Every early-stage startup is bootstrapped growing their business with little or no VC funding. Once the startup picks up, business operations and resources expand and the startup will need funding to manage the operations and the whereabouts. This means that the startup founders must have a better understanding of different stages in startup funding.

To cite, in a previous blog – Creative ways to seed fund your app idea, we looked at why and when tech startups choose to raise funds and explored four major types of fundraising: crowdfunding, angel investors, venture firms, and IPOs.

Applying that now let’s take a look at the different stages of startup funding and get into details of how much money startups might seek at each stage. 

SEED FUNDING

Seed funds are raised during the early stages of a startup. Investors contribute a small amount of money to bring an idea to life. The immediate goal is to produce a minimum viable product.

Seed capital often comes from the company founders’ personal assets, from their friends and family, and sometimes from angel investors. Professional investors and banks see this as a very risky investment. If they do invest, professional investors may seek a considerable equity stake, as they are accepting a high amount of risk.

Seed funding is mainly used for preliminary market research and to develop the minimum viable product. It may also be used for initial marketing of your product to test your market and gain some traction.

Funding range: $50,000 – $1,000,000

• Facebook’s first ads (May 2004) only generated approx. $2,400 in ad revenue. By June 2004, they raised a $500,000 which resulted in angel investor Peter Thiel agreeing to invest $5,000,000 into the project. This money was initially structured as a loan, the financing was later converted to a 10.2% equity stake in the company for Peter Thiel.

SERIES A FUNDING

The next step is usually getting a working product into the market and Series-A funding is the first round of institutional Venture capital funding once an idea has reached this stage.

The name refers to the Series-A preferred stock offered to the investors in exchange for their equity.

Typically, these funds are used for the first two years of operating costs, including software development, server maintenance, marketing, and other business operational costs.

Funding range: $2,000,000 to $10,000,000, in exchange for 10% – 30% stake of the company.

• In 2010, AirBnB raised $7,200,000 from Sequoia Capital and Greylock Partners. At that time, over 700,000 nights had been booked on Airbnb, in more than 8,000 cities. The press release stated, “AirBnB will use their millions to continue global expansion, hire staff, make translated versions of the app and create multiple payment options to suit any lister or booker, no matter what country they’re in.”

SERIES B FUNDING

The second round of funding takes place after the company has proven success with Series-A. In most cases, the company is already making decent revenue in this round.

Commonly, Series B funds are used to expand the team and for scaling the business. It may include salaries, infrastructure costs such as server costs and office space, and may also include marketing and branding costs needed to enter a new region to achieve globalization.

Funding range: $5,000,000 – $50,000,000

• In 2013, Snapchat raised $80,000,000 in Series B funding led by venture firm IVP (Institutional Venture Partners).

SERIES C FUNDING

Series C funding is the third round of funding for companies which have already proved successful in the market and have clear potential for a larger market. The purpose is to accelerate growth. Product diversification, acquisition, and tapping into the international markets are often the main focus points. Big banks, hedge funds, and public companies are involved at this stage, as the amount can be in hundreds of millions of dollars.

Funding range: $100,000,000– $500,000,000

• In 2013, Uber raised $258,000,000, led by Google ventures. This Series C funding put Uber at a post-money valuation of $3.7 billion.

The funding amount and purpose of funding for each round shown above are approximations; it varies based on the company. The number of funding rounds is also not limited to Series A, B, and C; that depends on the growth of the organization. For instance, Pinterest, founded in 2009, has accumulated $1.3 billion in funding. Their latest round, in 2015, was a Series G, which raised $186,000,000.

FUNDRAISING HISTORIES OF SUCCESSFUL STARTUPS

Facebook had four rounds of Series C funding and accumulated over $200,000,000 in funding before going public.

Uber used several rounds of funding to sustain its expansion. The latest funding from Baidu garnered 1,200,000,000 U.S. dollars in private equity, taking the total funding to over $10,000,000,000 by 2015, far exceeding the amounts raised by any company before in IPO.

Airbnb saw more rounds of funding totalling $2.39 billion by 2015. The latest funding, by Firstmark Capital, accumulated $100,000,000 (private equity).

Whatsapp did not have any more rounds of funding. However, on February 19th, 2014, Facebook acquired Whatsapp for a reported $19 billion.

Atlassian, founded in Sydney, Australia, raised $462,000,000 with its IPO on the U.S. NASDAQ exchange.

