You have a new and exciting tech start up idea, all you need now is the funding to make your idea a reality.
Funding a business can be an exciting time, but it can also be a challenge. There is no perfect solution, each option has benefits and pitfalls. They also don’t have to be used in isolation, many businesses use a number of different ways to bring capital into their business.
Getting funding for a tech start up isn't as hard as it once was. We explore some of the options available to help get your new project off the ground.
Bank funding:
One of the more traditional ways of achieving funding is through bank funding. In order to be eligible for bank funding you will need a good credit rating and you will need to be able to secure the loan with other assets such as the equity in your home.
Generally banks require business loans to be fully secured, which means that if you are borrowing $100,000 then you need to have $100,000 in equity that you can secure against the loan.
Angel Investors:
These are private investors, often successful entrepreneurs who are keen to help and invest in start up businesses. They will inject capital into a business in exchange for an equity share, however, the business needs to be able to show that it is a viable business and has strong investment potential for the investor. Angel investors can be a way of raising capital to develop a new product or execute a marketing plan that otherwise may not be possible. They can also provide added benefits beyond the capital such as mentoring and business support.
The downside to angel investors is that in exchange for the money you will need to relinquish a share of your business and this will significantly reduce your profit in the future and depending on the size of the share may even reduce your control of the business moving forward.
Grants:
Each year millions of dollars are made available by both State and Federal governments and sometimes corporations to support businesses in the form of grants. Grants offer a range of financial benefits ranging from rebates, incentives, discounts and cash. While the business is free to use this money as income into their business there is often extensive reporting that needs to be completed as part of the compliance requirements from the grant provider.
Grants are a great way of receiving a cash injection without having to relinquish ownership of your business, however, they are very competitive and the application process can be extensive. Many people invest in a professional grant writer to increase their chances of success. A grant writer can cost several thousand dollars and may also take a percentage of the grant received if successful.
Crowdfunding:
An increasingly popular method of capital raising is the use of crowdfunding. While the principles of crowdfunding have been around for years, it didn't gain real traction until the development of websites IndieGoGo and Kickstarter in 2008-2009. Their success has resulted in many similar websites being created and crowdfunding being seen as a legitimate capital raising opportunity. In 2015 it was estimated that worldwide over $34 billion USD was raised this way. The idea is to raise a large amount of money by receiving a small amount from many people.
There are two main types - equity crowdfunding where the backer receives an equity share in exchange for money pledged. The other type is rewards based, which involves the investor receiving a gift or the finished product. In this case it can provide pre production orders for a business which can provide the money to pay for the production but also provide confidence to other investors that there is genuine consumer interest in the product.
Crowdfunding has become so popular in Australia that the government has introduced legislation that provides guidelines for investment making it easier for Australian’s to invest in local tech start ups.
Startup accelerator and incubators:
The government is starting to initiate funding and support to regulate the accelerator and incubators in Australia to ensure that tech startups are getting the best opportunities out of being part of a program. If your lucky enough to be accepted into an accelerate or incubate program you can expect to receive basic funding, free rent, exposure to other budding tech entrepreneurs and a community environment to grow your idea. We recommend this for infancy stage tech startups.
Self funded:
90% of start ups are self funded. This is often viable if you have the time to work on the business and save, building on the organic growth. This isn’t always possible, particularly if as a tech start up you require significant investment for product creation and development.
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