Product development is a costly business.
Planning reduces the risk of failing to deliver on time, keeping to the budget and working as designed.
Being able to plan and estimate the funding required before revenue requires understanding the planned product as well as the development process.
Startups are generally self-funded, and according to data from Entrepreneur, less than 1 percent of all startups successfully secure startup funding from angel investors, while just 0.05 percent are funded by venture capital firms (https://www.entrepreneur.com/article/23001).
The numbers are similar in Finland, where FiBAN, the Finnish Business Angel Network, has made 3700 investments into 1300 startups since 2010. According to Business Finland, 4000 new companies begin operations each year with 300-400 of them reaching ‘significant’ growth over a three-year period.
Angel investors typically invest in companies either at the seed stage or at the early stage, with around 40% of all angel investments being secured pre-revenue.
Investing when a company already has a tested prototype or service model and a proper business plan is less risky than investing when the company is still working on their proof of concept.
Angels are looking for significant returns on their investment, and generally, what they’re looking for in businesses is a reason to invest, a credible team, a solid business plan, an opportunity to be involved and a viable exit strategy.
Getting angel investors involved in the company early on can help secure further investment when deadlines, budgets or requirements change. Angels are also typically seasoned business professionals with extensive networks who can help solve upcoming issues.
Angel investors invest in companies, and invested capital doesn’t need to be paid back in the event of a business failure, unlike bank loans, which almost always require collateral.
Although angels don’t need to be repaid their investment, it’s worth bearing in mind that giving them equity – typically between 10% and 30% for their investment – means that they’ll be getting a cut of your future earnings.
Self-funding operations can be further leveraged by grants.
For example, Business Finland offers different funding instruments aimed at boosting companies’ internationalisation efforts, including grants that cover between 50% and 75% of certain project costs. Securing a grant still requires some own funding, which is often an investment in the company’s share capital if the company is pre-revenue.
It may also be sensible to first start sales with something simpler, and raise funds for further development while learning about the market.
We offer different services related to funding, from applying to funding to keeping tabs on secured funding and preparing reports and cost statements.
And if you’re not quite sure where to start or what help you might need, we can also start by doing an assessment of your current state and recommend how to proceed.
Contact us for more information, or ask us about using Business Finland’s Innovation Voucher to buy our services.
Next post is about available funding instruments.
