February 19, 2018
Category: Business & Strategy
As a company with offices in two of the top U.S. cities for innovation (Boulder, CO and Austin, TX), we are regularly approached by potential clients who believe they have a great idea for an app, but don’t know how to raise funds needed for development. Perhaps you are in a similar situation.
Before we delve into resources they might consider to fund mobile app development, we like to remind them that more often an app idea fails for lack of business value than lack of funds. Rather than begin by developing a “fully featured” app with lots of functionality, we encourage them – and you – to build the simplest product they can and get it into the hands of consumers to prove its worth. Often called the Minimum Viable Product (MVP), the MVP offers the bare bones of functionality – just enough to show the concept, get feedback, and learn if your idea resonates with others.
Starting small not only enables you to refine your idea with limited dollars, it also provides valuable proof of concept to help you convince potential investors your idea is worth supporting.
That said, there are a variety of investment options you can pursue to raise funds for mobile app development. Some are more appropriate early in the process, and others later. Many would argue that entrepreneurs should put off securing funding as long as possible in order to build company value, thereby having a higher valuation before raising capital and diluting equity. Here’s an overview of some of the most common options:
Raise Funds via Bootstrapping
Bootstrapping is a metaphor that, in general, refers to the idea of bettering oneself without external help. In the context of start-ups, boot strappers are those who begin a business using only personal income, savings, and sweat equity. One could argue it’s the easiest way to raise funds for an app development project, in that you don’t need to convince external investors of the value of your proposal. It offers the significant benefit of unmatched control of the business, and complete equity in it.
Raise Funds via Family, Friends, and Colleagues
Friends and family are often great places to look for financial help early in the business development process. In fact, Fundable reports that, in aggregate, friends and family are largest investors in start-ups. They are typically investing in you, and are often less motivated by returns than other investors. That said, the potential for significant relational conflict is possible, should your idea not be successful. Be certain all investments are well documented and signed, as you would with any outside party.
Similarly, colleagues may also be interested in helping to fund your app development idea. This could be in the form of cash, or it could be sweat equity if they are familiar with the industry and able to offer relevant skills. Again, even though you have a pre-existing relationship, it’s important to draw up legal documents about what’s expected from all parties.
Raise Funds via Loans & Grants
If you have a promising mobile app idea and a compelling plan, it’s possible to obtain a loan from a bank. Rates will be higher than what you would pay for a mortgage, but you will not be asked to give a share of equity in your company.
In some situations, it could be worth exploring the possibility of grants from governments, businesses, or educational institutions. The Small Business Innovation Research (SBIR) program seeks to foster innovation in the technology space, and you may find that your goals align with government R&D priorities. These monies will typically come with some sort of strings attached, but it may be a tie that you are willing to have.
Raise Funds via Crowdfunding
Crowdfunding relies on contributions and support from your personal and professional networks. There are a number of different sites like Fundable, Crowdfunder, and Kickstarter, all of which enable you to try to tap a broad number of investors for start-up capital for your app idea. Some platforms are geared toward reaching the general population, while others tie you into networks of angel investors and venture capitalists. Most have helpful learning guides that walk you through the process of how to raise funds. Social media outreach is a must for success, so the earlier you begin curating a network, the better.
Raise Funds via Business Incubators & Accelerators
Business incubators don’t typically invest financially in start-ups, but they can help to make some great connections to capital. They can be invaluable in the start-up phase with everything from skill development to consulting to affordable work space. Incubators are often non-profit, and are run by both public and private institutions.
Accelerators offer even more robust training, typically in a concentrated boot camp style format. At the end of the training time, the start-up participants pitch their concept to investors, hoping to win funding. Investment amounts vary, but the accelerators typically expect an equity stake of 6-7%. Some well-known accelerators include Y-Combinator and TechStars.
Raise Funds via Angel Investors
An angel investor is a high net worth individual who is investing their own money in opportunities they believe look promising. Angels are often good sources for income once your mobile app idea has been proven to have some potential (e.g. through some successful beta testing). An individual’s investment obviously varies, but rarely exceeds a few hundred thousand dollars. Many are successful entrepreneurs themselves, and can be great mentors in addition fo financial backers. Since they are investing at a time where there is still significant risk, angel investors may look for returns in the neighborhood of 20-30%.
Raise Funds via Venture Capitalists
While Venture Capitalists (VCs) and angel investors are often looking for the similar things, VCs are typically formed as Limited Partnerships where the partners are investing in the Venture Capital fund. The fund appoints a manager, whose job is to find the opportunities they believe will return the most money. VCs are more likely to enter in after the concept has been proven, helping grow the company and develop market share. Their investment is regularly on the order of millions of dollars, and they stay actively involved until a company is ready to go public or be acquired. Their resources are significant, but they’re offered in exchange for some control of the business and ownership debt equity in the future.
While this list is undoubtedly incomplete, we hope this compilation of potential ways to fund your app development idea has given you hope that it’s possible! If you have an idea that you’d like to discuss, please drop us a line.
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