Apple’s App Store is projected to house more than 5 million apps by the end of 2020. But how do you raise your first round of capital to help gain traction is a hugely competitive market? We’ve have set out some preliminary questions founders of early stage app startups should first consider.
Do You Need to Raise Capital?
We speak to many early stage app startups founded by a solo non-tech founder. Of course, it’s possible to build a successful startup without a tech co-founder — but it’s not easy.
Non-tech founders often look to raise a first round of capital to have a development company turn their app idea into a reality. An alternative is to find a tech co-founder through connections, meetups and networking and build a first version (‘Minimum Viable Product’ or MVP) without having to raise.
It’s worth considering whether you need to raise capital or not even after you have built an MVP and are gaining traction on the App Store. You may very well build a successful business without the need to take equity dilution.
Why Would Anyone Invest?
Investing in an early-stage business is risky, and most startup investments lose money.
Any quality investor will ask, ‘Why is your app the exception?’
Don’t assume that an investor will invest because it’s their job. Most startups don’t raise capital in part because their app idea is not investment worthy.
The chances of securing a first round investment from a venture capital fund in 2017 are very low. If you don’t have a tech co-founder, product or track record of successfully monetising apps, a VC won’t be interested in your startup.
If you want to raise a round, focusing on friends and family, or possibly angel investors will be the most effective option.
How Should I Structure the Raise?
Our startup team has assisted many startups through the capital raising process – so we have some pretty useful insights into what does and doesn’t work when raising a round.
Startups with impressive founders, traction, big goals and a strong team are more likely to raise multiple rounds of investment and build successful businesses. But we’ve noticed another trait of successful startups – they keep their capital structure simple.
Too often, we come across founders who completely overengineer a deal. Here are some quick tips to help you avoid being that founder:
- Set up a holding company, and ensure all investors invest through the holding company. Operate your app business through your operating company.
- Don’t overcomplicate your share structure. If raising an early stage seed round, try to stick to ordinary shares. Ensure that if you do need to issue preference shares, they are limited to a one-time liquidation preference.
- Don’t issue warrants, and make sure the rest of your terms are standard. You can read more about capital raising basics here.
Raising capital is not easy. Don’t let that discourage you, but spend time thinking about whether you need to raise before you take action. If you do attract investment interest, keep the deal simple!
If you have any questions or need assistance raising capital for your app, get in touch with our startup lawyers on 1300 544 755.
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