You’ve got a million dollar idea.
Well, if you’re sitting on the next Snapchat, Dropbox, or Slack, you’ve got a billion dollar idea…
Maybe you’ve got a concept, or a prototype, or just a founding team with a vision.
Regardless, the fact is, making an app is a business:
Just like opening a restaurant or starting an agency, an app needs tools, traction, investors, and a lot time and money.
Before you quit your day job, you need to validate your idea and secure funding.
If you read TechCrunch or VentureBeat, it can seem like funding is something you only read about.
Is it a mythical money tree only accessible to the elite few who already have a “connection” with some hotshot serial founder?
I’m not denying it’s a hard road (and is getting harder every year), but it’s a winnable race.
App Funding: A Competitive (But Winnable) Race
There are over 2,000 new apps added to the iOS and Android app ecosystem every single day. The number of apps on the App Store alone has grown by 750,000 since mid-2015.
These statistics capture one of the fastest growing market segments over the past decade:
By 2020, it’s expected to grow by over $100B worldwide.
With these kind of growth projections funding is never far behind.
In fact, the Mobile Apps funding round category on Crunchbase reports that $18B of funding went to around 3,000 startups. Some of the heavy-hitters include unicorns like Snapchat ($4.9B since founding), and Coinbase ($525m).
Outside of mobile — in the world of SaaS — funding also continues to grow:
Notice how seed funding dips as time goes on?
While the size of the app market is growing constantly across all sectors, investors have stopped hedging their bets with smaller seed deals.
Today, they’re more prone to double down on proven companies because the market has matured.
The same trend is true for venture funding:
Bigger deal sizes — but fewer deals.
There are more app companies entering the market than ever before. Funding is diluted, and it’s harder than ever to get investors to make a leap of faith rather than betting on a more established app.
Don’t let that scare you off. Getting funding for an app is hard, but it’s not impossible. This guide will tell you everything you need to know.
But before we jump into the steps to secure funding for your app, let’s first take a look at the main funding stages…
What are your funding options?
The funding options depend largely on a company’s growth stage.
The more your idea has been validated by market conditions, customers, and other investors, the easier it’ll be to secure a larger amount of funding.
Funding comes in rounds, which are bursts of financing from one or more investors. At the very beginning, you’re in the pre-seed stage looking to raise a seed round — probably a few million dollars.
After getting seed funding, you’re in with a chance of raising Series A, B, and C rounds from established venture capital firms. These can come years down the line and tally up to hundreds of millions of dollars:
Let’s take a closer look at each funding stage.
- Company valuation: $1-3m
- Average funding amount: <$1m
A pre-seed app might be a beta, prototype, or non-existent. It’s an idea, and venture capitalists have yet to offer seed funding. You might get pre-seed money to validate product-market fit, or buy time while you refine the business model.
At pre-seed, your funding options are friends, family, and startup accelerators.
Accelerators support early-stage startups by offering education, partnerships, mentorship, and funding. With seed money and the guidance of successful ex-founders, startups that join accelerators often have the edge over bootstrapped companies.
So, how do accelerators work?
First of all, not every startup that applies can get a spot on the program. Usually, accelerators accept a limited number of applicants so they can focus time and money on the best of the best. This means you should have validated your idea as much as possible to support the application.
In return for the funding and mentorship, accelerators usually take a cut of your company’s total equity. How much depends on the accelerator:
- TechStars: up to 10%
- AngelPad: 7%
- Y Combinator: 7%
Handing over equity at the seed stage contributes to the overall dilution that comes with funding:
Not all accelerators work by taking a cut of equity, however.
MassChallenge is unique in that it takes 0% of equity, but still offers $2m in cash as well as expert mentorship and corporate connections. Learn more about our accelerator programs here.
- Company valuation: $3m
- Average funding amount: $150,000
Angels are ex-founders that use money from past exits to invest in other startups, or investors that use their own cash to invest in startups at the riskiest stages of growth.
Angels are individuals, not companies like venture capital firms. This includes people like Mark Cuban, Esther Dyson, and Scott Belsky.
The seed round is a big deal for startups. It usually comes around the third year of operation, and provides a necessary cash injection for scaling the business.
The meaning of ‘seed stage’ is changing rapidly. Back in 2010, 10% of seed-funded startups were generating revenue. By 2017, that barrier was raised to 50%. It’s more important than ever that your app has early validation because VCs are generally more reserved with seed investments, and are betting on companies with a proven track record of generating revenue.