Spotify received further rounds of funding from investors. On June, 2015, Spotify received $526,000,000 from a total of 13 investors, taking its total funding to $1.06 billion.

Conclusion

We hope you found this article helpful and we believe that if you are an app startup entrepreneur it is important to know the different stages of startup funding. This not only will help you raise capital for your startup in time but helps in planning out the entire funding process for your startup.

You might also be interested in reading the article on top five things that investors look when investing in a tech startup.

Fundraising can be as daunting as starting up for an early stage app entrepreneur.

There are a lot of articles about raising funds via angel investors, venture capitalists, hedge funds, etc.  They are the most common ways by which any startup can raise capital.

As we all know, fundraising for an early stage app startup is difficult than raising funds for an app startup that is already successful.

So why not try unique & creative ways to raise capital for your startup?

By that we mean, banks and investors aren’t the only options you have to raise funds. Before you can bring on those big guns for funding, you need to prove that you have something worth the investment.

Let’s explore a few unique & creative funding ideas for your startup journey.

6 Unique & Creative Fundraising Ideas

Personal money, friends, and family

The easiest way to raise capital is to approach your acquaintances.

The vast majority of apps are initially funded with the help of personal savings and resources of their founders (and founder’s friends and family). If you are not able to convince your friends and family with your idea, it is going to be pretty hard to convince a stranger.  The best part of this fundraising is often it is interest-free.  If you are hesitant, you probably don’t believe in your idea fully. Look at it as sharing the opportunity with your friends and family. 

Crowdfunding

Crowdfunding is an option to raise funds for seed capital. Though most crowd-funding platforms adopt an “all or nothing” approach to crowdfunding campaigns, there are other options as well.

For example, Indiegogo offers many flexible plans which allow app entrepreneurs to keep the money accumulated even if they don’t reach funding goals.  Read our funding options blog for more details about this option.

Pitch contests

There are contests that are held around the world, allows people to get in front of investors and pitch their app ideas. If you Google ‘pitch app ideas’ or ‘start-up pitching contests’, you will find opportunities in your city. Many universities globally also run contests to offer seed funding for startups.

• Code Launch is an annual event where people with app ideas pitch their app idea to the community of investors.
• Syd Start is a startup conference in Sydney which runs pitching contests.
• There is even an app to pitch your app idea 
• The University of Melbourne has its own start-up incubator, called the Melbourne Accelerator Program. 
• Melbourne’s RMIT University has an investment fund offering seed capital to students and alumni. 

 Google “pitch deck templates” to find time-saving resources for app creators. 

Accelerators

Startup accelerators are programs that include education and mentorship with public pitch days. Typically, accelerators invest $20,000 to $50,000 in startups in exchange for equity.

Y-combinator and Techstars are among the first seed accelerators. Startmate and Angelcube are Australia-based accelerators.

Government Grants

It is worthwhile to consider the many grants your government may offer for tech start-ups.  In Australia, there is a Research and Development program that provides a significant tax incentive to app companies that qualify.

The R&D tax incentive program helps you get up to 45% of your expenses back when you are in a loss position.

The Australian Government provides 45% tax rebates for apps that aim to improve the economy. Your app idea must be novel and qualify as a research and development project.

There are companies which help you apply for this program.

• ATY Advisory is a private consulting firm specializing in assisting small to medium-sized companies to gain access to Research and Development tax credits.
• The Victorian government, in particular, supports innovation by providing funding to entrepreneurs who focus on projects that simplify policy changes and aim at providing value to the public.
• The city of Melbourne offers grants to small businesses and start-ups.
• The Australian Government also provides financial assistance by funding new businesses.
• The Australian government has an Entrepreneurs’ Programme for budding entrepreneurs.

The Queensland government-funded “iLab” is one of Australia’s largest schemes for technology start-ups and had incubated over 100 start-ups.

 The Western Australian government offers an “Innovator of the Year Award” granting the winner a $100,000 package.

 Check which funding programs you qualify for by answering a few questions at the following link.

 Start-up funding loans

Many organizations offer loans to start-ups and other small businesses. These funds can be utilized by businesses as seed or growth money. 

Some good sources are:

• Kikka Capital makes things easier for businesses by providing approval for a business loan of up to $100,000 in just 7 minutes. 
• MoneyPlace specializes in peer-to-peer lending with funding up to $35,000. 
• Moula offers to fund to start-ups and provides an option of instant approval for funding of up to $100,000. 

