After you have checked all of the first boxes for launching your startup, you will be at the stage to accept investors and raise capital. Funding is one of the biggest hurdles that many startups face. For most companies, raising capital has to happen early on, which means founders are taking out loans, bootstrapping from personal savings, or seeking out investors who believe in the vision from the get-go. Looking for investment is quite common within the tech sector since development and setup costs will be moving much faster than your incoming revenue—especially at this startup stage.
Tech has its own unique financial structure for funding new companies:
- Friends and family round: Since companies in their early stages will have difficulty convincing traditional investors to join an initial funding round, it’s not uncommon for startups to tap into their existing relationships. The close personal connection of friends or family members to the founder makes this a convenient source of initial funding, and typically, these individuals will invest anywhere between $5,000 and $25,000.
Despite the loyalty and trust between a founder and investors during a friends and family round, it’s important to be very clear on the risk of the investment. As simple as it would be to conduct these deals with a handshake, you should still be carefully documenting these investments to avoid potential conflicts, build proper foundations for future investments, and maintain relationships.
- Angel investments: Angel investors refer to small networks formed for investment purposes, high net-worth individuals who are entrepreneurs themselves or have experience investing in early-stage companies, or community members. Unlike friends and family who contribute based on believing in the startup idea, angel investors are motivated by a return on their investment and opportunities to mentor or coach a budding entrepreneur. They will typically write checks between $10,000 to $100,000.
When approaching angel investors, you need to have a compelling story and passion for your idea since they are looking for large market opportunities and gambling on your company for a payoff. Most angels understand the risks associated with early-stage investing, so some investors will become quite involved with your company, while others will stay at arm’s length. Aside from friends and family, an angel will be one of the first ones to invest in your business, which acts as a vote of confidence that can open doors and help attract venture capital funding.
- Venture capital: Venture capitalists (VCs) deploy large amounts of capital and expect significant returns. Investing potentially up to multi-million dollar figures into your company, VCs look for emerging companies with high growth potential in exchange for equity or an ownership stake. A VC’s job is to find opportunities to make money back for themselves and their investors, so they are focusing heavily on large markets and looking for big returns. Although fundraising with venture capital may mean losing some control of your company, it provides significant opportunities to scale and grow quickly.
Because VCs are interested in reducing risk, they want to get to know founders, watch them execute, and make progress before committing to investing. Ultimately benefiting both sides down the line, you’ll want to seek out someone you can work with long-term that’s in alignment with your company’s values.
Regardless of who you end up seeking and securing investment from, these individuals essentially become a business partner, so ask yourself: could you go on a 4-hour flight with them? You’ll want to ensure you’re on the same page and trust one another. And you may be the one pitching to them, but take the time to check their references and see what other founders’ experiences were working with this investor.
Here in Saskatchewan, there are a couple of opportunities around funding, including a variety of government programs that provide financing to companies doing research and development. A major one to note and consider being qualified for is the Saskatchewan Technology Startup Incentive (STSI) that encourages investment in early-stage technology startups bringing new products to market and creating jobs in our province.
Beyond this overview and learning how you can find and secure these different stages of investment, we encourage you to reach out to us here at Innovation Saskatchewan to talk about more opportunities—we’d love to point you in the right direction.
From pathfinding to incubators to investments, we’ve covered the initial stages of starting a new tech company, but we still have one more piece of advice to help you go above and beyond. Stay tuned to hear about taking your company to the next level!