“It really is the hardest thing you could possibly do. You’ve just got to have the mental strength to cope with the days that are bloody awful and dark, to just keep going.”
When Craig Brennan started fundraising for Newbe, he knew it would be tough — but only first-hand experience unveiled the agonizing reality of raising a round for his upcoming app.
His subsequent journey in building and funding his app, Newbe — made for expats who want help relocating — would teach him about the importance of finding a target market, partnering with a trusted technology firm, and relationship-hacking by bringing on a fundraising expert.
If you’re looking for a view of startup fundraising through rose-tinted glasses, this isn’t the guide for you.
If you want someone to reassure you that it’s really not that tough — better find another manual.
If you want to have the process broken down into each individual component, understand each stage, and hear how it’s done successfully from someone who actually raised startup capital — read on.
What you’ll take away from this Startup Fundraising guide:
- The 3 stages of startup capital
- How much funding you really need
- The 5 ways to get startup investors
- The 6 steps to follow if you want to get your app funded
- Lessons from the trenches: What Craig Brennan learned raising funds for Newbe
- 3 tips for making your pitch
The Potential for Fundraising is Higher Than Ever
The amount of funding that entrepreneurs can raise today at an early stage is staggering.
According to Pitchbook data, around two-thirds of the seed deals made in the US in 2017 were between $1 million and $5 million each.
Compare this to the initial amount that Dropbox raised 11 years ago, which came up to a grand total of $15,000. Just a few days ago, the same company went public and is now valued at roughly $10 billion.
But to say that entrepreneurs today have it easier is to ignore the other half of the story. The same report released by Pitchbook showed that the number of seed-stage funding rounds has dipped by more than half since 2014.
In other words, there’s more money available in the market, but it’s harder than ever to get a hold of it.
When it comes to mobile apps, the situation seems even bleaker. In 2017, the number of apps in the Google Play Store and Apple App Store numbered at around five million. The competition in every commercial segment is intense, to put it lightly.
The good news, however, is that mobile app startups continue to be a hot favorite to be funded. According to Crunchbase data, the average seed or early-stage funding round in the mobile category group has been on the rise since 2012:
What does this mean for budding mobile app entrepreneurs? Likely, that only the best of the best app ideas will ever see funding — but when they do, they’ll get everything they need, and more.
This guide will show you how to break away from the pack and land that much-needed funding.
A Primer to Startup Investing & App Funding
Totally baffled by the terms used in the previous section? Welcome to the world of startups. In order to navigate this brave new world, let alone raise funds here, you need to know some of the commonly-used concepts and terms.
3 Stages of Startup Funding
Think of startup funding stages in terms of risk and potential level. The further you go, the more potential and less risk there will be, and hence the larger the amount of funding you can expect.
1. Pre-Seed Stage
At the pre-seed stage, you have a great app idea that you think might work, if only you had a bit of cash in the bank to test your hypotheses. While more and more venture capitalists (VCs) have entered this arena recently, you would likely get most of your funding at this stage from friends and family, or angel investors.
This is where Craig was self-funded and leaned on friends and family to get him through beta to development.
2. Seed Stage
At the seed stage, there will still be a lot of uncertainty about your app idea. Although you should have some traction by this stage, it is not clear yet whether you’d be able to maintain this level of growth at later stages. Hence, the amount of funding will still be fairly small, and the equity stake your investors will take in exchange will be higher — think 20 to 25 percent.
Craig’s primary experience was in the seed funding stage, which we’ll get to in a bit.
3. Series A, B, and C
As we move up to series A, B, and C (and onwards), growth is the name of the game. Product-market fit should be a given by now, and investors will be looking for potential revenue growth at scale. Expansion plans and acquisition of smaller companies are common here.
What is a Term Sheet?
When you arrive at an agreement with your investors regarding funding, you’ll need to draw up a term sheet to formalize it. While an agreement lays out the broad parameters of the investment — the Money and the Control and Investors’ Rights — it is not a legal promise to invest.
Founders Fund goes into the details of exactly what the term sheet entails in the link above, but the five legally-binding documents, which are based on the term sheet, are as follows:
- Stock purchase agreement
- Investors’ rights agreement
- Certificate of incorporation
- The right of first refusal
- Co-sale agreement and voting agreement
How Much Funding Do I Really Need for My App?
First things first — just because you can get your hands on a lot of money, doesn’t mean you need to.
Let’s be clear about this: the more funds you raise at an early-stage, the more of your company you’re giving away off the bat.
