App Funding: How to Raise Money for Your Mobile App Startup

App Funding: How to Raise Money for Your Mobile App Startup

Building mobile apps isn’t cheap. Even the simplest mobile app requires over $10,000 to make. The higher you aim with features and technology, the more expensive it gets. If you wish to know how to get funding for an app, here’s a rundown of your options, the stages of the whole process, and some advice on how to pitch your idea to potential investors.


Conents:

  1. Sources to raise capital for mobile apps
  2. Stages of startup funding
  3. How much funding do you need to develop an app?
  4. How to get funding for an app idea

Having a great idea for an app is, unfortunately, not enough. Building an app requires resources, from hardware and software to a professional team of developers. Creating a mobile app isn’t a cakewalk. Fortunately, the mobile world is thriving, and that means there are plenty of ways to raise funds for an app:

  • Bootstrapping
  • Personal network
  • Private investors
  • App funding contests
  • Angel investors
  • Venture capital (VC) investors
  • Crowdfunding
  • Bank loans

Each of these funding options has pros and cons, requirements, and certain limitations. Let’s touch upon each of them one by one so you can decide which is best for you.

Sources to raise capital for mobile apps

Sources to raise capital for mobile apps

Bootstrapping

Bootstrapping means funding your idea with your own money. You know best how much money you can afford to spend, don’t you? This is also one of the safest options, since you won’t owe anyone anything in case your app idea doesn’t work out. If you’ve got savings that can cover app development without putting too much strain on your life, bootstrapping is the best option.

In case your own money isn’t enough, you can turn to your personal network of family and friends.

Personal network

Usually, family is among the most reliable sources of funding, second only to bootstrapping and followed by friends. People in our personal network tend to believe in our potential and support us when we decide to venture in a new direction with possible risks. This isn’t to say that you don’t need a solid plan and a proper sales pitch to persuade them to lend you money, of course. But persuading people who know you tends to be easier than selling your idea to a complete stranger.

More often than not, funding your app idea through a personal network is possible with smaller and cheaper projects.

Another good option is to use bootstrapping and your personal network to create a minimum viable product (MVP). With an MVP, your chances of getting funded by bigger investors rise significantly.

Private investors

Next on our list of mobile app funding options are private investors. These are often local businesses working in the niche your app will serve. For example, say you’ve got a unique idea for restaurant reservations. You can pitch it to local restaurant owners and ask them to fund the development of an app to gain an upper hand over their competitors.

This option is viable if your idea fits a particular niche or industry and you have ways to communicate with businesses that have funds to allocate for an app yet don’t have an app of their own.

App funding contests

App funding contests

If you’re feeling brave and confident in the revolutionary nature of your idea, you can get funding for your app through one of multiple app funding competitions held by industry leaders, angel investors, and other companies every year. Some of these competitions offer only funding; some also provide mentorship. However, if you’re to brave such a competition, it’s essential to prepare for it thoroughly: getting funding for an app through a contest means you’ll have strong competitors, sometimes up to a hundred of them.

On the other hand, taking part in a competition can be a valuable experience and a way to attract attention to your idea even if you don’t win. Sometimes, runners-up and pitchers who weren’t even close to winning receive offers post-competition.

Angel investors

Angel investors

Now we come to the option that usually most interests those seeking app funding: angel investors.

First of all, don’t be fooled by the name. Angel investors don’t give you money and expect nothing in return. They aren’t selfless, as actual angels are believed to be. However, being backed by angel investors is way less risky than dealing with most, if not all, other types of loans.

Angel investors are mostly individuals — and sometimes businesses — who use their funds to help startups at the earliest stages of development. In return, angels usually ask for a share in your business, or at least a convertible bond.

This is an important characteristic, and you need to consider it carefully.

It’s true that you won’t need to give back the money angel investors lend you in case your idea flops. This is what attracts most startups to seek angel investors.

However, if your idea does survive and thrive, your “angel” will have a share in your business. Typically, you can expect angels to ask for anything from 10% to 25% of your shares, depending on the sum of money they give you. This means they’ll have some level of control over your business and will be entitled to a share in your income or the amount you receive if you sell it.

Family and friends can also be angel investors, as can private investors — it all depends on how you build the agreement. Some angels participate in crowdfunding and trust foundations, or are businesses instead of individuals. There are also angel investment pools where several investors combine their funds and invest jointly.

