The way you handle early funding for your software development venture may determine the entire course of your company’s future. From an exit strategy to your valuation, every major milestone of the future is largely based upon the decisions that you make at startup. But what kind of investments should you consider at the start of your journey? Watch this video to get an idea of what types of investment you should consider and why.
Why would investors invest in early stage tech startup funding opportunities?
When you do speak to investors, the issue with investing in early stage companies, as I said, is that it is very risky. Traditionally 1 out of 20 start ups succeed.
The issue is that with this type of investor, and the type of conversations we have had with early stage investors is that, they are looking for a bang for their buck. They don’t want to come into a high valuation. They’re happy to back an Expert 360, which is called a disruptive innovator in the technology market, at that $1 million valuation and exit at 20, 30, 40 x that.
The issue with investing in early stage businesses is that your time horizon needs to be, at the minimum, 3-5 years before an exit. You need to be prepared to hold that investment for a very long time.
These are just examples of how you, as a business owner, would get capital.
1. Co-working incubators
The first part is co-working incubators. There are a lot of incubators out there such as Stone & Chalk or Incubate or Monash University or the York Butter Factory, where you can hire co-working space. You go over there, you can hire a desk, it only costs around $600 a month, and they provide resources and strategic advice. The good thing is you are in the same boat as a lot of these early stage businesses. You can share information, it’s great for business innovation.
There is a catch. The catch is these incubators want to buy a stake in your business for very little. That is something you have to weigh up.
2. Angel investors / crowd funding
Obviously there are angel and crowd startup funding investors. There are companies like Our Crowd or Equitise or Melbourne Angels or Venture Crowd that are essentially crowd funding . Does everyone know what crowd funding is? It is an ability to share your business into the crowd. Guys like us look at that as a form of deal flow.
The good thing about that is you might not have to give that much away. The type of investors who come into those crowd funding platforms are high network investors that want to get access to deal flow that they don’t see anywhere in the market; like BHP, Rio Tinto or Woolworths. They are looking for those early stage businesses because they want to back them. In that situation the good thing as well is that the Equitise or the Our Crowd or the Venture Crowd you hope have done some sort of due diligence as well. That is important.
3. Venture capitalists
Then obviously you’ve got the venture capital route. The thing with venture capital is that, similar to the co-working incubators, they really want to take a very large stake in your business for very little, the positive is that they’re very well connected.
They’re normally traditionally from a venture capital model and they want a board seat. That could be a good thing or a bad thing. If you’re the boss and you don’t want to listen to anyone else telling you what to do, well unfortunately you have to, because they control 30% of your business. They control what you do.
Traditionally investors don’t necessarily like, depending on where the venture capital round is, to come in just before the pre-IPO. Normally a lot of these venture capital guys or the private equity guys have already made a lot of their money. When they do IPO the business, they don’t leave much for the retail investor.
As you can appreciate, every consideration for early investment has to be measured and calculated based on your instincts, intuition and long term goals. Crowd funding, angel investment and various strategies all have their positives and negatives. Measuring your current needs should include your definitive plan for growth. You should also consider keeping the percentage of ownership that provides a healthy trajectory for your startup. Consider your options with research and care for the best chance at long term success.
Do you need help to find the best pathway for your software development goals? Contact us right away; we look forward to hearing from you.