Seed funding can come from VCs, multiple angels pitching into a round, or even crowdfunding.
Even if you’ve never pledged for a Kickstarter product or paid a recurring Patreon subscription, you can’t ignore the power of crowdfunding. In 2018, businesses raised $34 billion by making it possible for anyone and everyone to contribute to a product’s funding and development.
Wynd Halo, a hardware/software product, hit its $50,000 funding goal within 12 hours and then went on to raise far more than the average angel round.
Crowdfunding sites to check out include:
But for startups, crowdfunding doesn’t have to be done in exchange for a product.
Equity crowdfunding is an option for startups to sell off small percentages of equity to investors. In 2018, investors poured $2.5B into equity-crowdfunded projects like this:
Venture Capital (Series A, B, C…)
The next rounds of funding are typically from venture capital firms. These are series A, B, C, and so on.
Series A funding is offered to companies that have undergone serious scrutiny and proven that they have product-market fit.
- Company valuation: $15-30 million
- Average funding amount: $10.5 million
By the time series B comes around, your startup is a hot commodity. Startups tend to sell less equity at a higher price during rounds later than B. If you can make it here, you can probably make it anywhere:
Series C and beyond
Series C rounds are raised by stable startups to fuel international expansion or a new large-scale initiative. You know… something that might need $50,000,000 to pull off.
After series C, it’s almost guaranteed you can get acquired:
How Much Funding Do You Need?
In 2005, Y Combinator co-founder Paul Graham penned these immortal words:
“Venture funding works like gears. A typical startup goes through several rounds of funding, and at each round you want to take just enough money to reach the speed where you can shift into the next gear. Few startups get it quite right. Many are underfunded. A few are overfunded, which is like trying to start driving in third gear.”
The amount of funding you need isn’t a badge of honor. It should be proportionate to your burn rate.
Funding is buying time for survival, so if you go through $100,000/month in costs then investors will fund you for as many months they think you’ll need. With a burn rate of 100k, $1.2m would keep your company in business for another year so it can prove itself.
Getting funded is an awesome achievement, but you need to strike a careful balance between two things:
- Accepting enough money to get your app off the ground
- Not giving away too much equity
You also need to keep in mind what investors are looking for, and sell to this during your funding campaign.
As you can see, revenue and product/market fit isn’t as important as a capable CTO or an experienced founder. Sounds counterintuitive, but in the world of startup funding there are surprising nuances — and a process to follow.
Next, we’ll look at what that process looks like.
5 Critical Steps to Get Your App Funded
#1. Build a Minimum Viable Product (MVP)
Without a team of professional software engineers and whip-sharp planning, you’re not going to come out with a feature-complete version of your app overnight. It takes time and iterations to build your vision, due to technical limitations and the need to gather user feedback that shapes the app development roadmap.
A minimum viable product (MVP) is a basic proof-of-concept that shows early adopters and investors the idea behind your app and gets it into the hands of early adopters. In the early days of app development, it’s important to be agile and ship an MVP fast so you can grow it with the help of your testers and community.
There are a variety of options to build an MVP — some don’t even require code.
You could mock up a user flow with a graphic design program and arrange the wireframe in a tool like InVision:
(Source: Design App Mockups with Adobe Illustrator & InVision)
This approach helps you get feedback and demo the app to friends, family, investors, and alpha testers. But it doesn’t give you an app users can truly adopt.
Thankfully, there are tools like Siberian CMS for mobile, and Bubble for web apps — tools that don’t require code for you to build and host fully-functional software that you can distribute to alpha users.
So, what’s the process to build an MVP app?
- Define your ideal customer profile
- Identify the problem(s) your app solves
- Do competitor analysis to evaluate how the problem is currently being solved
- Define user goals and routes they take to achieve them
- List the specific features that enable users to achieve their goals (and prioritize them)
- Prototype an app that helps users achieve a core goal
#2. Collect Money from Early Adopters
To maintain momentum and generate buzz, it’s important to get your app into the hands of early adopters as soon as it’s ready, in its most basic form. This will help you get vital feedback, but can be used as validation in the early funding stages.
From a successful Product Hunt launch, it’s possible to capture the attention of tens of thousands of users. Here’s a screenshot of the traffic spike Froala Design Blocks saw after getting #2 most-upvoted product:
Product Hunt has a very active community that can be a valuable source of unbiased feedback:
Collecting money from early adopters helps validate your app; you can offer access to beta premium features as they’re developed for a discount rate subscription, accept donations, launch your app through a crowdfunding page — or all of the above.
