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How to raise investment for your digital startup

Despite what people may tell you, blood, sweat and tears alone is not enough to successfully take a business to market.

You need money – often, a lot of it.

Even the initial startup capital for Amazon (somewhere in the region of $250,000) came from Jeff Bezos’ parents’ personal savings.

You can have the best idea in the world, but if you don’t have the financial backing to execute your idea, it will remain just that – an idea.

Placing idealism to one side for a minute, you need money to get the business off the ground, cover the cost of hiring the right people, and promote your business against much more established market competitors.

These pressures are heightened in the case of a digital startup.

Not only will you have to spend to compete with businesses trying to become the next Facebook or Spotify, but you’ll need to spend some serious money to even get into the building – let alone find a seat at the table.

Without funding, a business that’s barely out of the starting blocks can find itself in financial disarray. It can leave owners draining all of their personal savings and a business crashing before it’s even taken flight.

Here are 6B’s tips on how to raise investment for your digital startup.

It pays to be disruptive

When talking about startup businesses, the word ‘disruptive’ can feel like a bit of a buzzword (comparable to the word ‘organic’ on food packaging).

Yes, investors are on the lookout for the next big thing, and often, whether or not a startup is truly disruptive will be a good indicator of whether or not they should invest. But for startups that aren’t in the mould of Airbnb or Uber, this can feel like an unattainable goal.

What’s key to remember is that both of those companies were once startups. What they did and how they positioned themselves in the marketplace made them disruptors.

For a digital company to qualify as disruptive, they need to change societal norms. When the norms of society are changed, so too do the behaviours society deems appropriate. Whether that’s sleeping in a stranger’s bed or getting into a car driven by a stranger.

Once these norms are adopted, it’s hard to imagine what life was like before they existed. The thought of booking a hotel or flagging down a taxi seem alien to us now.

To establish whether or not your business is disruptive, ask yourself these three questions:

  • Is it solving a problem people have?
  • Is it better than what’s already out there?
  • Is it cheaper than what’s already out there?

Pull your business up by your bootstraps

Investors are notoriously risk-averse, and they know how to spot a risky startup venture from a mile away.

If an investor doubts the return they’ll make by investing in your startup, then you’ll see them running for the hills. The more at ease your company can make them feel, the greater the chance that they’ll invest in your business.

An effective way of doing this is bootstrapping. This is the process of starting your business from scratch without attracting investment or with minimal external capital. You purchase and use resources at your own expense, without giving away equity or borrowing large sums of money from banks.

Bootstrapping will help convince investors for two reasons; firstly, it proves that you’re committed to your business and when push came to shove, you were willing to back yourself and your idea financially. Secondly, it shows that you’re responsible with money and can get things up and running on a relatively small budget.

But bootstrapping goes far beyond being savvy with money. It’s about what you can achieve with limited resources. Instead of throwing money at your startup business (because let’s face it, anyone with a big bank account can do the same), what can you achieve without money?

How resourceful can you be? What relationships can you leverage to help promote your brand? The more you can do without an investor, the more appealing your startup will become to one.

Investors have deep pockets and the business acumen to take you to where you want to go, but you have to show you were already travelling in that direction before they get on board.

Give away a piece of the pie

Dragons’ Den is a TV show that we’re all familiar with, and it emphasises the value of bringing in a well-informed and connected investor from the beginning in exchange for equity in your startup.

As a digital startup, you’ve backed your business from the start and have taken a leap of faith in trying to make your startup successful. But as your business grows, so too does the need for additional finance.

Simply put, equity financing allows you to sell shares of your company in order to raise capital. Although you’ll be relinquishing full control of your company, it provides your company with the cash it needs to grow at no immediate cost and you won’t have to pay monthly interest on repayments.

An equity investor can also bring a wealth of knowledge to your business, along with decades of experience and a string of useful contacts to help your startup grow. This won’t be the first startup they’ve invested in and as such they’ll know how to identify common problems and how to resolve them quickly.

It all sounds pretty good, right? Well, yes and no.

While equity financing is one of the more popular ways of raising capital for startups, it does have its drawbacks.

Equity finance is cheap and if your business plan stands up, it’s relatively accessible. However, as time goes on and your business expands, the value your investor provides doesn’t always match what they paid, as they receive bigger profits for the same initial investment.

The more the merrier

Rather than placing all your eggs in one basket with a single investor, you could always turn to online crowdfunding platforms. This way you won’t give up any of your company shares before your business has had the chance to reach heights you couldn’t have imagined when you were just starting out.

Typically, crowdfunding websites will charge a commission fee by way of a percentage of the total funds raised, a fee for successful transactions or a subscription fee.

Kickstarter is an example of one such website and it has a vast community that will help your startup idea be seen by as many people as possible. They run on an ‘all or nothing’ principle, meaning that they will only take their 5% commission if the full target is reached. If you fail to reach your total sum then backers will be reimbursed.

Depending on the type of crowdfunding you choose to go for, people can donate without expecting anything in return, or you can install a rewards-based programme. On Kickstarter, potential investors will expect to see something for their money.

Rewards can vary but you should think about offering something exclusive related to your business. Discount codes, free trials, free subscriptions to membership services and access to your products are all great ways to convince people to part with their cash and secure the investment your startup needs.

Does your startup need help raising capital?

 

As a company that started out in need of financial backing to grow, 6B knows just how important securing the right investment is to ensure your business doesn’t fall at the first hurdle.

 

If you’d like to speak to us about strategies you can put in place to get your startup off the ground and running, talk to us today!

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