Since mobile app angel investors undertake great risks in funding startups, it can be challenging to pitch your idea to them. But if you manage that and you’re fine with offering equity to a third party, angel funding for an app can propel your business nicely.

Venture capital investors

Venture capital firms are, in a way, similar to angel investors — they too offer significant funds for businesses to expand in exchange for a share in the business. There are distinctions, though.

Angel investors invest in app ideas at the very first stages when your business is young. Venture capital firms, on the other hand, offer money when a product is already in development. Basically, venture capital is offered to those businesses that VCs deem to have potential for fast growth.

Another distinction between an angel investor and a venture capital investor is that the latter are usually big companies or funds rather than individuals with money to spare. Thanks to this, venture capital usually operates with bigger amounts of money. More money also means you’ll have to give up more shares in your business, though. Expect something between 25% and 50% to go to venture capital investors.

If you’re seeking funding for mobile app development at a bigger scale, VCs are the ones to go to.

Crowdfunding

Crowdfunding platforms

Crowdfunding platforms can attract any and all kinds of investors (except probably for banks). When you pitch your app idea on a site like GoFundMe, IndieGoGo, or Kickstarter, anyone can offer funds for your project.

There are quite a few crowdfunding platforms today. Some are industry-focused; some offer an opportunity to attract investors for any business. There are different types of crowdfunding, too.

  • Donation-based crowdfunding offers patrons some kind of extras when the app is launched, like early access or premium features.

  • Debt-based crowdfunding is like lending money with a promise that you’ll get it back.

  • Equity-based crowdfunding is what angel investors and venture capitalists offer — money for a share in your business.

But crowdfunding offers more than just money. Especially if we’re talking about getting funding for an app. Crowdfunding platforms are also places to promote your app to an audience larger than a few investors. Anyone can see your pitch and get interested in your app. Some will be willing to pay for early access when you launch. Crowdfunding is very public, making it a perfect way not only to raise money but to spread the word about your project.

Bank loans

The last funding option on our list, bank loans are the least favored by startups. The reason is obvious — banks don’t care if your idea soars or drowns, they expect you to give back the money by a specified date and with specified interest, no matter what. That’s why for a startup, a bank loan is a bad option. It’s safer to take a loan when you expand, not when you’re only starting out.

The process of getting a bank loan to fund your mobile app idea is largely similar to that of getting any other big loan — a ton of paperwork and a number of interviews, a presentation of your app monetization prospects, providing security for the debt, etc. You can take a loan as an individual or as a business, and the requirements will differ depending on your choice as well as the state you’re residing in.

For a bank loan, you’ll most likely need to know a more precise amount of money than for any other funding options — bank officials often like it when specific numbers are presented. If you aren’t sure how much your app will cost to build, our specialists can offer you a quote.

In most cases, tech startups requiring funding for app development go through several options among those listed above, one by one. The typical funding process is described below.

Stages of startup funding

Stages of startup funding

  • Pre-seed

    Typically, this is where bootstrapping and private network funding is involved. This is the very beginning of your startup, when you’re creating and evaluating the idea. Money raised during this stage is used to analyze the market and prepare a strong pitch deck to present at later stages.

    In some cases, when there’s enough funding, the pre-seed stage can be used to build a prototype of some kind. Tech startups spring up like mushrooms, and many of them need to raise funds for mobile apps. This results in a highly competitive environment. If you can offer something besides an idea and initial calculations, it may raise your chances of piquing investors’ interest.

  • Seed

    This is the first stage with substantial funding. That is, it goes beyond your own savings and the money your personal network can offer you. (Of course, your own money and money from your personal network can also be part of the seed stage.) While it’s possible to attract angel investors at the pre-seed stage, it’s the seed stage when they usually appear. Recently, venture capital firms have also been seen during the seed stage.

    The money you receive during the seed stage should be allocated, at least in part, to expanding your app development team and adding more experienced specialists. You might want to outsource part, if not all, of the development to an app development company with relevant experience.

    By the end of a successful seed stage, your idea has been validated and you’ve built a minimum viable product (MVP). An MVP is designed to be presented both to the public (to gather early users) and to bigger investors (to get funding). In the best case scenario, at the seed stage your idea starts bringing in revenue.

  • Series A

    Series A is the beginning of your startup’s active growth. Consequently, this is the stage at which venture capital comes into play — as we’ve mentioned above, venture capital firms fund startups they believe to have high growth potential.