That means that even if your mobile app startup manages to get acquired or go public one day, you might only be left with a tiny slice of the pie for all your troubles.
At an early stage, it’s advisable to consider how much funding you need to do these two things:
- Build out your app
- Get some traction
Most of your funds will go towards achieving the first goal. A developer costs around $15,000 per month in Silicon Valley according to YCombinator, and so a small team of five working on your app for 18 months would easily cost over a million dollars.
At this stage, however, it is more important to plan for the latter, given the current venture capital climate. Investors want to see some proof of concept first before taking out their wallets, so developing a Minimum Viable Product (MVP) and getting it to market takes center stage.
A slightly different perspective on this comes from our friend Craig at Newbe, who viewed equity as a way to:
- Incentivize top talent to help him raise funds (and actually fund themselves)
- Align incentives between his network of advisors and his up-and-coming business.
- Instead of a transactional service, the help he received along the way was truly motivated to deliver the best results — not to mention demonstrating a belief in the app and having “skin in the game.”
5 Ways to Get App Investors
Now we’re getting to the good part.
Before you actually approach an investor to fund your app, it’s important to know the different options available and what they entail. Each has a set of pros and cons — use your goals and objectives to decide which is the best fit for you.
1. Friends and Family
This is probably your best chance to raise funds, especially in the early stages. In fact, according to crowdfunding platform Fundable, around 38 percent of startup founders report raising cash from their friends and family.
However, bringing people who are close to you into your business world can be a risky endeavor in itself — there’s the added stress of losing those relationships if things don’t work out.
That’s why it’s important to treat them as you would any other investor. Be sure to present a formal business plan, show them where their money will go, and clearly explain the risks involved.
One of the greatest fears founders tend to have is that, at a later stage, they end up getting ousted from the very company they’ve worked so hard to build. And this usually happens when other stakeholders in your company hold enough equity — and hence, power — to vote you out.
Think Apple co-founder Steve Jobs, Etsy founder Rob Kalin, and more recently, Uber founder Travis Kalanick. All were forced to exit their own companies by shareholders.
For this reason, crowdfunding has emerged as a popular alternative to accredited investors. In fact, according to research done by the World Bank, the crowdfund investing market is estimated to hit $93 billion by 2025.
As the name suggests, crowdfunding involves getting a lot of people (the “crowd”) to invest in your idea, instead of having a handful of people do so. Typically, you’ll set a goal on a crowdfunding platform — $100,000, for example— and ask people to chip in there.
What this does is spread out the risk: no one person will end up holding a big chunk of equity. Instead of a single investor forking out $50,000 and getting the corresponding amount of equity in the company, you might have 1,000 people putting in $50 each, instead.
Take note, though, that most crowdfunding platforms do require a small cut of the funds you’ve successfully raised. The two biggest crowdfunding sites right now are Kickstarter and Indiegogo, both of which take 5 percent of all funds raised.
If you’ve raised $50,000, for example, that would come out to $2,500. If you ask us, that’s a small price to pay to de-risk your venture.
3. Angel Investors
As we mentioned earlier, in the early stages, it is especially risky for anyone to bet their money on your idea. That’s why founders tend to raise money from friends and family at the pre-seed stage.
There are, however, a special class of investors called angel investors who generally enter at this stage as well. They will either join as individuals or syndicates, putting in sums of $25,000 to $100,000 — and sometimes more.
Beyond their money, though, some angel investors are also well-equipped to offer you advice and guidance in specific areas of your business. Many of them are able to invest their own money because they’ve already made their fortune elsewhere, and would hence be able to guide you along a similar path to success based on their experiences.
Big name angel investors will also be helpful in attracting other investors later on down the road. If you had legends like Peter Thiel, Paul Graham, and Kevin Rose in your line-up, you probably wouldn’t need to worry about funding for quite a while.
4. Venture Capitalists
When startups hit the news for a round of funding, it is usually accompanied by a slew of venture capitalists (VCs). Indeed, whenever founders think of funding, they immediately jump to VCs first.
VCs are professional investors. In other words, while your vision and mission might seem compelling, their concern lies primarily in whether they’d be able to make money from your success. As such, they tend to invest from the seed stage onwards, when a company has gotten some traction and product-market fit.
Some of the top VCs in the world today include Andreessen Horowitz, Sequoia Capital, and Union Square Ventures. And as for those who have a history of making big bets on mobile app startups, the frontrunners are Kleiner Perkins Caufield Byers (who backed Snapchat), IVP, and Accel Partners.
