into your product directly impact the final app development budget. Hence, it’s essential to jot down a list of required functionality to plan the software creation budget properly.
Assess your profit and establish goals.
Before starting app development, it’s important to set up visible revenue goals. Thus, you’ll understand how much it demands to return the investments and when you’ll be able to reinvest into developing more sophisticated features, as well as the appropriateness of further project financing.
Find a trustworthy IT provider
Finally, you’ll need to find the right development team that will assist you in developing a top-class application to attract initial investments. There is no sense in hiring in-house employees when you’re a startup since such an approach is associated with additional expenses (e.g., rent, software, hardware, wages, sick days, etc.).
The optimal way is to outsource app development to popular tech hubs like Estonia, Poland, or Latvia. Even though the average cost to develop an app ranges across the regions, you’ll still pay less than in-house product creation. For example, software developers in Central and North Europe charge $25-50 per hour while providing a high level of expertise. There are many solid software development firms that can build any-scale custom software solutions for an affordable price.
The startup fundraising process requires a responsible approach. To get investment for a tech startup, you’ll need to center on delivering appealing, well-structured software and prepare a detailed elevator pitch. In addition, being a startup founder implies strong communication skills to persuade investors that your idea is worth capital.
My name is Katherine Orekhova and I am a technical writer at Cleveroad – mobile app development company. I’m keen on technology and innovations. My passion is to tell people about the latest tech trends in the world of IT.