Great idea for a tech start-up? From AI and robotics to additive manufacturing and IoT, technology is opening up countless new business opportunities. New tech start-ups are being created every day – and some of them will change the world we live in.
But to succeed, your tech start-up needs more than groundbreaking technology or even a good idea. It will only be the success you want if you can bring in the funding you need.
Many start-ups can find it difficult to use a bank or start-up loan to fund their business in the early stages. This is because most lenders prefer to lend to a business with a record of profitable trading, simply because it shows they stand a better chance of being repaid. The challenge for a tech start-up, when there are simply no comparable businesses to set benchmarks, is greater still.
If you’re an emerging tech start-up with zero track record and no idea for monetising your product, you’ll need to take a look at these funding options.
Fund it yourself
If you really believe in your business idea, you will need to fund it yourself. This can be impossible if your plans involve major engineering works or a global distribution chain – but it can be feasible if your idea is an app or similar where you can build a new product or service, start small and grow it.
It does mean starting lean, but it can lead to success if you take the ‘Bootstrapping’ approach. Use your own resources to build a minimum viable product (MVP), then get it out in the market as soon as possible. Rather than investing a lot of time and money into creating a perfect product, you can use feedback from your buyers to support your development.
You gain customers and hopefully advocates early and start bringing in a profit early too. You will probably need to reinvest the profits back into the product (hence the idea of lifting yourself by your own bootstraps). On the other hand, with a proven product and a list of customers, it can suddenly become much easier to get lenders to take an interest in what you have to offer.
There are lots of grants available, and some of them could be ideal for tech start-ups looking for a funding boost.
You can find details of grant providers and current schemes relevant to your sector online. The big attraction is, of course, that of free money – you don’t have to pay a grant back.
However, there will always be competition for free money. Grant proposals can take a long time to put together, and months spent trying to nail down the cash could be a big disadvantage if you lose your market lead.
What’s more, a grant will not usually provide all the funding you need. You’ll often be expected to match the funding with finance of your own. This will usually mean getting a commercial lender to provide match finance. Grant providers prefer to fund businesses that are commercially sound enough to attract lending from the private sector.
Crowdfunding is a new way to raise funds (although it actually has its roots in some fundraising approaches that go back at least to Victorian times).
There are two types – Equity Crowdfunding and Reward Crowdfunding. Equity Crowdfunding is when people pledge money to your business and are given a share in it via equity. With Reward Crowdfunding, they will (naturally) receive a reward – probably one of the products you are offering.
Crowdfunding is time-consuming. You’ll need to market your launch to anyone who will listen and if you don’t meet your goal, it could leave you worse off then before.
Success can also be a problem. Over-funding can mean a lot of extra demand that you might not have bargained for. If you can’t meet it, your business will look as though it has failed – even though it has succeeded beyond your dreams!
Peer-to-Peer (or P2P) funding is often confused with Crowdfunding but, in fact, they are very different.
Both use the power of the internet to attract large numbers of people to back your business, but Peer-to-Peer lending is more like a crowdfunded loan.
Like any other loan, you pay interest on the money that is lent to you. Peer-to-Peer loans involve a pool of different investors, and you can easily apply for loans up to £1 million with some of the leading platforms.
There are some major advantages of P2P. You get the privilege of borrowing large sums and it becomes easier and flexible than a bank loan. It also provides clear support for your idea, demonstrating that it has mass appeal. On the other hand, paying the interest can be expensive if you can’t pay back what you have borrowed.
Venture Capitalists and Angels
Venture capitalists – often shortened to VCs – are generally professional investors who will support your business idea, not just with funding but with expertise and contacts.
This can be particularly valuable in the tech sphere, where their knowledge can be just as vital to your success as their money.
Venture capital firms are made of professional investors, and their money comes, not from their own pockets but from a variety of sources – including corporations and public pension funds. The job of VC firms is to find those businesses with high growth potential and expect a high return on investment in exchange for their involvement. After a period of time, venture capitalists sell shares in the company back to the owners or through an initial public offering, usually making much more than what they put in.
Venture capital usually deals with very large amounts of money and may be more suited to growth situations than start-ups – although, with the right business idea, VCs may be prepared to get involved. However, if things don’t go smoothly it could go badly wrong, and even see you losing control of the business you have created.
Angel investors tend to provide smaller sums of money and to be more hands-off than VC investors – and can be more appropriate for start-ups. However, lots of start-ups are competing for angel investment and if you don’t have a proven track record, it will still be an uphill struggle for you to win over investors.
VCs or angel investors will need to be really passionate about the idea and willing to take the risk before investing. This kind of investment means you will give up equity in your business and lose some control.
Getting the funding you need
Business finance specialist Rangewell reports a steady rise in enquiries from people ready to start their own tech business and, as business funding specialists, they have found those lenders who are prepared to support tech start-ups. They can provide help with getting the types of funding mentioned above – and with finding help from lenders.
Some lenders remain cautious – but others have recognised the importance of the sector and the potential of innovation to create real profits. Funding your start-up with a business loan can be a solution that avoids the risks of losing control of your business – or delays that could make your market-leading new idea an also-ran.
You can find out more about Rangewell’s funding solutions for new business ideas here.