5. Accelerators and Incubators
Another great funding opportunity and means to get guidance in the early stages is to apply for accelerator and incubator programs. As their label suggests, these programs are designed to help jumpstart and nurture your idea in a safe environment till you’re ready to stand on your own two feet.
The difference between the two also lies in their respective names. Accelerator programs tend to have a fixed timeline in which companies work with mentors to build out their businesses. On the other hand, incubators take a more long-term approach to business building, offering shared office spaces and ongoing access to a community that is relevant to your industry of choice.
3 Examples of Incubators
- Idealab in Los Angeles, which birthed well-known companies such as Twilio and Coinbase since its commencement in 1996.
- Amplify LA, an incubator in Los Angeles that features an expansive network of prominent leaders from across the “LA technology, entertainment, and media industries.”
- Launch 22, a charity incubator based in London and Liverpool that’s focused on helping the most disadvantages of entrepreneurs in the UK.
3 Examples of Accelerators
- Y Combinator, an accelerator that will invest $120,000 in exchange for 7 percent of your company.
- AngelPad, an accelerator that is ranked the #1 U.S. accelerator y MIT’s U.S. Seed Accelerator Rankings.
- Techstars, a well-known accelerator that has taken part in the investment of apps like Uber.
Both incubators and accelerators will provide startups with a small amount of funding. However, incubators tend to take a larger sum of equity in exchange, while accelerators usually take single-digit amounts.
6 Steps for Getting an App Funded
Before you even start talking to investors, though, you need to have a few things ready.
1. Solidify Your App Idea
At the earliest stage, you’ll need to have a solid app idea. Now app ideas are a dime a dozen, but here are some steps to ensuring that your idea is sound:
- Your idea starts with a real problem. Too many apps are created out of perceived problems that do not exist, which means that no one actually wants to use them by the time they’re launched.
- Browse websites like ProductHunt and Indie Hackers and observe the world around you, or simply journal and keep a record of ideas when they hit you. Once you have narrowed down a few possibilities, share them with friends, family, and anyone who will listen, to get feedback as soon as possible. This will get you out of your “bubble” and into the real world.
- Build a Minimum Viable Product (MVP) only you’ve been able to confirm that a particular idea tackles a real pain point in the world. A Minimum Viable Product is defined as “a new product or website developed with sufficient features to satisfy early adopters.” This is to test the core assumptions behind your app.
- Get your MVP back out to the same people who you had asked for feedback previously, and see what they like or don’t like about it.
- Put a price tag on your app to further validate it; see if early-adopters would actually pay for it. Got some real customers? That’s traction, and it puts you in a good place with potential investors.
Now you’re ready to talk to investors. Here’s how to make those meetings with investors happen.
2. Build a List of Investors You Want to Talk to
A quick search for investors on AngelList yields over 36,000 results. You want to be able to narrow that down to the top 50 investors who might be a good fit for the type of app you’re building and the industry you’ll be competing in.
AngelList, as mentioned, is a great starting point. You can filter by type of investor, what markets they specialize in, which companies they might have worked for, and even see if they are open to having a coffee or not.
Another great way to find relevant investors is to check out tech publications such as TechCrunch and Tech in Asia. Have a look at which investors have recently been active, and find those who have invested in companies in your space.
Crunchbase is another startup database that you can leverage to find investors in your space. Look for similar startups, and check out who has invested in them previously. The data will include angel investors, venture capitalists, and everything in between.
Finally, you can always use the almighty Google too. Simply enter search terms such as “top [industry] investors” or “best angel investors” to find leading investors in your space. This can help to round out your list.
3. Identify Your Target Market
This may seem counterintuitive, but may very well determine your success in launching your venture.
While finding the target market is always touted as ultra-important, it’s sometimes placed later in the development process.
In our experience, this is a mistake.
App investors want to see that you have a strategy and a vision for your product. Sure, you may still be working out the kinks, but the one thing you should know — or present yourself as knowing at this moment without a shred of doubt — is your target market.
Who is your app intended for? How are you going to differentiate from other solutions? Why you?
If investors don’t feel confident in your confidence to identify your niche market, you won’t get funded. It’s that simple.
As Craig from Newbe put it, investors wanted to know, “Who are you targeting? What’s the pain point that you’re trying to resolve for them? That is, why would they use your product?”
Demonstrating an iron-clad approach to your target market is equal parts practicality and optics.
Investors really do need to understand YOUR customer, who they are, and why you can serve them.
