How to secure funding for your tech start-up
The number of early-stage technology businesses continues to increase in Scotland, with various incubators and universities providing more support than ever before to help entrepreneurs develop their ideas into a business.
However, creating a successful technology business requires investment and this is rarely a simple process.
The level of investment required will be different for every business, but for most technology ventures the funding model will be very similar, with significant investment needed early on to develop and commercialise the technology before there is something tangible to take to market. This creates an extra level of risk, but this should be offset by the potential returns.
Any business looking for funding must consider all options, including grant funding, debt funding and equity investment. However, most early-stage technology businesses will find that debt funding is a non-starter, so grant funding and equity investment should be considered as the most likely sources.
Grant funding will be available for certain technologies but, in most cases, the level will be limited so equity investment will almost always form part of the overall funding requirement. Therefore, identifying and attracting the right equity investor to the enterprise is critical for most technology businesses if they are to succeed.
For equity investors, tech has led the way in creating quick returns, rarely seen with more traditional businesses, and double-digit returns are not uncommon. However, with this comes the risk that the technology will take longer to commercialise, require additional investment or even become obsolete.
As a result, the fundraising process becomes much more challenging as investors increase their level of due diligence when faced with a potential all-or-nothing return.
Thankfully, the prospect of backing the next technology success story remains very attractive to many investors, so now is a good time to be looking for funding. But with more technology businesses competing for investment, here are some key points that every business must consider and address before starting the process.
- Can the venture show credible market support and demand for its technology which will create a commercial business if successful?
- Can the enterprise clearly demonstrate the level of funding required and what the funds will be used for? Any credible investment opportunity should be supported by a robust set of cash flow projections and appropriate financial controls to manage cash flows after investment has been secured.
Brian McMurray is a partner and Head of Equity Funding at Anderson Anderson & Brown. For more information, visit their website.