How to Attract Investment in a Startup
Where to look for money to implement an idea, what tools to use and how to negotiate to make a decision in your favor.
Any startup needs money like in the air. In the early stages, attracting investment is the biggest headache of all start-ups. Usually nobody wants to believe in even the most wonderful idea; very few investors are ready to be the first.
In this article we will talk about raising funds for innovative projects and about the situation on the IT investment market. Thus, we strive to facilitate the task for those who have already decided to try their luck in the fight for the "long dollar" of investors.
Features of IT-investments market
Today it is difficult to come up with an epithet in order to describe the situation on the IT investment market. We can call it a superfavorable one for start-ups. But even this will not adequately reflect the optimism of investors in terms of IT innovations.
Investment volumes break records
Until recently, investments in the area from $50,000 to $500,000 were considered common for the sowing rounds. Today, the average sowing rounds are estimated at 1-2 million dollars. Sometimes they reach up to 5 million dollars, and this is not considered a limit. The volume of investments in literary rounds break records every month.
High demands on the team
Investor optimism is not shared by all teams, because as the volume of investment grows, so do the requirements to companies. Teams with no history and no reputation take their competencies particularly seriously. It is no secret that the vast majority of startupers in this category.
A characteristic feature of modern investors is that they do not invest more in an idea or business model, but in people who will implement the idea and use schemes of its monetization.
Investors always pay attention to metrics and formal growth rates, which is a very serious problem and repeatedly complicates tasks for money seekers.
Growth in project capitalization
Another trend in the IT investment market is the growth of project capitalization. The more an investor is afraid of competitors, the more he invests in the project, seeking to gain advantages. This is used, the capitalization grows astronomically, but sometimes there is nothing behind it.
Just 10-15 years ago the capitalization of IT companies reflected real figures, such as the volume of profit and the size of the audience. Today, many simply overestimate the figures in order to attract another round. As a result, the bubbles naturally burst after periods of long, regular, often rapid, but formal growth.
Expertise sometimes helps, but this measure also makes it even more difficult and bureaucratic to attract money.
Today it is easier to name those who do not invest in startups. Investing in innovative projects has become almost the rule of good tone. Startups finance large IT corporations (Google, Microsoft, Wargaming, Facebook, Atlassian, Alibaba), investment associations, venture funds (ABRT Venture Fund, ABRT Venture Fund, Accel Partners, Admitad Invest, Sequoia Capital, Tiger Global Management), as well as business angels of the middle class, banks, and financial institutions.
There are also such forms of investment as crowdfunding and crowd investing. These tools involve investment at the expense of future users of the product. Works well with games and gadget development.
Examples of large personal investments in startups are known. For example, co-founder of WhatsApp Brian Ekton has invested $50 million in Signal messenger.
Another characteristic source of money for start-ups at the idea stage are investors from the FFF group (Family, Friends, Freaks - family, friends and crazy). It is known that many successful startups received their first investments from this very source.
Ways to attract investments
Crowdfunding is the collective financing of interesting ideas in exchange for gifts and bonuses. And in fact, it is a tool that helps people learn about new ideas and projects. Explore more the link above.
Launching an IPO
A reliable and traditional tool for attracting money to an IT project is the placement of shares on the stock exchange, ie IPO. For an IPO, for example, in the U.S. it is necessary to long push the threshold of such organizations as CES (Securities Commission), to become a joint stock company, and then find a couple of million dollars for an advertising campaign.
It is believed that IPO is suitable for mature projects, and for startups can not be quite effective. At the same time, Google once denied this claim.
ICO, or token mail
As an alternative to the placement of shares is often used ICO, or token mail. In tokenseil, the attraction of money is through the sale of its own cryptographic currency. It is believed that for the U.S. and the European Union, the cost of an effective ICO is equivalent to 500,000 dollars. This amount will solve the problem of advertising and legal registration of public sale of cryptographic assets.
Crowdfunding (crowd investing) can help in the early stages. For fundraising platforms such as Kickstarter are suitable. Future users are dumped to the developer to "support the pants" during the preparation of the product for the market, and the latter, in turn, undertakes to give them the result of his work, and in the case of crowdfunding - and share the profits.
Such forms are good at low costs. For Kickstarter it is enough to write a short resume of the project, place some photos and promotional videos, show the team. The platform will do the rest. Lately, large media journalists are interested in Kickstarter projects, which helps many people to solve the advertising issue without costs.
Incubators (gas pedals) play a special role among investment attraction tools. They look for startups themselves and invest in them. Projects do their homework and are subject to acceleration, and automatically fall into the focus of large investors.
The incubator's start-up investment volume starts at $150,000. For this he gets a 7% share in the company. Part of the money is charged for training, and other startupers spend as they see fit. Usually, incubators get into incubators with easily scalable ideas and realistic business models; other incubators are rejected.
Rules for negotiating
In order to receive investments it is necessary to conduct qualitative negotiations. Sometimes, an ingenious idea and a working business model do not require discussion, money is allocated quickly, but it is rare. More often, the team and the project are thoroughly studied during the negotiations. And at this point the main thing is not to screw up. To do this, you need to follow several important rules:
- Do not focus on the very fact of the investment and the amount needed. Talk more about profits and how to make them than about needs.
- Offer several business plans and business models that will be designed for different product developments.
- Get accurate answers to your questions. Ask when a person will decide if they need to discuss investments in your project with partners, and so on.
- Give preference to bold experienced investors who are ready to be the first to invest in your startup.
Attracting investment into a startup is always difficult, often ambiguous and sometimes even unpredictable. It's really difficult to give advice, but the ones outlined above will increase the project's chances of survival in an aggressive competitive environment. Investment optimism has reached its peak, and now is probably the best time for startups.