Best Funding Options for Your Early-Stage IT Startup
Seeking funding is the first major challenge that any startup faces. For any given startup, regardless of the industry that they are operating in, there will be numerous different funding options to choose from, each with their own advantages and drawbacks. Before you make a final decision on what your preferred type of funding is, look at what other funding types are viable fallback options.
The following funding options are all suitable for an IT startup looking to secure their first round of serious investment. Make sure that you familiarize yourself with all of them before you make a firm commitment to any particular one.
Venture Capital
Venture capitalists (VCs) are one of the most common funding options for tech-based startups. Venture capital is considered one of the “sexier” funding options, in that it is VC funding that tends to capture the attention of the press, and which dominates headlines.
VC funding is an established funding method, and if you are entering a sizeable market with a disruptive product, VC funding is sometimes your only choice.
Taking funding from a VC will require you to give up equity in your business, and usually some degree of control as well. This can have a considerable impact on your long-term plans. If you are planning on selling your stake in the business further down the line, the less equity you hold, the less you will have to sell.
However, although you will have to give up equity, and in some cases board seats, to a VC, you will be gaining their expertise and experience.
Venture Debt
This funding mechanism is suitable for venture-backed startups who are either in their early stage or growth-stage. Provided either by funds set aside specifically for venture debt, or from specialized tech banks, taking on venture debt means that you will receive the funds you need on the understanding that you will repay the loan, plus the agreed upon interest, by a certain date.
If you have already secured VC investment, you should have little trouble securing venture debt, if that is your preferred option. However, you should only enter into a venture debt agreement if you are sure that you can meet all of your targets and obligations. If you aren’t able to, the lender may demand a faster repayment of the loan.
Bank Loans
Approaching a bank and seeking a loan on the strength of your business plan or your first wave of financial reports is one of the oldest ways of securing funding for an early-stage business. If you can secure a good deal on favorable terms, a bank loan is an excellent way of funding your IT startup. However, in order for a startup to secure a deal on favorable terms, they will need to be offering something truly special.
It is also important to note that banks will only usually underwrite loans for those who have a long and favorable track record. In some cases, a bank will be willing to underwrite the loan provided that you sign a personal guarantee. This enters you into an agreement whereby you agree that if the company fails, the bank can recoup their loss from your personal assets, which could include your home and other assets you hold.
Startup Loans
Startup loans are a type of loan designed to provide your startup with enough funds to cover expenses while your business is growing. They are crafted specifically to best serve startups and their lenders.
Typically, any startup that has been in business for at least six months can apply for a startup loan, although the exact requirements will vary from one lender to the next. The less stringent requirements to take out a startup loan, in comparison to a bank loan, make them an effective lifeline for any startup business that needs funding to grow.
These are some of the most common funding options available to IT startups, but there are others. Before you make any final decisions on the kind of funding to pursue, make sure that you consider all the possibilities and compare their strengths and weaknesses thoroughly. The decisions you make with regards to your initial funding will have a considerable impact on how healthy your startup is in its earliest stages.
