Anybody can launch an app, but if your goal is to build an app startup that has the potential for large scale success – well, at some point you’re likely going to need to know how to raise seed funding. Building an app is an expensive undertaking; it can cost tens of thousands, or even hundreds of thousands of dollars to bring a full-scale app to the market. Once you launch it, you’ll need additional capital to fund your marketing efforts and actually get users to the app. Knowing how to raise seed funding is critical to a startup’s business plans, as many major app startups must go through several funding rounds to maintain progress until profitability is reached.
Everyone with an app idea believes that they are ready to pitch VCs and secure a large investment to bring their idea to life. Unfortunately, of the millions of app startups (or pre-startups) out there, very few of them are actually in a position to secure even a minimum amount of initial funding. In this guide, we will answer everything you want to know about how to raise seed funding and convince investors to invest in your app startup.
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Is Your App Startup Fundable?
Often, entrepreneurs who have not been through the process of obtaining funding mistakenly assume that just having a great app idea is enough. It isn’t. These entrepreneurs are quickly humbled when they pitch their idea for the first time only to be hammered with questions that they weren’t prepared to answer. The truth is, an idea on it’s own has zero value to app investors. Everyone has the next idea that will “completely disrupt the industry!”; or the next “Uber for ____” idea; or the next idea for an app that will “really change our lives!” Mark Hurd (CEO of Oracle) once said, “Without execution, ‘vision’ is just another word for hallucination.” Unfortunately, very few app ideas ever become apps, and very few apps ever become fundable startups.
There are several steps between the app idea stage and the seed capital raising stage – and even if you know how to raise seed funding, you probably won’t if you haven’t at least progressed your startup to a certain position. At minimum, a fundable startup will have reached these three milestones before raising seed capital:
- Established Startup Team: A single-member team isn’t a startup team at all. Building a business takes more work than most first-time entrepreneurs can ever imagine, and doing it alone is usually too much work for one individual. Your team should be complete with several professionals that have an extensive breadth of knowledges, experiences and backgrounds. Each member should have a specific job that relates to their skill set, and particular talents that add major value to the overall organization. When you’re raising seed capital, potential investors will lean heavily on the strength of your startup team when making a funding decision.
- Validated Idea: It is not always necessary to have a full-fledged and already launched app to get seed funding for a startup business. However, it is necessary that you have tested the idea with real users and that you have validated every assumption. It’s not enough to assume that a demand exists for your app or to assume that your idea is the one that will effectively meet this demand. Ideally, you should have a functional minimal viable product with real customers using it, and should already be producing some type of revenue.
- Developed Strong Pitch: Even if you have a great startup, if you can’t communicate why it’s great, you’ll have no chance of convincing investors to trust you with their money. Make sure your business plan is strong, have an effective startup pitch deck in place and practice your pitch until it is ready to be delivered confidently, at a moment’s notice.
If you haven’t accomplished these three requirements, all of your efforts should be going into doing so – especially before seeking initial funding from seed investors.
You Already Know Your First Investor
There is one person out there that is in the perfect position to invest in your app idea – and you already know them. You guessed it…. It’s you! There is a bootstrapping stage to every successful startup. Some startups do so well in this phase that they bootstrap their way to success without giving away any equity for initial funding. Taking just the first steps towards building an app takes time, energy and money; and before you can ask someone else to invest their resources, you’ll need to invest in yourself.
By definition, an entrepreneur is an individual who takes risks to reap a large reward. It is quite the irony that many app entrepreneurs want seed funding firms to risk their funds, but aren’t willing to risk their own. Even those who have very little savings can access funds if they are committed to putting in the effort and taking a risk to pursue their idea. Ready to invest in yourself? Here are a few ways you can access funds to get your app idea into the minimal viable product stages:
- Business Plan Contests: Although many business plan contests also require businesses to be at a certain level before entering, some lower-prized contests and events also allow entrepreneurs to pitch in the idea stage. Some of these events may offer several thousands of dollars in prize money which can be used as seed capital funding to build a prototype or launch a first version minimal app.
- Crowdfunding: One of the best validation tests for your app idea is crowdfunding. If you believe that consumers in your market would really find value in your app, this method allows you to bring it to them pre-development and allow them to support it with their donation. However, succeeding with a campaign is not as easy as it may seem. It takes much work to successfully promote a contest, and the rewards must be worthwhile. App startups that have been effective with this approach however, have been able to obtain hundreds of thousands of dollars in initial revenue while forming a strong consumer base.
- Loans: We take out loans in our everyday personal lives, but for many entrepreneurs, personal loans have also been used to fund the launch of their startups. To secure a loan, you will need to have decent personal credit – likely you will not have established enough business credit at this point to secure a business loan. Before taking out a loan of any kind, make sure you understand the terms of your agreement and that you can afford to pay back the required monthly payments.