Personal funding, crowdfunding, pitch contests, accelerators, government grants, and loans all represent valid avenues to raising the funds you need.

Conclusion

Don’t believe you can’t find the money to pursue your great idea!

There is no other business in the world that can scale up as fast as tech startups. Given the competition to invest in startups, Investors not just evaluate startups based on the awesome startup idea that you have come up with. But they delve deep evaluating the core team, the market size, business model, your commitment etc.

When you are in the early stages, getting investors is not easy.  Once you invite an investor to consider funding your company, what criteria do they consider?

Here are the top five things Investors look when investing in Startups:

THE ‘A’ TEAM

Investors truly believe in the saying, “Bet the jockey, not the horse”. The majority of early-stage investors say that they actually invest in the people backing the idea, rather than the startup idea itself.

A skillful and passionate team with a proven track record will always have an edge over competitors who have a great idea but a sub-par team.

While investors looking to invest in small business ask these questions to themselves, “Is the founder a doer or a dreamer? Are they determined and ready to put in the necessary work to build the business? Are they trustworthy?  What is the core team’s track record?”

 MARKET SIZE

Venture capitalists and angel investors consider the size of the target market paramount. How big the company can grow depends on how big the market is for the product. To them, it doesn’t matter how mind-blowing the idea is if the market isn’t big enough. Most investors looking to invest in small businesses are on constant lookout for ideas that work across languages and cultures.

Investors ask this question to the founders, Is your idea universal? 

CLEAR BUSINESS MODEL

By looking at your business model, investors can identify how well you have thought out and planned your business.

They will look for how much and how soon the company can make returns, and what the exit strategy looks like.

Competitor analysis, revenue model, customer segments, and distribution channels are a few key things that need to be included in the business model.

RISKS

Investors take on considerable risk by investing in startups—especially early-stage startups. They want to know that the founding team or entrepreneur is aware of all the potential risks, and has developed a risk mitigation strategy to address these risks as they arise.

When they ask you, “What are the risks involved in this business?” the last thing you want to say is that there are no risks. Make sure you perform risk analysis. 

The standard SWOT (Strengths/Weaknesses/Opportunities/Threats) analysis is one method to consider the risks and come up with mitigation plans.

SKIN IN THE GAME

Investors look for proof that you strongly believe in your idea. Have you quit your job to get this business started? How much of your personal savings have you invested?

Have you already made some progress with your idea by building a prototype of some sort? Investors are more comfortable getting on a train that is already moving, rather than one that is just an idea.  

Assess your start-up by these five criteria. If you were an investor, how interested would you be in your own company?

Considering these elements is one step towards knowing if you’re ready to start fundraising.

If you are interested in finding more funding options for your startup, we have collated a list of venture capitalists, angel investors in Australia. Check out the link.

Don’t forget to share this article with your startup friends and spread the word.

How should I raise funding for my mobile app startup?

This has been the question asked by most of the app entrepreneurs. A recent study by US Bank study, Jessie Hagen, says 82% of the startup fails because of the cash flow problems.

Raising capital could be the nightmare but as app entrepreneurs, if you have taken the leap to start up your business. Raising capital need not be as scary as starting up. In fact, it’s not rocket science. If your App idea has validated the product market fit, we are sure you will succeed in raising capital for your app business.

In this blog, we explain the key issues to explore before choosing your funding options, and the different options available during the life cycle of your app business.

Below are the three questions that pop up when you think about raising capital:

• Should I raise funds for my app idea, and if so, how much?
• When is the right time to get the funding for my app idea?
• What’s the best way to find money for my app?

The answer to these questions really depends on where do you see your app business in 10 years. Your decision-making becomes much easier once your vision is clear. 

TO RAISE CAPITAL OR NOT TO RAISE?

If you want the app to provide a good lifestyle with less working hours and steady cash flow for yourself, you’re better to self-fund as much as possible. It is possible to fund a successful business without external investment.

• Markus Frind founded the dating site Plentyoffish in 2003, and built it to a very profitable company without any external funding. In 2015, he sold it to the Match group for $575,000,000 U.S. in cash.
• Zoho is a very successful Enterprise software company with hundreds of thousands of users which never took any external funding, and founder Sridhar Vembu shared he has no interest in funding (or an exit strategy) in spite of getting calls from investors every day.

Of course, many people launching a tech start-up don’t have the option to fund the project themselves.

