Investments for startups in the software development industry: cons & pros
In the following article will be briefly described some popular options of funding of startups within the IT industry and their positive and negative sides. External investment in your startup on early stages of development is definitely a controversial decision, therefore it is always good to learn more about it. If you already had an experience in searching for the venture, then this article will help you to update your knowledge again!
Option 1: Venture Capital funding within IT industry
This form of financing childish startups usually popular among risky but innovative projects. The idea is simple. Professional investors finance young web development companies but ask for equity or an ownership stake. You basically sell a substantial part of your company which is projected to have some value in the future in exchange to get some cash ASAP.
Pro: Unexperienced, young, and, most importantly, frugal entrepreneurs can possibly receive all needed resources and mentoring in a very short period.
Pro: New company which receives VC funding, also obtains some credibility within the market and consumers.
Pro: VC’s can create a business network which will connect all organizations in order to cooperate on the win-win principle.
Con: Investors are usually not very limited in decision making and can possibly change anything they want.
Con: You might face a lot of pressure from VC’s side in terms of monthly reports, risky decisions, or developing of the strategy.
Well, it is up to you to evaluate such a trade-off. Experience, contacts, and money are against freedom in decision making and stress-free environment. Your life,
Option 2: Bank financing for web companies
The oldest way of giving money to capitalists, so they can run the economy is through bank financing. Nowadays, this process is completely official, formal, and structured. It requires a lot of attention starting from which bank to choose and finishing by the type of contract you want to sign.
Pro: There is a wide range of types of loans, paybacks, contracts, so you can always find something for your needs.
Pro: You do not exchange anything except your promise to pay back in some period of time.
Pro: Formal procedures make you think twice about your business plan, digital strategy, and the idea in general (sometimes it is good).
Con: You can be easily confused by legal norms written in your contract.
Con: You are responsible for paying the money back.
Con: It is always a
Summing up, the bank can offer you a suitable deal, for example, a mortgage for a 15-year period which is attractive to all long-term players. Nevertheless, you must always be careful with signing documents (probably learning the experience of any IT consultancy company is a good idea) and respect all formal procedures.
Option 3: Special Grants/Government programs which stimulate growth of IT firms
Probably in every capitalistic friendly country with competitive market environment exist some government programs. They are designed to motivate entrepreneurs to open their businesses and actively work for the economy. Moreover, you can even find private-founded grants!
Pro: Gives your startup some exposure which might attract the attention of people without spending resources on digital advertising since you receive for free on TV shows.
Pro: Motivates you to look for strong competitive advantages on early stages of development and simulates the real competition.
Con: There may be too many requirements or restrictions, as grants are usually operated by the government.
Generally speaking, it is suitable for startups that seek some attention and money but ready to spend a lot of time and energy in competition.
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