Funding Big Ideas – Tech Startups Require Alternative Financing Options

Tech startups built Silicon Valley, and they have generated a multi-trillion dollar industry with far-reaching implications. The tech mega giants of the world include Facebook, Alphabet Inc., Twitter, Yahoo!, Microsoft, Alibaba, Amazon, and others. The market capitalization of these companies routinely runs up into 12digits, and many of these companies experience tremendous growth potential once they are up and running.

One of the biggest problems for entrepreneurs seeking to get involved in tech startups is funding. Startup loans from banks or other financial institutions are typically the only method available to these companies. Unfortunately, it can take a long time for these tech companies to become profitable, and many of them endure considerable losses every year. For profits to be generated with high-tech companies, it is imperative to build a team of investors, massive audiences, and generate impressive growth figures.

Pros and cons of funding options for tech startups

Owing to the difficulty in acquiring the necessary seed capital for a tech startup, many entrepreneurs use their own funds to get the product to market. This is known as bootstrapping. This hands-on approach is characterized by utilizing audience feedback to improve and refine the product offering to ensure that it is acceptable to audiences. If profits are generated, they can be plowed back into product development. This is a popular method of funding startups, and it allows for greater efficiency and hands-on experience. Once the tech startup is up and running, the growing customer base can be used as leverage to acquire funding over the long-term.

Naturally, the biggest downside to using personal resources is the inherent risk. Sacrifices will have to be made and there’s certainly limited wiggle room with limited funds. Tech startups that have received the green light for investment from banks and other financial institutions are typically not constrained, and the owner/entrepreneur will not have to quit his/her day job to see the project through to completion. Tech products and services that require significant investment are not ideally suited to the bootstrapping funding method.

Crowdfunding as an investment option

There are 2 types of crowdfunding available – reward-based and equity-based crowdfunding. With equity-based crowdfunding, investors will pledge money to the business and then they will receive a stake in it. With reward-based crowdfunding, people will pledge capital to the business and then receive a reward for it. Since tech businesses do not have any tangible products, it may appear difficult to generate reward-based crowdfunding. For entrepreneurs seeking this avenue of investment, it may be worth noting that there are options available. For example, the investors could be given early access to the tech platform, or be able to use some of the VIP features.

The benefits of using reward-based crowdfunding is that the tech entrepreneur retains control over the company. However, with equity-based crowdfunding, parts of the company are given away to investors who now have a stake in it. On the plus side, the tech entrepreneur can control exactly what percentage of the company has outside influence. On the flipside, crowdfunding is a time-consuming undertaking. It requires monumental effort, and if the startup does not reach its objectives, the business will suffer.

Applying for loans for investment purposes

The process of applying for loans will vary from one business to the next. There are many different types of loans that are available in the market, including short-term loans with a maximum loan amount of $250,000 and a minimum loan amount of $2,500. These loans typically come with terms of 3 months – 18 months. Interest rates hover around 10% on the low end and can rise significantly higher depending on the lender. Fortunately, entrepreneurs would be able to access these types of loans in as little as 1 day. The pros of short-term loans include limited paperwork, acceptance of bad credit, a set payment structure, and applicability across a wide range of businesses. On the flip side, the annual costs are significantly higher, and weekly payments could be high for tech startups that are not generating regular revenues.