    Series A is the first stage in venture capital funding, and it’s the most dangerous for investors. To get funding at this stage, you’ll need a strong elevator pitch to attract investors. At the same time, if your app clears this stage, the chances of it being successful in the end will be significant.

  • Series B

    From the funding point of view, the largest drop in survivors takes place before and during Series A. If you’ve reached Series B, chances are your app is going to make it. Although screwing up is always a possibility, so we recommend not relaxing too much.

    Series B funding is about developing faster and expanding your presence. At this stage, your shares rise in price, so you can sell fewer of them to venture capitalists, maintaining control over your business.

  • Series C and beyond

    At this stage, if your business is still alive, it’s most certainly kicking. Meaning you make enough revenue to cover any regular costs without needing extra funds from third parties. Every funding stage after Series B is targeted at large-scale expansion, major upgrades, and so on.

How much funding do you need to develop an app?

The amount of money that flows into your startup at each new stage will increase, and it’s important to know how much funding you need. Underfunding a project is a clear way to failure if you can’t secure additional money in time.

At the same time, while it’s certainly handy to have extra money, you need to keep in mind that more money means you surrender more shares in your company. Ask yourself at the beginning of each stage: How many shares can I surrender without long-term consequences to make angels/VCs invest in my app idea? And don’t stray too far from that number. At the end of the day, you still need to be the owner of the biggest portion of shares.

There’s no average amount of funding for a mobile app startup. Though you can find rough estimates, precise numbers will depend on your idea, its complexity, and the team you’ll be working with. Here’s an example of a rough estimate we came up with for a mid-priced mobile app developed for both iOS and Android:

Funding stage Funding amount % of shares expected in return
Pre-seed $100,000 10–25% (Angels)
Seed $150,000–1,500,000 10–25%
Series A < $3,000,000 25–50%
Series B < $5,000,000 ~33%
Series C and beyond > $5,000,000 ~33%

Keep in mind that funding isn’t only spent on actual app development. There’s a whole bouquet of costs, from marketing to non-development staff and software.

How to get funding for an app idea

How to get funding for an app idea

So you know how apps get funded, what funding options are available, and how the startup funding process typically goes. Now let’s talk about how to get funding for your app. How can you convince people and organizations with money to fund you and not someone else? How can you build a solid elevator pitch and pitch deck?

There are strategies in place for this kind of thing. Investors generally have a single aim — to get a return on investment (ROI). To convince them you have what it takes to deliver that ROI, here’s what you need to prove when you go eye to eye with them.

Your idea is unique

Or at least it’s better than existing solutions for a specific problem. No one needs another clone of Facebook, even though many are dissatisfied with it. Your idea needs to approach users’ pain points in a unique way and offer solutions that haven’t yet been exploited. Most outsourcing app development companies have project managers who can help you find a unique value proposition for your app.

Your idea fits the market and will be profitable

To get seed funding for an app, you need to prove that your idea has demand in the market you’re aiming for. Invest in market research and keep tabs on what’s trending on the mobile market. You need to present your app’s market appeal and its potential for revenue if you want to find investors.

You have a business plan

It’s a well-known fact that investors prefer to give their money to startups whose owners have previous experience, preferably successful. Having a complete plan for development shows you know what you’re doing, especially if you’re doing it for the first time. A strong business plan for development, marketing, and expansion is a big yes for many investors.

You have a team working on the app

When you have good specialists with relevant experience working on your idea, it’s a kind of insurance that the resulting app will meet the expectations of users and, hence, investors. This is why, unless you’re a developer yourself and have a team of seasoned professionals at your side, it’s recommended to outsource your app to an app development company. Look for companies that have completed projects in your niche.

You have a prototype or an MVP

There are few things that can better convey your dedication to your project and your idea’s potential than a working prototype or a minimum viable product. Better yet if the product is beyond the MVP stage and is already getting some revenue.

Even if you don’t have a prototype, you need to explain to your potential investors what stage your product is at and what you’re planning to do first if/when you get funding.

Overall, the more information you can provide about yourself, your team, and your idea, the better. Keep it professional and to the point, of course. Don’t linger on unnecessary details and focus on what’s important for investors — the potential for revenue. It’s easier to let go of money when you’re convinced you’ll get it back with interest.

Summing up

Tech startups come and go, and many promising projects are forgotten after a couple of months due to lack of funding. Competition for investors’ attention is harsh. But when you go into battle prepared, your chances of winning skyrocket. If you have questions about how to raise funds for mobile apps that weren’t covered in this article, contact us for a consultation.

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