Investment for a Tech Startup: How to Get Funding For App Development

Mobile app startup funding can be challenging. Many startup ideas fail because founders can't pitch them to investors right. In order to build a high-quality and popular software product, it’s critical to consider the startup funding sources in advance to analyze all pros and cons.

Read this guide to know how to get funding for app development, what stages you have to go through, and the most popular business financing sources, including venture capital firms and angel investors.

First and foremost, you can’t just come and get money. You need to go through several phases called rounds to prove that your idea deserves investment. Each funding round is made to accumulate enough capital to grow the startup and can take from 3 months to a year. Let’s discuss the core stages of startup fundraising.

Pre-seed stage

Founders try to give their idea a push and begin to develop the startups relying on their own money. Here are the proven ways on how to get funding for app development at the idea stage:

1. Look for a reliable co-founder to launch a startup
2. Start a crowdfunding campaign
3. Raise funds on your own website
4. Take part in funding contests
5. Focus on angel investing at the early stages

Seed stage

Seed funding implies attracting so-called angel investors to mobile app startup funding. The sum needed is relatively modest to cover the critical business needs such as business plan, team recruitment, rent, production start, etc.

Series A

Series A aims to attract third-party investors for further growth. This stage implies that you have a tested business model, decent client base, and are already making money. Typically, business owners deal with venture capital firms that ask startups to demonstrate real data and progress obtained from earlier investment rounds.

Series B

Series B is connected with tech startups scaling and turning them into enterprises. You’ve already proved the business viability and now focus on entering new markets.

Series C

This stage demands even more considerable results from you. Your business is estimated at $100+ million, and you’re looking to get equal funding.

IPO

Initial public offering (IPO) is the final stop of startups’ existence. It’s about selling a private company’s shares to the public. IPO provides excellent funding opportunities along with a new level of transparency.

Startup fundraising requires a lot of time and thoughtful business strategy. However, understanding each funding round will allow you to overcome startups that wait for any investment passing by.

As a tech startup founder, you should be aware of the primary financial sources before raising the money. So let’s take a look at the main ones.

Crowdfunding implies that you can raise money using specific platforms like Kickstarter or Indiegogo (you can also think out how to create investment platform like these ones). In other words, users “pre-order” your digital product before actual development. Once money is raised, you can start building the software. The main drawback of this method is that there is a risk of the ideas stealing. But, it’s a great way to launch the startup fast.

Business Incubators are the organizations that serve as mentors for early-stage startups. Apart from seed capital providing, they organize lectures, business meetings and share insights with startup owners. Moreover, they introduce you to VC firms over time. However, the competition among applicants is high, and it takes some time to help startups to establish solid business connections.

Bank loans are focused on financing short-term operations. Financial institutions offer various kinds of loans to provide startups with complete control over their business activity. However, this option requires tons of documentation and standards compliance in addition to an elaborate business plan.

Venture Capital or VC is a form of business investment, especially digital one (e.g., mobile app startup funding). It’s based on collective investment on behalf of a group of organizations that entrusted their money to this fund. A venture capitalist is a representative who controls fund money and who invests this money into reliable projects. VCs cooperate only with startups that have a great plan, a dedicated team, and already generate profits.

Angel investors are the individuals that submit funds to different startups, even risky ones. They watch for potential IT unicorns and guide your business to compensate for the risk. Angel investors assess whether your product meets market needs, as well as the technical team and initial clients. But before contacting angel investors, ensure you have a stunning presentation, perfect business plan, and proof of the project's idea viability.

As you’ve noticed, we described several types of startup funding sources. The question is, what option to choose? Today, venture capital and angel investing are the most demanded financial sources applied by successful tech startups such as Facebook, Twitter, Airbnb, and Snowflake.

The following two paragraphs are dedicated to these two fundraising options, so keep reading to know all the peculiarities of both options, including their differences.

As was mentioned earlier, venture capitalist deals with startups that have the potential to reshape the markets and grow very fast. The money deployed by a VC firm usually comes from institutional investors, corporations, insurance companies, or wealthy individuals willing to make serious investments. So a VC firm is a partnership: there is a group of people who decide whether or not a company is going to be financed.

It’s worth noting that venture money is relatively short-term money. The idea is that the VC firm invests in the startup, waits for the company’s growth, and sells its equity stake for a profit. In essence, the venture capitalist purchases a stake in a business idea, helps you scale existing offering for a short period, and then gets off with the help of an investment banker.

The core feature of VC firms is high-quality deal flow. It's based on thoroughgoing business analysis, allowing venture capitalists to decide which opportunities are worthy of investment easily. The downside for business owners is that such type of app startup funding implies participation in decision-making in addition to a portion of the equity.

Now, let’s consider how startups can benefit from venture capital financing.

Expertise. Venture capital is a team of professionals with extensive knowledge. They have experience in creating and scaling startups, solving business challenges, and analyzing financial performance.