For example, screen sharing tool Use Together offers a limited plan for free during beta, but offers custom solutions for enterprises on a deal-by-deal basis:
Every pricing strategy is different — it’s up to you to find that delicate balance between user adoption and revenue generation.
#3. Establish a Brand
Users adopt things people like them use.
By defining, strengthening, and promoting your brand, you dictate the kinds of users and investors you attract:
In small firms, a founder’s personality or the people they surround themselves with can be the foundation for an app’s brand. At its most basic, the assets you need to get together to ensure a consistent brand are:
- App name
- Color palette
- Font palette
- Social assets (header, content templates)
Look at competitors, industry, users, and brands that have caught your attention. For example, take a look at the branding for Heap, a product data analytics platform aimed at developers and other data-driven professionals:
The product name and copy is slightly more technical than your average app. The visual depth, colors and shapes capture the sci-fi feeling synonymous with data science.
What do you want your product to evoke with its look and feel? What tone of voice would your users most respond to? With feedback from an MVP launch, and further market research, you can build and refine the brand as you go.
#4. Create a List of Potential Investors
At this point, a list of potential investors will likely not include Mark Cuban or Sequoia Capital. Not yet, any way.
Your first port of call for potential investors should be friends, family, and people who already trust you:
Average annual investment total from each type of investor (Source)
Marketing is all about generating trust, and if you already have the trust of people around you — because you already know them — you can skip the rapport building and go straight for the sale.
Think about the people you know who are connected with other successful people, or past business partners and CEOs that might have an “in” for you following a launched MVP.
Local meetups are a hot source of leads — conferences or city workshops can be great for networking, especially if you’re meeting like-minded entrepreneurs or those that fit your ideal customer or investor profile:
To source new investment leads outside of your current circle of influence, you’ll need a more outbound approach. You can scrape Angel List using a tool like Import.io to get a list of investors in a particular city, or start manually prospecting in your local area.
To search for Boston investors, check here for example:
If you’re feeling really scrappy, use a Google Sheet to track outreach and relationships with investors. However, there are a number of CRMs you could use to track communication and investment size. Use a free CRM to get started.
#5. Prepare the Pitch
When you come up with a pitch, make sure you nail the key points each and every time, leaving nothing to chance. So, don’t just memorize your app and wing it every time — you need a tried and tested pitch deck:
In a study of 200 startup seed funding pitch decks, DocSend found the majority of pitch decks covered the team, product, problem, and business model.
As you can see from now-legendary examples like Stripe, your deck doesn’t have to be beautiful, but it should clearly communicate the value of your product, identify the core customer, and target market:
Get started quickly by using a template like this one from Slidebean. Research from DocSend and advice from The Art of Startup Fundraising author Alejandro Cremades recommends you include the following in your pitch deck:
- App name and logo
- Team + contact information (prominent phone number and email address)
- A clear, visual explanation of the concept (see the Stripe slide above!)
- The problem — why does your app exist?
- The solution — how does your app solve a problem?
- Market size metrics
- Key competitors + competitor metrics if available
- Product features and their benefits
- Business model (value prop, pricing, customer profile, etc)
- Basic financials — burn rate, investment needed, revenue projection
- What you intend to use the money for
- Other investors or notable achievements
Also check out this collection of pitch deck examples to get inspiration from great app startups like Snapchat and Intercom:
#6. Present Deck to Investors
You scored an investor meeting. Phew! Now the real work begins – you have one shot to make an impact:
With a fine tuned deck, you now need to deliver it to investors and be prepared to address objections. Whether you’re launching a super-technical app for developers or presenting your new salsa on Shark Tank, all pitches should follow a few simple rules.
Stick to less than 10 minutes of presenting, and pack the most important information in at the start and the end. Keeping the deck to less than 20 slides will help — you want to be sure you leave the investor with enough time for a Q&A afterwards.
Investors will expect you to be able to come up with answers to tough questions on:
- How many customers or users you have validated your app with?
- What is your go-to market strategy?
- What is your unique differentiation?
- What is your customer acquisition cost?
…And many more.
#7. Walk Through an Interactive Demo
If you can sell an investor on your app’s concept and value, the next thing you’ll need to deliver is an interactive demo. This could be your MVP, or a prototype in a wireframing tool:
It doesn’t have to be a fully-functional app, just something that shows a user flow or the core value. Make sure the app is populated with dummy data so the investor can envision using the app and get a hands-on feel for the product’s value (“Aha! Moment”).
