Let’s talk about app development funding. How do you fund your app? When are you ready to approach investors? How much of your own money should you expect to put into your app development?
App Funding Basics
The basic principle behind app development funding is to prove that you can solve a problem for someone else to the point where they will pay for you to solve their problem. Basically, you need to prove that there is a customer for your app.
Realizing what pain point your app solves will greatly improve your ability to help potential customers understand the need for your app. A great way to figure these points out is by going through the “value proposition canvas,” You can check this link here watch a video overview to find out more.
Investors typically won’t invest in your app until you’re already in revenue. They want to see that you can operate a SaaS business with what’s called Annual Recurring Revenue (ARR). Basically, the only proof they will accept that you can get customers is that you’ve gotten them. So, what do you do until that point?
Startup Funding Rounds
Funding a startup happens in rounds.
You will probably start off bootstrapping your app, which involves paying for your app development yourself. Here, you’ll most likely need to pull funds from savings or retirement accounts, bring on equity partners to do the same thing, and share ownership with them.
Next you’ll look for angels, friends, and family. This group of people will be your first outside investment. A lot of these people will want to see you succeed and will believe in your idea. Don’t just ask them for money; ask them questions about your app to get an outside perspective. They need to feel involved in your journey. They may even refer you to other angel investors.
Important side note: While you are getting funding from angels, friends, and family, your app should be far enough along to at least have mock-ups that you can show them. Having a functioning app is even better, but you need more than just an idea. You need to show you have put in your own work. If those people can see tangible evidence of what they are investing in, they will be more willing to invest.
Between an angel, friends, and family round and a pre-seed round, ideally, the app would have been launched and begun generating some sort of revenue. That’s a huge reason to celebrate! Don’t let all the hustle and stress get in the way of you celebrating the release of your app.
During a pre-seed round, you are looking for growth. Some firms or family offices may be open to getting an equity position in your app early. This round has the potential to raise anywhere from $250-500k. This money can be put toward operating the app, running the business, implementing consumer feedback, and enhancing or upgrading your app with new versions.
After the pre-seed, comes the seed round . Here you look for local seed funds who are looking to invest$1-3 million. Some seed funds in a more expensive, populated area like New York or San Francisco might look to invest $2-5 million.
Following those rounds you are now looking at the major rounds of funding, and they are defined by a letter in alphabetical order. So you start with round A, where you’re earning $1 million a year, aiming to raise between $2M and $5M. Then round B is looking for $5-10 million. Quick side note, you can be “stuck” on a round for multiple years, maybe it takes 3 years for you to accomplish round A. We call the rounds from the A to B bridge rounds because you aren’t quite at the round B level, but you are still injecting investor funds to prepare for series B.
In the end, app development funding is a test of your ability to bring investors and the market together. You need to dial in the investment opportunity with your investors’ tolerance for risk. You need to use the funds to drive growth instead of spending it on things that don’t drive growth. The more investments you take in, the more ownership of your company you give away, but you might personally exit and earn much more from growing a company with investor funds than you could bootstrapping and doing everything yourself.
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