Funding vs. Investment: Financial Options for Your Mobile App
The mobile app industry is booming at the moment, with mobile apps predicted to generate over $935 billion in revenue in 2023 alone. No wonder then, that many people want to get involved and create their own offering in the space.
However, creating, maintaining and marketing a mobile app requires money and you may find that you don’t have the funds yourself to support the venture initially. Luckily, there are many sources of finance to get your idea off the ground and into the market place and we will discuss these here.
Financing for your mobile app can broadly be categorised into ‘funding’ and ‘investment’. The simple difference between them is that investment requires the exchange of equity in your business for money whereas funding doesn’t. We’ll explore both of these options below and the advantages of each. By the end of this article, you will have a better understanding of what may make the most sense for you and your business.
Funding can take a few different forms which I have broken down below. The key theme is that typically the source of funding contributes funds not for financial return, but because they want to help you personally, see your idea come to life or indirectly create a benefit to the community.
Bootstrapping is the simplest form of financing your idea. You use your own funds or money your family/friends are prepared to give you.
You maintain full autonomy in the creation of your product
No lengthy application/pitching process
No (financial) risk
Difficult to get a lot of funding this way for most people so initial development may be slow
No access to experts
Platforms like Kickstarter offer founders the opportunity to raise funding in exchange for rewards for backers. The rewards can be as simple as early access or limited edition merchandise. The additional significant benefit is that you see if there is a market for your idea with a broad range of potential users.
Validate your idea while looking for funding
A broad range of potential backers
No equity loss
Maintain full ownership of product direction
Initial time/investment needed to put together a compelling pitch
Reward fulfilment can be hard work
No guarantee you will reach your funding goals
Grants and Competitions
There are countless grants and competitions out there for aspiring entrepreneurs to apply to. These are often created for the public good in some way i.e. bringing more tech jobs to a particular region or helping solve a particular problem. You can win some serious money using these schemes but they are often bureaucratically challenging and highly competitive.
Significant sums of money available
No equity loss
Typically get access to ancillary benefits (experts, office space etc)
Hard to win
Often strings are attached to the money and how it is spent
Investment relies on you being able to provide a compelling enough reason for investors to believe that they can achieve a return on their money working with you. This gets easier the more you validate your concept. In return for their investment, they will take a piece of your company. As they now own some of your firm, they will have a say in how you run it, the direction of the product and various other aspects of your business.
We’ll discuss three different investor types here: Angel investors, venture capitalists and private equity investors. Rather than discussing the pros and cons of each, we’ll talk about whether they would be a good fit for you based on the stage you are at in your growth.
Angel investors are typically individuals with significant financial resources that they are looking to invest in products they believe have potential. Think Dragons Den or Shark Tank. They often have a good appetite for risk and come in at the earliest stage of the three types of investors.
Angel investors usually look for three key attributes:
A capable team
A scalable and marketable product
A plausible path to profitability
The more you can demonstrate all three of the above, the more likely you are to land an angel investor. Highlight your (or your team’s) industry experience or a track record of producing successful products. Show research that confirms your theory that your product has the potential to scale. Spend time on a business plan that outlines how you will make money.
Venture capitalists look for products that appear to have found the beginnings of product-market fit, buy a minority stake and use their resources and expertise to grow the company’s value quickly.
Typically they will want to see some traction from your product (consistent user growth, user engagement, industry buzz etc.) so you are unlikely to find them while at the pre-seed or seed stage. Series A, B and C are usually where you will stand a chance of getting these investors interested.
Bringing venture capital into your business will accelerate your growth, but with it comes a very vocal partner. Your autonomy will be reduced and you may feel as though you have lost some control of your direction.
If you are reading this article, then a private equity investor is unlikely to be a good fit for you at this time. These investors look for established companies that they believe are currently operating poorly. The PE firm will purchase a majority stake in the company, replace the leadership and revamp the business. In doing so they hope to quickly boost the valuation of the company with a profitable exit following shortly after.
You may consider a private equity firm as an investment partner once your product reaches a certain size and you are considering exit options.
What financing is right for you?
Now we’ve explored some of your options, how do you decide what route is best for your mobile app?
The reality is, that most founders don’t pick one route. They combine financing options to give themselves the best chance of success given their personal situation and the stage of product development.
A typical example might look like this:
You initially bootstrap some funding to pay a product designer to put a prototype together
You use this prototype to crowdfund and validate your idea by seeing the scale of demand for your product
The initial funding raised from crowdfunding constitutes your seed funding and you build your minimum viable product (MVP)
You launch your MVP to market and start to see traction with user numbers rising and your first few paying customers
You take your user numbers and pitch to some venture capitalists who invest in your company for a minority equity stake
You use the money to invest in marketing, new features and growing your team further
At each stage of your growth, you need to weigh up the speed at which you want to move with the size of equity in your firm you are willing to relinquish. Some founders enjoy the autonomy that comes with growing organically and slowly whereas others want to get to a big exit as fast as possible and are happy to do what it takes to get there.
Think carefully about what success looks like for you and use the financing options that fit your goals.