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The Nuts and Bolts of Startup Funding

Jack Byrne

When it comes to getting your tech startup off the ground, there are always good news and bad news. The good one is that if your idea is indeed as brilliant as you think, you have good chances to become a new Steve Jobs or Elon Musk and build a big company. But the bad news is that the road leading you to the business you dreamed of will likely be rocky and full of personal and entrepreneurial challenges.

 

To help you in this way, GBKSOFT decided to dedicate this article to one of the most tricky issues you probably faced right after the ingenious idea for a startup had rung your doorbell. As you may have already guessed, it's funding, since regardless of what exactly you envision as your future business, it's crucial to know how much money it will cost you.

Startup Funding (Startup Capital) — is the money needed to launch a new business. It can come from a variety of sources and can be used for any purpose that helps the startup go from idea to actual business.

The Startups Team

Let's start with a brief overview of typical startup costs.

How to calculate funds needed to start a business

To determine how much money you should collect for your startup, first, think about the costs you will incur during the initial stage, i.e. before your business brings you any profit. So what exactly do you need to open a business? There are many types of expenses you may have depending on your location, industry and future business activity, but here are some categories you most likely have to take into account:

Organizational expenses

These are all one-time costs related to the incorporation of your business. They may include state fees required for the registration of your company, receiving compulsory licenses/permits, hiring legal professionals, purchasing necessary equipment/furniture, designing a logo, etc.

Product expenses

This is probably the most significant part of your overall costs. It comprises expenses on the development of your digital product, as well as expenses on its launch (including costs on product promotion).

Ongoing expenses

Rent, utilities, taxes, salaries for your employees, payments for other services you plan to receive on a regular basis for at least the first 12 months after the launch must be also considered when calculating your initial startup capital.

The above list is, of course, non-exhaustive. To determine how much money you need to start a business, you have to conduct comprehensive research and define all other additional costs that may apply in your case. Lots of startups fail because their founders underestimate the amount of money they need at the beginning. To avoid this trap, we recommend you to assume that everything will cost more than you expect and some unforeseen issues will likely arise as well. So when you create a budget for your business, it's a good rule of thumb to consider a small "safety margin".

 

Tech startups

Innovative idea and amazing enthusiasm are usually not enough to open a business, you also need funding. Fortunately, you are not the first person on the planet trying to estimate startup costs and there is a lot of data available to help you make sound calculations. So let's dive right into the hard numbers.

You have probably heard that the average amount to start a small business may be as little as $3,000. However, this does not apply to technology startups.

Of course, if you are ready to go slowly and if you already have a viable product, you may try bootstrapping, meaning that you can start without external funding. Ben Chestnut and Dan Kurzius, founders of MailChimp, did this in 2001 and it took them about six years to turn their startup from a side project into a full-time business.

However, if you do not have a viable product and you aren't ready to wait that long, you need to be realistic. The minimum amount you must have to develop an application for your tech startup is about $50k, while the average costs for building a successful digital product range between $100k and $200k. Let's look at some examples:

  • Uber. The company was founded in March 2009 by Garrett Camp and Travis Kalanick who provided the first funding of $200k. The beta version was launched in May 2010 and then the company raised $1.3M to scale up quickly at the Angel round to further develop the app.
  • Dropbox. Dropbox is another tech start-up that is worth mentioning in the given context. The company was founded in 2007 and raised over $1.2M at the seed rounds in July and September of the same year. The service was officially launched in September 2008.
  • Coinbase. The third case is Coinbase, a platform for digital currency exchange. It was founded in June 2012 and in September the company raised $600K at the seed round. This was followed by the launch of the service in October of the same year. It took the company almost two years and over $30M to grow to 1 million users.

So if you still think that you may start and skyrocket your business with little or no money, throw your rose-colored glasses away and brace yourself for an adventurous funding journey. Let's talk about this in more detail.

Industries to invest in 2021

Online Education: according to the current situation all over the world, online education is definitely worth to invest. As most schools and universities go to remote online studying, there is an urgent need for more educational platforms where students and professors can keep in touch. Online education gives the ability to learn everything you want, find any required information on the web, and share it with your classmates or tutors. Also, it gives the opportunity to study for everyone despite age, gender, state of health, and level of knowledge. So there are more and more different educational services that simplify remote studying.