RAISING MONEY: WHEN DO YOU START?

This is a very difficult decision which weighs on the reality that the sooner you raise funds the quicker you can release your app vs. the fact that the sooner you bring an investor on board, the less you have to show them which generally5 results in them asking for a larger share of your idea.

A rule of thumb is that the best time to raise funds for an app idea is to ensure it’s there before you need it. Note that it’s a fact that getting investors on board when all you have is a great idea has its own challenges.

The best case scenario is that after you have spent a little time and money on things like an app prototype or generating data to show there is a demand for your product you can raise funds without giving away as much of your equity.

3 Main Funding Options

There are three main funding sources for tech start-ups: crowdfunding, angel investors, venture funds, and “going public,” or IPO. Let’s look at each.

Crowdfunding

Crowdfunding is a way of attaining capital from a large pool of individual investors, friends, family, etc. This funding option also leverages the networks of these individual investors, increasing your reach exponentially. There is no limit on how much money you can raise using crowdfunding.

However, most crowdfunding platforms impose a time limit within which the target has to be achieved. Therefore, it is important to be reasonable with your funding goal. Also, running a crowdfunding campaign involves a learning curve and takes a lot of time, so be realistic about that as well.

There are two types of crowdfunding options available.

• In reward-based crowdfunding, entrepreneurs offer rewards that supporters receive if the funding goal is attained, such as t-shirts, experiences, or the product itself when it’s complete.
• In equity-based crowdfunding, entrepreneurs offer equity in exchange for capital if the funding goal is attained.

 Some popular crowdfunding platforms include Kickstarter and Indiegogo. Popular crowdfunding platforms specializing in mobile apps include:

• Appsfunder
• Appbackr – Surf
• Appsplit
• Angel

Angel investors

Angel investors are wealthy individuals who invest in start-ups in exchange for equity in the start-up company. These investors generally invest in the early stages of funding, providing seed funding anywhere from $25,000 to $1,500,000.

To look for potential angel investors, do an internet search for angel investors in your city. Don’t write them a cold email; see if you have can get an introduction from a mutual contact. Use LinkedIn to find out if you have a mutual contact, and to research the angel investors that you’d like to target. Go to events they go to, network, and ask them out for a coffee.

MELBOURNE ANGEL INVESTOR GROUPS

• Australian Investment Network
• Melbourne Angels
• Melbourne Investors
• Business Angels

Venture funds

Venture capital funds typically come into play after seed funding. Venture capitalists obtain funds from a plethora of sources, such as foundations, wealthy individual groups, endowment funds, etc. They invest much larger amounts than angel investors. Venture capital firms invest in businesses, not ideas. They care about the ability to execute. So get your idea built, get customers, create revenue, and then approach VC firms.

Below are some VC firms in Australia.

• Adventure Capital 
• BlackBird Ventures
• OneVentures
• Starfish Ventures

Initial Public Offering

IPO, or Initial Public Offering, is when your company shares are sold to the general public, usually with the help of an investment bank. This is when the founders and investors monetize to get a return on their investment. A company selling common shares is never required to repay the capital to its public investors. The ability to quickly raise potentially large amounts of capital from the marketplace is one reason many companies go public. The disadvantages of going public are that the founders lose a lot of control over their own business, and are subject to much higher legal and compliance requirements.

Some noteworthy Australian start-ups that went public includes:

• Started in 2002 in Sydney, Australia, with a $10,000 credit card, the founders say that the company has always been profitable. In December 2015 the company went public, selling 22,000,000 shares at $21 a piece, raking in $462,000,000 at a market valuation of nearly $4.4 billion.
• Founded in September 2011, founder Ruwan launched the platform in July 2012 and went public in just three years, in October 2014. The IPO raised $4,000,000, valuing the company at $30,000,000. It received a lot of criticism because it was too early and had only 64 paying customers at the time of IPO.

Alibaba and Facebook are two of the biggest IPO’s ever. In September 2014, Alibaba, the Chinese e-commerce company went public in the US NASDAQ exchange at $21.8 billion, making it the biggest IPO ever at that time. When Facebook went public in May 2012, it raised $16 billion.  

Fundraising is an essential skill for most start-ups. It isn’t enough just to build a fantastic app; you need business skills to build a sustainable company. Putting some time and research into fundraising from the start can help transform a great idea into a successful startup.

If you want to learn more about the different stages of funding an app startup, read about it here.