3 Types of Apps Most Likely to Get Funding
Not all apps are created equal. Some types and/or industries are easier to secure funding than others.
Software is already the biggest investment category out there. In fact, almost every investment across the 4,164 companies shown above is technical in nature.
Inside the software category, let’s take a closer look at the hottest, most-funded app industries.
A record year in FinTech funding, 2018 saw $41.7bn across 788 deals. While deal count is trending down like most industries, the overall confidence in the market is at an all-time high.
Some headline-grabbers in this category in recent years include TradeShift ($432m), and SenseTime ($680m).
Despite the Bitcoin crash, cryptocurrency still has very valid business applications in the worlds of finance, real estate, and politics. Consumer interest has declined, but many app builders in this category are still getting sizeable investments.
Some big deals that have closed since the crash include Trustology ($8m) and Securitize ($12.8m).
In the past decade, cybersecurity has been an increasing concern for businesses as we’ve seen software and service solutions receive notable amounts of funding. Since 2013, VC investment in cybersecurity startups has gone up by 300%, or $5.7b!
In October 2018, cybersecurity testing software Randori raised $9.8m before even launching to the public. In a later stage deal, Anomali raised $40m in a round led by Lumia Capital.
Draw Up a Term Sheet
A term sheet is a document that is exchanged between the startup and its investor(s) that details the legal terms of the investment, and what both parties will do as part of the agreement.
The term sheet should cover:
- Type of shares and option pool
- Valuation and milestones
- Dividends — reinvested, or taken as payment?
- Liquidation — who gets what in case of liquidation?
- Founder shares
It’s best to get a lawyer to create the final document — preferably one familiar with investment law. Any good accelerator will also help you out with this.
3 Examples of Big Name Apps That Secured Funding
Coinbase made it to unicorn status in August 2017 when it raised $100m at a valuation of $1.6b. Between then and October 2018, the company’s worth went up 500% to $8bn after raising $300m from a single round of investments from firms like Y Combinator and Andreessen Horowitz:
Coinbase is a digital currency exchange app, so it’s easy to see why it took off at the same time as the crypto boom. However, even after bitcoin’s value plummeted, Coinbase weathered the storm — and quintupled its valuation — to form its own seed fund to invest in innovative crypto startups.
Curious about their seed round pitch deck? Check it out here:
In a post by Coinbase co-founder and CEO, Brian Armstrong, he offers this advice to startups:
“Great things start from humble beginnings. Most of what you see around you started as nothing more than a simple idea and a crude prototype. It’ll take 5 to 10 years to turn it into an “overnight success”, with dozens of setbacks and course corrections along the way. So pick something you’re passionate about and get started.”
Snapchat is an obvious inclusion. It was founded in 2011 with the philosophy that the world is changing how it connects and communicates, but there was no app that met the need:
“Snapchat isn’t about capturing the traditional Kodak moment. It’s about communicating with the full range of human emotion — not just what appears to be pretty or perfect.” — Evan Spiegel
As with any new tech concept, Snapchat’s pitch deck includes explanations of basic terminology and functionality:
By collaborating with influencers and positioning themselves as the gatekeepers and tastemakers of teen culture, Snapchat secured investors that wanted to buy into a vision of the future.
Over 13 rounds since 2012, Snapchat has raised $4.9B and grown to 188m daily active users:
Slack has been getting non-stop hype since 2015. It’s odd for a B2B app, but what kind of B2B app buys a full-page ad in the New York Times, anyway?
…Especially one addressed at the enterprise incumbent, Microsoft!
In 2018, Slack raised $427m more at a valuation of over $7B. It absorbed Atlassian’s HipChat competitor, and has beaten Microsoft away at every corner.
With more than 3m active paying users, its growth is symptomatic of a changing business landscape. We’re no longer tolerant (or reliant) of clunky email. We’re in the workplace of the future. Slack’s marketing — focused around making work fun and serving exciting teams like the Mars expedition — has got the whole world buying their story and loving the experience.
Getting your app funded is tough. You need to prove your concept, and be ready to sell your belief to people who live or die by calculated investment decisions.
That said, VC funds, angels, accelerators, and even friends and family, have more money than ever before to pour into innovative tech companies.
But the age of making shots in the dark has largely come to and end, as the market’s movers and shakers focus their money on only the strongest ideas.
Confident your app has a future? In search of funding? Get in touch with MassChallenge today.
This post has been updated from the original published on 1/20/20.