Chatbot service: Chatbot Services are implemented on most modern websites as human resources cant cope with this huge amount of customer information and their questions. This technology helps to provide an excellent customer experience. help the customer get quick responses. Investing in building a chatbot service can be really beneficial.

Delivery service have always been a popular way of earning as it is constantly actual and in demand. Due to quarantine conditions, many people started to use the services of delivering more actively. It can be anything – goods, food from cafes or restaurants, parcels, and many other things. There are a lot of things to improve in the quality of services – quicker delivery, a wider range of offers, discounts, 24\7 open, etc. This area has ways of improving and expanding, so it is worth to invest.

Healthcare: nowadays the healthcare industry is swiftly developing and implementing modern technologies to improve the quality of treatment. The medical apps, EHR systems, and other services are integrated into many medical facilities that help to track patients on the distance, define the right diagnosis, and suitable therapies.

How to get money for a startup

You may feel a little bit discouraged after reading the previous section, but don't be. There are a number of ways to seek money for your business.

Crowdfunding is a way to raise capital by collecting small amounts of money from many people. But don't be skeptical. There are numerous success stories about using this method to fund a startup. For example, Pebble, a company that developed the technology connecting smartwatches with smartphones via Bluetooth (BT), raised $7.41 million on a crowdfunding platform. If you also want to try your luck, go to such platforms as Kickstarter and Indiegogo — they are quite popular among startuppers.

 

An Angel investor is a person investing his/her own funds in startups in exchange for a share in a company. How to get such investors for your startup? Well, you can either try networking (ask your relatives, friends, other social connections for help) or use a relevant platform such as AngelList. Speaking about numbers, BorrowMyDoggy, a company that developed an application connecting dog owners with sitters, received about $2 million from angel investors in the UK.

Venture capital is perhaps the most "generous" way of funding, meaning that you can literally make a fortune if your pitch is successful. For example, Medium raised about $134M in total applying for funding to venture investors. The downside is that you have to share the control over your company with such investors.

Both Incubators and Accelerators are the short-term programs in which startuppers spend some time with mentors. Accelerators usually include seed investment but the main advantage for people who are just starting off is the opportunity to connect with a wide network of potential investors. The most famous startup accelerators are Y Combinator, Techstars, and the Brandery, while IdeaLab is one of the oldest incubators. Airbnb, Stripe, and Reddit, and many others successfully started their ways from accelerators.

Bootstrapping: it may seem ridiculous but it is one of the effective ways of raising funds for the startup. This type implies investing from your own savings or asking your family or friends to do it. Sometimes it is hard to convince investors of your success without having any strategy and business deals. So this type to raise money can suit anyway. At a later stage in the case of the successful launch, investors will pay more attention to the project.

Contest winning: nowadays there are a lot of various contests created for new entrepreneurs who have creative ideas for business and ready to make it real. Usually, to participate and win in such contests, the participants need to build a business plan and stages of its realization. The more unique it is, the more chance the idea has to win.

Bank loans: this way of raising funds is a risk but usually, banks have different kinds of loans suitable for different needs. Mainly there are two ways of getting money from bank – capital loan and funding. Each of them demands different conditions for startup companies.

Government programs: in some countries, local government provides grants for supporting local businesses.

How to Choose a Startup Idea?

Before you decide to launch your own business and choose a specific area, there is much work you need to be first. The main task is to make research in the industry you are going to invest in to find out whether it is worth and actual on the market. Also, it is crucial to choose the location, define local people's needs, what services or products they would like to use. The next and important step is to create a business plan considering all details and specifications of the chosen industry. To build a successful business strategy from scratch, you need to get a consultation with a Business Analyst who knows all the tiny details and pitfalls in all business areas.

Conclusion

You may have a brilliant idea for a startup, but if you want to launch it quickly and successfully, you also need money. The exact amount of funding you should have to get your business off the ground mainly depends on the cost required for your product to be developed. The minimum threshold for product development is about $50,000 while the average numbers are between $100,000 and $200,000. To raise the initial capital, you can use crowdfunding platforms, apply to angel investors or venture capitalists, or attend startup accelerators and incubators.

 

June 09, 2021 @ 10:33 AM EDT

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