Investors have typically seen enough wayward startups; filtering out by lack of focus is one of the easiest ways they can avoid them, and consequently, how you can lose out on essential funding if you’re not careful.
4. Prepare Your Elevator Pitch
An elevator pitch is exactly what it sounds like: a succinct, compelling introduction to your company that lasts no longer than the length of time you would spend taking the elevator. 30 seconds or less would be a good span of time to work with.
Why the need to summarize all the potential goodness your app can do in the world into a short pitch? Because therein lies the key to getting an investor’s interest. Angel and venture capitalists alike are busy people, and once you have their attention, you need to make the most of it.
An elevator pitch should pack the maximum punch in the shortest time possible. Adeo Ressi from the Founder Institute offers an excellent formula that you can use to communicate the essence of your startup in a single sentence:
5. Get in Front of Investors
Referrals are by far the best way to quickly get an audience with investors. If you know someone who knows any of the investors on your list, ask them to connect you. LinkedIn is a great tool to help you find out who in your network might know these investors — check out your second- and third-degree connections.
Right at the other end of the spectrum is to send a templated email to the generic hello@investorname[dot]com inbox. Investors hardly have the time to clear their own inboxes, let alone man the general company ones. Yes, there might be associates who help them to filter through the emails, but your chances are far slimmer going via this route.
A far better way to literally get in front of investors is to attend events and meetups. As much as startups are always looking for investors, investors are also constantly on the lookout for deal flow, especially at relevant events.
Startup conferences, for example, are teeming with both parties trying to get to know each other. However, the tendency here is to get distracted by the talks and other fun stuff that happens at these events.
Do enjoy yourself, but remember that your primary objective is to get some face-time with the investors on your list. And do your homework: take note of where and when these investors will be at the event and find them there. It’s even better if you can arrange to meet them at a specific time and place within the event venue!
If not, leverage your LinkedIn connections to get those warm introductions, and arrange to meet them at these events. Typically, investors are more open to such meetings, as they have already set aside time to attend an event for the express purpose of meeting startups, so your request would fall right in their ballpark.
If all else fails, consider sending a cold email directly to the relevant investor’s inbox. The key here is to keep them short, sharp, and to the point — this means leaving out pleasantries.
However, it is also important to quickly establish a genuine, personal connection with the investor in the beginning. This can be achieved by referencing his/her writings, investments, or interests. Then, move on to your elevator pitch and ask for the meet.
We’ve created a cold email template for this particular occasion. Feel free to use it as a guide:
6. Pitch Deck for Raising Seed Funding
You did it. You’ve landed a meeting with the hottest investors in town. Now, the nerves start to kick in. How can you create a pitch deck that will knock their socks off and convinces them to take out their checkbooks?
Firstly, the pitch processes for angel investors and VCs are quite different. For angel investors, it differs based on individual styles and preferences: it might be closed in a single meeting or over drinks. You’ll have to play according to what the angel investor wants.
For VCs, the process is a bit more structured and is typically longer. According to David Beisel from NextView Ventures, it starts off with “a small number of meetings with one or two team members.” At this point, a pitch deck might not be necessary just yet — the meeting will unfold in a more conversational, get-to-know-each-other manner.
Then, it moves onto a meeting with a larger group, such as the full partnership of the VC firm. Here, it’d be much more formal and time-bound, and your pitch deck would be of paramount importance in explaining key details about your app startup.
Here’s what David recommends:
“Instead, what you actually want to do is drive home the story and the excitement of the opportunity, as well as the inevitability of your success. Emotion is a bit more crucial here, since this may be the first or only major interaction you have with these people during your fundraising.”
A quick search on Google will show that different investors have different ideas of what a pitch deck should look like. According to Slidebean, these are the most important components that all of them generally agree on:
In other words, you should definitely include these critical slides:
- The problem you’re looking to solve
- The solution you’re proposing
- The business model you had in mind (e.g. in-app purchases)
- What the competition is
- Your founding team
- How much you intend to raise
- Risks to your business
If you need some inspiration from legendary startups who have been there, done that, and successfully rode the wave to the top — think Facebook, Airbnb, and LinkedIn — you’ll find 30 pitch deck examples here.
App Funding Success Story: 3 Lessons From Newbe
Craig is getting ready to launch Newbe, and it wouldn’t have been possible without a round of funding.
But let’s back up a few steps.
It didn’t exactly go right from zero to bank account swelling. Along the way, Craig learned some valuable lessons — not just about app funding, but entrepreneurship overall.
He distilled these lessons into 3 key points:
1. Have a Great Team
When Craig was raising funds, his product was 80% complete.