- Credit Cards: While only recommended as a last resort, many entrepreneurs have financed portions of their businesses on credit cards. Unfortunately, credit cards often have high interest rates, so you will pay much more to access these funds; but they are also quite easily accessible by anyone with a decent credit score. Again, it is important to only borrow money that you can comfortably pay back. Financing should only be used to better your position, but it can severely worsen your position if not careful.
How To Find Seed Money For Your App Startup
There is no shortage of seed money investors out there – some of them are obvious, some are hidden in plain sight, and some don’t even know that they are investors yet (maybe they need some convincing first). You may not know anyone who meets the requirements of an ‘angel investor’, but without a doubt, you can access investors if you try hard enough. If you want to know how to raise seed funding for your app startup, here’s a few places to start:
- Explore Your Network: There is no better way to begin a positive relationship with an investor than through a direct referral. A great referral can move the startup/investor relationship several steps ahead before the two even have a chance to officially meet one another. Take inventory of everyone you know, and who they know. Tell people about your business and let them know that you are looking for app investors. Six degrees of separation is a real thing, and you probably don’t have to go six whole degrees to find potential seed money investors to pitch.
- Join An Incubator: App incubators are made to take apps from their initial phases and to bring them to a fundable level. Many incubators have connections with app angel investors, seed funding firms and VC partners; and some are launched by VC firms themselves. Furthermore, many app incubators provide some type of initial seed money, in exchange for a small equity percentage, to help businesses bring their ideas to life.
- Promote On Investor Platforms: With software startup financing being at an all time high, app funding sites have sprung up like spring weeds; acting as a bridge between fundable startups and angel investors. Sites such as Gust, AngelList and Dealroom allow businesses to set up profiles and promote their startups directly to investors. Even without knowing exactly how to raise seed fundings, investor platforms give startups direct access to investors that looking for amazing deals. These platforms are extremely competitive however, and to succeed in raising funds startups must meet several requirements to help them stand out against other startups.
How To Prepare for Seed Funding
Once you know how to raise seed funding and how to find investors, you will also need to learn how to attract them and convince them to invest in your business. These seven tips will position you for the most success when seeking a seed investment:
- Make your elevator pitch count – Sometimes, you only have a few seconds to make a good impression with an app investor. An entrepreneur should be able to effectively explain their business within just a sentence or two. Make sure that your elevator pitch is simple in content but offers enough information to draw curiosity. Your elevator pitch should be refined, reworked and optimized frequently until the most effective version has been established.
- Be the expert – Entrepreneurs can become so fixated on all the features and functions of their app idea that they miss important things happening within their industry. Investors put their capital in people that they believe have the knowledge and expertise to truly deliver a successful product; and if you want them to invest in you, you must have an above-average knowledge of your market, industry and competitive landscape. Moves that your competitors make will have a direct impact on your startup, as will trends in the industry, government policy, and other important factors that may relate to the potential success of your idea.
- Know the numbers – There is one thing every investor cares about, and that is, whether their capital investment will produce a positive return. During your pitch, it is likely that you will be asked about sales, the number of users on your app, revenue, profits, projected revenue, funding requirements and more. Don’t pitch a seed money investor without knowing the numbers that represent your business. If they ask you about these numbers, and they will, you will lose major points if you fumble over their questions and will lose all credibility if you accidentally misrepresent them.
- Have a pitch deck ready – Don’t wait until you’ve got an investor meeting scheduled to start working on your pitch deck; get it ready ahead of time so that you can focus on perfecting your pitch on the days leading up to your meeting, instead of building slides. Create a pitch deck that is captivating, compelling and that tells a story that investors can easily follow. Design is important, but use it minimally to enhance your pitch so it doesn’t draw attention away from the slide’s content.
- Show a demo – Talking about how your pre-developed app will operate can possibly help app investors visualize it in real use, but showing a demo leaves a lasting impression. A demo or prototype may not be a totally functional app, but it allows potential investors to interact with your software and “experience” it for themselves.
- Pitch it well – The key to pitching seed money firms or investors confidently is practice, practice and more practice. Practice your pitch in front of a mirror; record yourself and play it back for critique; pitch it in front of friends and family, and get their feedback; pitch it EVERY CHANCE YOU GET! Eventually, pitching your app idea will become second nature – the more you practice it, the quicker your confidence will build.
- Evaluate and optimize – Unfortunately, you won’t convince every investor to invest; but you will receive valuable feedback each and every time you pitch your app concept. Don’t lose sleep over an investor’s critique of your startup, but use their feedback to optimize your pitch. Each time you get rejected, you learn more and more about how to raise seed funding. Identify the weaknesses in your pitch and in your business, and strengthen them until they are no longer seen as weaknesses.
How To Raise Seed Funding – The Process
Knowing how to raise seed funding for an app is about as beneficial as having just an app idea – it means nothing without execution. In your startup journey, it is vital to be honest with yourself about whether your startup is truly fundable, or if you need to put in more legwork to validate your idea first. Once you know how to raise seed funding, that’s where the real work begins – because now you have to do it!
Can’t decide what the next step is in your seed funding journey? Contact us today and schedule a free consultation with one of our app startup experts!