May 16, 2015
You’ve got a great tech idea; one that you think tons of people could use in their everyday lives. You want to launch your own tech startup but, first, you’ll need to raise the capital to turn your entrepreneurial dream into a reality.
Fortunately, you have numerous options. Which option you select is dependent on your tolerance for risk, how much control of your company you’re willing to relinquish and your financial projections.
Here are six ways that you can raise money for your tech startup:
Consider Incubator Funding
There are numerous incubator programs like 500 Startups, TechStars or Y Combinator. If you can get your startup into one of those programs, you’ll not only get some up-front cash, but you’ll also receive invaluable guidance from more experienced people. That’s a win-win for everybody.
Also, incubator programs give you the option to network with other people and forge business alliances that could turn out to be very lucrative in the long run.
Use Preferred Stock
Preferred stock is an excellent way for startups to raise capital. That’s because preferred shareholders have a priority when it comes to the financial obligations of the company, but no voting rights. In other words: They get their money, you keep control. Everybody wins.
Keep It in the Family
Even if you have an outstanding business model, there’s an old saying among venture capitalists and angel investors: “Bet the jockey, not the horse.” By that, they mean that they’d rather invest their money in a company run by an entrepreneur with a proven track record as opposed to a greenhorn with a great idea.
If you’re one of those people with great idea but not much experience or history in business, you’ll likely find that it’s best to turn to friends and family and ask for a loan. They’re the people who already know you very well, after all.
Issue Convertible Debt
What do new shareholders of a successful company really hate? Dilution.
Dilution occurs when investors buy into a company in exchange for a certain number of shares of stock. Then, the entrepreneur running the company decides that more capital is needed and issues more stock. What happens then? The number of shares increases, so the existing shares drop in value.
You won’t have happy investors if you do that.
One solution to that possibility is to issue convertible debt. That’s when the investor essentially “loans” the company money, but the note for the loan is converted into equity at some future point in time. The conversion occurs at a discount to the next funding round, so the “lenders” have protected themselves against dilution.
Meet the Sharks
No, you don’t have to literally appear on Shark Tank, but you will have to present your idea to investors who will scrutinize your background and your business model. You do that by seeking venture capital.
There are numerous venture capital firms all over the country that will listen to your pitch, but it’s strongly advised that you know what you’re getting into before you appear before them. That’s why it’s a good idea for budding entrepreneurs to watch Shark Tank because they’ll likely be subject to the same level of cross-examination that’s seen on that show.
Crowdsource Your Capital
If your tech idea involves making the world a better place in some way, you could go with a fundraising platform like Front Stream, which specializes in philanthropic money-raising (Kickstarter does not allow projects that focus on charitable giving).
Likewise, RocketHub is a well-known crowdsourcing platform that’s become popular in a variety of business niches, including technological ones.
You’re on the verge of fulfilling your dream of turning your tech startup ideas into a real, functional business. Make sure you secure the capital necessary to launch and run that business to long-term profitability.
How did you raise money for your startup? Tell us about your experiences in the comments section below!
Image by Luke Chesser
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