They had a very beautiful relocation app, but it wasn’t quite ready for full release.
Craig faced a daunting challenge.
“Pre-revenue, pre-market, it’s pretty hard to raise capital, particularly in Australia.”
This meant that investors weren’t just betting on the concept or the underlying technology — they were betting on the continued execution of the team.
Of all the factors that investors look for, “the team you’ve got on board is the most important.”
But investors view “team” in a truly holistic sense; everyone involved with getting the product to market.
Craig had to pitch investors on their ability to finish the product, iterate, and continuously incorporate feedback from real customers. It wasn’t just a bet on marketing — it was a bet on technology.
“We put Appster forward as our technology partner when we first went out to raise capital. What that obviously did was give us a degree of “these guys are legit” given Appster’s reputation for building quality products.”
In that sense, your technology partner — internal or external — offers more than the beautiful, well-functioning products your business is built on; they provide the credibility to inspire much-needed confidence in external stakeholders.
Craig recounts, “The fact that we had someone like Appster, a really well-recognized app development company, that was enough. You really need to be partnering with someone who has delivered in the past and who is recognized.”
2. Identify Your Target Market
The term “target market” gets thrown around a lot. Everyone has an answer.
But as Craig learned, just having an answer isn’t good enough. You need an answer that demonstrates your ability to dominate in an ultra-specific sector.
“You need to really be laser-focused on your target market and how you’re going to monetize it. Laser-focused. When we started, we were too broad. We said ‘anyone who is moving anywhere’ is our market. So we had to really define who we were targeting, which is the expat group as opposed to mum and dad moving across to another suburb.”
Honing in on the best segment of their initial broad market is what ended up swaying investors.
3. Nail Down the Right Valuation
After putting in the blood, sweat, and tears, every founder has to believe that their startup is the next big thing — that it’s ready for the 7 or 8-figure valuation.
It’s understandable that you’d want this kind of valuation — but it’s potentially detrimental to your fundraising.
“Being realistic in terms of your evaluation of the company and what you’re prepared to offer up,” says Craig. “I think that really needs to be really well thought out at the beginning. Going in with way too high an evaluation just turns people off and it makes it look like you don’t know what you’re talking about, particularly when you’re pre-revenue.”
3 Tips for Making Your Pitch
As we’ve already seen, the process of app funding begins in the early stages with the right technology partner, right on through to identifying your market and determining a valuation.
But this glosses over the arduous nature of the pitching itself.
Identifying the right investors, getting their time, and selling them on your dream: this is no picnic.
Having successfully closed a round, Craig has 3 invaluable tips for other entrepreneurs looking to close a round for their app idea.
1. Target the Right Investors
You can save yourself a lot of time and heartache by simply identifying the investors with a higher likelihood of interest. Craig was keen on this:
“Targeting who you’re going to talk to in terms of raising capital is vitally important. If people aren’t interested in our space, it’s not worth trying to pitch to them. You really need to know who you’re pitching to, that they know the market, and they’ve invested in similar types of companies before.”
And it’s not just the type of companies, but the medium or platform.
“It’s important to pitch to people who get it, who had already invested in the app space.”
Why bother selling an investor on the space itself, when you can find one who’s actively looking for the next breakthrough app?
2. Get Feedback
Craig learned that defining his target market was important in large part due to honest feedback from investors who said “no.”
While he realizes in retrospect that “we would have raised capital more quickly and got[ten] us to market more quickly” had they narrowed down the target market, “getting that feedback from people who weren’t wanting to invest at that stage was crucial to the funds we did raise.”
Even though it’s tough to take a “no” on the chin, it’s crucial to shrug it off and actually learn from the experience.
Why did they say no? What would have changed their mind? What parts of your pitch did they find appealing?
Understanding why investors pass can help you beef up your pitch to better anticipate questions for the next funding opportunity.
3. Don’t Let a “No” Get You Down
Everyone understands this in theory; it’s much tougher in practice.
“It can be really disheartening when you’re meeting person after person after person and they’re saying ‘no, no, no.’ But all of a sudden you find the gems, and it’s amazing how things can turn around.”
For Craig, it was a lesson in framing and the power of belief.
“You gotta have tenacity. You really do have to wake up saying ‘it’s gonna be a great day,’ and keep that positive mindset moving forward.”
Newbe is a brand new app for people relocating to a new state or country that connects you with locals, provides the information you need, and acts as your virtual relocation agent.
Visit them at https://www.newbe.com/
Coming soon to a city near you!