5 Common Funding Challenges Faced By Tech Start-Up

When launching a tech startup, one needs to have an innovative product and business model. However, having all these doesn’t guarantee success if you don’t have a reliable source of funds. According to statistics, a significant number of startups fail within the first year of inception. This is mainly because of a lack of funds or administrative issues.

As a startup, you need to have a reliable source of funds to enable you to hire personnel, work on your product and establish a robust marketing strategy. However, there are common funding challenges experienced by tech startups. Here are some of those challenges and how you can overcome them.

1. Identifying an Appropriate Funding Option

As stated before, most startups find it challenging to find an appropriate source of funding. There are multiple funding options every startup can use to keep the business afloat. These include;

Self-funding– this is where you use your own funding or borrow from family and friends to fund your startup. This option gives you access to flexible investment terms. Using these finds, you can run the business till it starts to earn a profit before starting to pay off.

Credit cards– those with credit cards can take advantage of their limits to fund their startups. Keep in mind that this is an expensive option and may attract huge interest rates.

Venture capital– this source often invests more than $2 million in startups. Aside from financial assistance, you can also find valuable guidance that helps you streamline your operations and run your business smoothly. This is one of the most viable tech startup funding options.

Angel Investors– the Angel investors provide you with flexible terms against your startup equity. They can invest up to $1 million in your tech startup in most cases.

Bank loans are also one of the best ways to find funding for your startup and overcome your funding challenges.

2. Determining the Amount Needed

Another challenge often faced by startups is determining the actual amount needed to kick off the business. This can greatly affect the funding phase since most investors or banks need you to come up with a specific figure. It is not in your best interest to raise funds through loans without having a clear figure in mind; you may end up paying for too much interest. To avoid this, you should;

Be specific- investors and banks are more willing to invest in a startup that has the potential of generating profits. You need to be clear and show them where the money will be invested and how it will bring in revenue. It may be a good idea in this instance to look into using a financial model excel template, so that you can draft financial projections in an efficient manner.

Have a business plan- this is vital in determining the specific amount you need and how the money will be spent. The plan should also include a realistic financial forecast.

Demonstrate positive cash flow– displaying a positive cash flow can help you secure the funding you need, especially when you are looking to expand. Come up with the amount needed for production, marketing, automation recruiting, and training.

3. Developing a Scalable Business Model

Without previous background knowledge, a startup can find it difficult to come up with a scalable business model. This affects their chances of securing venture capital or getting investors to inject resources. As a tech startup, your business goes beyond your idea into a business. You need to come up with a scalable business idea. Most people tend to focus their research on what their competitor is doing. However, it’s in your best interest to come up with a unique model that works towards desired results.

The model should indicate your growth; this way, you can overcome your funding challenges. To look more attractive, you may want to consider incorporating some of the latest software and automated process.

4. Spending Wisely When Funded

Startups are often faced with the challenge of spending their funds wisely. However, you need to be accountable to the investors and do exactly as you said you would with the funds. There are often the temptations to spend some of the funds on various activities; however, this will come back to bite you in the future. Spend wisely on supplies and other things you need to keep the business running. You should also keep the investor in the know on how their money is being spent. This way, you can boost their confidence in you, making it easy for them to consider you for future funding.

5. Cap table Construct

At the initial stages of the startup, the founders own a 100% stake in the company. However, by bringing in investors, this stake is diluted. Most startups fail to understand the importance of dilution and how to go about it to bring in more investors. As you bring in new investors to the cap table, your stake in the startup becomes diluted. To protect yourself, you need to raise the value of the venture to maintain control over your startup.

Most starts are faced with various funding challenges. However, looking at some possible ways to overcome these challenges can help them run and launch successful startups.