Networking opportunities. When you’re focused on startup development, there is no time to network with entrepreneurs that can contribute to your business growth. Instead, venture capitalists spend 50% of their time expanding their networks and can help you establish strategic business connections at the enterprise level.

Improved public perception. VC firms improve a startup's reputation due to the credibility established. It contributes to increased business appraisal and simplifying fundraising from other investors, especially if the venture capital fund is a well-known brand.

Managing risks. Experienced venture capitalists hedge their interest rates risks and prefer to syndicate their investment with other trustworthy VC firms and enter deals if they are invited to join reliable syndicates.

Due diligence. Venture capital firms enroll experts with an in-depth understanding of the rules of the business game. Long-standing experience based on a cut-and-try approach backed with well-developed market instincts proves VC firms' advantage over other market participants.

Commonly, the angel investor is one person who is willing to fund your startup. However, often angel investors form groups, where individuals invest as a syndicate. These people usually don’t invest a lot of money since they rely on their own capital. Thus, it’s better to reach angel investors at the initial stages.

Most angel investors are accredited, though there are exceptions. Accredited investors must comply with two following criteria determined by the Securities Exchange Commission (SEC):

• Individuals with annual earnings exceeding $200,000 for the past two years with the rational expectation of the same gross income in the near future. If the angel investor files taxes jointly with their partners, the needed annual income rises to $300,000.
• Individual net worth, or joint net worth with that person's partner, must exceed $1 million (regardless of the person's primary residence).

As the two most popular sources of startup financing, venture capitalists and angel investors have some similarities. They both cater to innovative business ideas and prefer dealing with technology companies. However, there are critical differences you should look at to comprehend all the peculiarities of mobile app startup funding.

Investment amounts

Another difference is the amount of business capital both sides are willing to invest. VC firms cater to deals in millions since they invest money pooled from multiple corporations. Generally, angel investors can’t manage big sums because they invest their own capital. For example, the average venture capital deal for enterprise tech rounds is about $27,7 million. In contrast, angel investment varies between $15,000 and $250,000.

Return on investment

Venture capital firms regularly engage in investment activities, and they expect a higher return on investment (ROI) than angel investors. Venture capitalists' returns range between 25% and 40%. Angel investors want 20% to 25% ROI.

Due diligence

Some angel investors do very little due diligence. It’s because they give their own money, and they shouldn’t be accountable to other investors. VC firms have to do more due diligence because of fiduciary responsibility to partner companies. Venture capitalists can spend a lot of money when it comes to startup analyzing or market research.

Role in the business

Both investors want to have business equity to ensure they get a high ROI. But angel investors often aim for total control over the startup, unlike the VC firms that might just ask you to initiate a Board of Directors and give them a seat on it.

Motivations

Angel investors are more outgoing and emotional. They are ready to invest in risky projects based only on the product's vision and its prototype. Besides, angel investors practice a personal approach, are ready to spend a lot of time working with founders, and strongly believe in the startup company.

Venture capitalists, on the other hand, are cynical and don’t believe unsubstantiated facts, as a rule. They tend to explore the business from all angles and calculate all the risks. As a result, VC firms invest only in solid reliable projects, holding a competitive advantage and a talented team.

Angel investors might be one of the critical figures you will go after when it comes to really needing capital for startup development. So let’s consider all the pros and cons of angel investing.

Benefits of Angel Investing:

• When you try to understand how to get funding for app development, it’s challenging to find the point to start with. Typically, angel investors seek to help not only funding but provide support and business advice. They can make introductions around potential other investors, around distribution and business development.

• Angel investors prefer dealing with a small number of startups to be entirely involved in the process and establish strong trust relationships with founders.

• Angel investors assume great risks making decisions based on emotion which is quite beneficial for early startups. That is because most “angels” have already experienced developing startups themselves, know all the possible risks, and are ready to take them on.

• Taking out a bank loan implies that you’re obligated to repay it regardless of venture success or failure. Another principle guides Angel investors. They offer you the capital needed to build a startup, and in exchange, they get an ownership stake in your enterprise. If the business takes off, you’ll both receive a financial gain. If the venture fails, the investors won’t expect you to pay the money back.

Drawbacks of Angel Investing:

• Angel investors often exit the startup fast. If a startup grows and founders can repurchase its share, it can be an advantage. Otherwise, it may risk the loss of the startup's credibility of the other investors.

• Angel investors often provide startups with unrealistic estimates (both understated and overpriced), which may be quite confusing for business owners. Ownership equity in the business should be specified. However, the Simple Agreement for Future Equity (SAFE) introduced by Y-Combinator (startup accelerator) allows for managing this issue.

• In some cases, angel investors take such a large share in a business that founders lose control over their venture and drop their value for VC firms. It’s especially harmful to startups at the early stages. Even if they give you more freedom, you will still need to explain the reasons behind some of your decisions. Before starting cooperation with angel investors, ensure you’re at ease with involving somebody unfamiliar with your business in making critical company decisions.

