How to attract investment in a startup

2024 Author: Malcolm Clapton | [email protected]. Last modified: 2023-12-17 03:44

Where to look for money to implement the idea, what tools to use for this, and how to negotiate so that the solution turns out to be in your favor.

Any startup needs money like it does in the air. In the early stages, attracting investment is the biggest headache of all startups. Usually no one wants to believe 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 the situation in the IT investment market. Thus, we strive to make it easier for those who have already decided to try their luck in the struggle for the "long dollar" of investors.

Features of the IT investment market

Today it is difficult to come up with an epithet to describe the situation in the IT investment market. It can be called super-friendly for startups. But even that will not sufficiently reflect investor optimism about IT innovation.

Investment volumes are breaking records

Until recently, investments in the region of $ 50,000 to $ 500,000 were considered common for seed rounds. Today, the average seed rounds are estimated at $ 1-2 million. Sometimes they go up to $ 5 million, and this is not considered the limit. The volume of investments in the letter rounds break records every month.

High demands on the team

Investors' optimism is not shared by all teams, since with the growth of investment volumes, the requirements for companies also increase. The competencies of teams with no history and no reputation are especially taken seriously. It's no secret that the vast majority of startups are in this category.

A characteristic feature of modern investors is that they invest to a greater extent not in an idea or a business model, but in people who will implement the idea and use its monetization schemes.

Investors always pay attention to metrics and formal indicators of growth, which is a very serious problem and many times over complicates the tasks for money seekers.

Capitalization growth of projects

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, capitalization is growing astronomically, but sometimes there is nothing behind it.

Even 10-15 years ago, the capitalization of IT companies was reflected in real numbers, such as the volume of profits and the size of the audience. Today, many people simply overestimate the indicators in order to attract the next round. As a result, bubbles naturally burst after periods of prolonged, regular, often violent, but formal growth.

Sometimes expertise helps, but this measure also makes raising money even more complicated and bureaucratic.

Investors

Today it is easier to name those who do not invest in startups. Investing in innovative projects has become almost a good form. 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 medium business angels, banks, fintech organizations.

There are also such forms of investment as crowdfunding and crowdinvesting. These tools involve investing at the expense of future users of the product. Works well with games and gadget development.

There are known examples of large personal investments in startups. For example, WhatsApp co-founder Brian Acton invested $ 50 million in the Signal messenger.

Another common source of money for startups at the idea stage are investors from the FFF group (Family, Friends, Freaks - family, friends and madmen). It is known that many successful startups received their first investments from this very source.

Ways to attract investment

IPO

A reliable and traditional tool for attracting money to an IT project is the placement of shares on the stock exchange, that is, an IPO. To conduct an IPO, for example, in the United States, it is necessary to beat the thresholds of such organizations as the CES (Securities Commission) for a long time, become a joint stock company, and then find a couple of million dollars for an advertising campaign.

It is believed that an IPO is suitable for mature projects, but for startups it may not be effective enough. At the same time, Google at one time denied this statement.

ICO, or token sale

ICO, or token sale, is often used as an alternative to the placement of shares. With a token sale, money is raised by selling your own cryptocurrency. It is believed that for the US and the European Union, the cost of an effective ICO is equivalent to $ 500,000. This amount will help resolve the issue of advertising and legal registration of the public sale of cryptoassets.

In the early stages, crowdfunding (crowdinvesting) can help. Platforms like Kickstarter are suitable for fundraising. Future users are dumped by the developer on "trouser support" during the preparation of the product for launching to the market, and he, in turn, undertakes to transfer the result of his labor to them, and in the case of crowdinvesting, also to share the profit.

These forms are good at low cost. For Kickstarter, it is enough to write a short summary of the project, post a few photos and a promo video, show the team. The platform will do the rest. Recently, journalists of large media have shown interest in projects on Kickstarter, which helps many people to solve the advertising issue at no cost.

Startup incubators

Incubators (accelerators) occupy a special place among the tools for attracting investments. They are looking for startups themselves and investing in them. Projects do their homework and undergo acceleration, automatically falling into the focus of large investors.

The most reputable incubators are 500 Startups and Y Combinator, investors trust them and quite easily invest in projects that have been accelerated there.

The volume of start-up investments in the incubator is from $ 150,000. For this, he receives a 7 percent stake in the company. Part of the money is charged for training, and the rest is spent by startups as they see fit. Typically, incubators come with highly scalable ideas and realistic business models, while others are rejected.

Negotiation rules

To obtain investments, it is necessary to conduct high-quality negotiations. It happens that a brilliant idea and a working business model do not require discussion, money is allocated quickly, but this is a rarity. More often than not, a thorough study of the team and the project occurs during negotiations. And at this moment, the main thing is not to screw it up. To do this, you need to follow several important rules:

1. Do not focus on the fact of the investment and the amount required. Talk more about profits and how to get them than about needs.
2. Provide multiple business plans and business models to accommodate different product developments.
3. Get accurate answers to your questions. Ask when the person will decide whether he needs to discuss investments in your project with partners, and so on.
4. Choose the bold, experienced investor who is ready to be the first to invest in your startup.

Outcome

Attracting investment in a startup is always difficult, often ambiguous and sometimes generally unpredictable. It is really difficult to give advice here, but the ones outlined above will increase the project's chances of surviving in an aggressive competitive environment. Investment optimism has peaked, and now is perhaps the best time for startups.