Before addressing investors, it’s vital to have a clickable prototype to ensure everyone that your startup is worth money. So the first funding round is needed for MVP (minimum viable product) development to release the product fast, collect initial feedback, and get investments for further development. A working, well-balanced website or an app makes stakeholders trust you more.

Let’s move on through the steps you should follow to build a minimum viable product.

First of all, you need to conduct market research to ensure that your product will be interesting and useful for users. You can use one of the platforms that provide paid surveys (e.g.,Toluna) and scrutinize your main competitors to see how they create MVP products and learn from their experience.

To understand how to make an MVP, you need to define customers’ problems and whether your product can solve them. For instance, Airbnb is a response to expensive hotel rooms, BlaBlaCar provides flexible routes and schedules. After defining the users’ pain points and their solutions, you can create an MVP version of your software.

Before looking for a tech partner, prepare a list of desired features for your future application. Then, leave the components that will be critical for making a minimum viable product concept. MVP implies that you don’t need to implement complicated functionality and trendy design.

After defining the requirements, start looking for a reliable tech partner with confirmed expertise in the field you need. When choosing an IT vendor, consider the number of successful projects, their complexity, what technologies were applied during the development processes, and the clients’ reviews.

After all app elements are defined, you can start developing your MVP product. It shouldn’t be features overloaded. Instead, focus on creating qualitative and concise software. The software development process itself consist of the following stages:

1. Discovery phase. Business analysts make a project specification that details each feature and tech aspect. Designers create wireframes for each app screen. Both processes go simultaneously.

2. UI/UX design. UI/UX designers create an app’s prototype (screen by screen) based on the wireframes approved on the previous stage.

3. Development process. Software engineers convert mockups into a working product using the appropriate tech stack.

4. Quality assurance. QA engineers conduct thorough testing of all functionality implemented to ensure the product is bug-free and work as expected.

5. Release. Developers transfer the product to the client with all the project materials.

Once your product is ready, it’s time to demonstrate it to stakeholders. It’s vital to run beta testing before a meeting with investors to avoid failure at the beginning. You should also test your app on a real audience and make improvements based on users’ feedback. Once getting an initial investment, you can develop more advanced features.

It’s essential to properly plan the software development budget to develop successful digital product and attract investors. This way, you’ll understand what expenses can be cut on and what not. Here are several tips on how to identify your budget for building an application.

Select a platform

The choice of a platform is a significant factor influencing the budget to create an app. The bill will differ whether you decide to create an app for just one or several platforms.

Estimate your app's features

The functionality you want to add to your application directly affects the final software development budget. Thus, it’s vital to create a list of features that should be implemented to plan the final app development budget accurately. In addition, it will allow you to figure out what customers’ problems your product is determined to solve and come helpful when discussing the project’s details with your team.

Evaluate your profit and set goals

Before diving into product development, it’s critical to determine clear revenue goals. It will help you understand how much time it requires to pay off the expenses when you can reinvest into adding advanced features and the appropriateness of further investments.

Find the right team

Finally, you need to find a reliable vendor who will help you build a sought-after software to attract first investors. At early stages, it may be unfeasible to assemble an in-house team. You’ll need to take care of rent and provide your employees with a sufficient salary.

The best way is to outsource software development to one of the popular outsourcing destinations. Experienced outsourced app developers charge less than in-house ones but still guarantee high performance for your software solution.

As you can see, the rates are different across the globe, ranging from $100-175 per hour in the USA and Western Europe to $25-45 per hour in Africa. Central Europe seems to be a golden mean charging $25-50 hourly while providing a high level of competency. There are many reliable software development companies that can deliver custom software solutions for a reasonable price.

Cleveroad is a software development company located in one of the most popular outsourcing destinations — Central Europe, Estonia. Since 2011, we have been helping startups to deliver unique digital solutions in various domains.

Our team has thorough expertise in building MVP projects, the Discovery phase, providing CTO as a service, etc. Our MVP development services will allow you to stand out from idea-only startups and get noticed by applying to investors with a working product.

Each of our cases is unique, and we adapt to the client's financial capabilities thanks to flexible cooperation models. For instance, there is a Fixed price cooperation model. This approach implies a fixed scope of work, detailed estimations, well-defined requirements, and strict deadlines. The following benefits of Fix Priced cooperation are:

• Transparency. All requirements are discussed and estimated beforehand.
• Flexibility. Even though this model leaves no room for changes, if you need to, we put it on the list of 'out-of-scope tasks' and perform these tasks after we finish the confirmed scope.
• Cost-effectiveness. It’s a great option if you’re on tight or fixed budgets and want to test idea viability without investing a lot of money.

The fundraising process is long and tiring. Feel free to contact our team if you want to impress your investors with a high-class prototype or if you are ready to entrust us with the whole project.