Discovering the Funding Channels for a Technology Business

The recent tech revolution has driven remarkable advancements that have greatly influenced our daily lives in almost every aspect. In the modern world, tech companies have eclipsed more traditional business models such as oil and finance that used to dominate global markets in scale and profitability.

Hence, the opportunities presented by starting a tech business are vast, and if done correctly, very achievable. Perhaps, the most prominent barrier to entry to starting a technology business is sourcing the appropriate level of funding to transform the idea into a reality.

Fortunately, there are multiple avenues for financing your tech business dreams.

The utilization of one’s own personal capital as a source of funding for their technology business is an intelligent option for a variety of reasons. Namely, owners who fund their own businesses are not beholden to the whims of third parties regarding the vision and operation of the company.

Of course, the drawback of self-funding is that it can be a costly and somewhat risky endeavor. As it may result in insufficient capital and the centralization of all of your savings into a singular enterprise.

Of course, the drawback of self-funding is that it can be a costly and somewhat risky endeavor. As it may result in insufficient capital and the centralization of all of your savings into a singular enterprise.

1. Complete autonomy: If you have a clear vision and well-planned strategy then having absolute control can be a huge advantage. Often, a detrimental element of starting a business can be differing perspectives on the direction and shape the business should take. However, when the company is yours, the key decisions are decided by you. This control allows tech business owners the ability to design and run the company in the way that’s best suited to meet their desired outcome.

2. Zero debt: Starting any business involves intrinsic risk in terms of success rate. In fact, over 60% of tech businesses fail, with a staggering 25% not making it past the first year. A major contributor to this reality is debt pressure. Therefore, a company that’s built without outside funding removes this hazard from the equation.

3. Increased profits: Debt is a two-sided coin. On one side it provides capital and ongoing funding if required but on the other side, it requires interest repayments. These interest payments can substantially eat into profits at a time when the company is in its infancy. Thus, leading to further financial pressures when that money could be better invested in more important aspects of the business.

Raising the required capital to get your tech business off the ground and having enough financial resources to operate it can be expensive. Fortunately, financing can provide a viable solution. There exists a range of diverse financing options available for tech entrepreneurs to gain access to the necessary funding. For instance, traditional bank loans, small business loans, and loans from family or friends to name a few.

Sourcing loans for financing new businesses is a common practice, almost 50% of small businesses including in the tech industry opt for this method. That’s because it encompasses a host of benefits that can enhance the chances of success.

1. Financial stability: In contrast to self-funding your tech business, applying for and receiving financing via loans ensures financial stability. That’s because access to money is not limited to the amount of personal savings available. Furthermore, money can be accessed immediately and increased as required without sacrificing personal savings or assets.

2. Tax incentives: In the U.S. debt financing provides favorable conditions from a tax point of view. For example, tech businesses can deduct loan interest payments which has the potential to substantially lower the costs involved.

3. Growth: Yet another common obstacle faced by new tech businesses is restrictions when it comes to growth. Of course, growth requires investment and if there simply isn’t money available to invest, growth can be stunted. In an industry as saturated and competitive as tech, the ability to allocate capital for growth is essential and the loan financing model can provide this.

Venture capital (VC) is another funding channel for tech businesses that brings with it added security and advantages that other alternatives don’t provide. That makes it an attractive option for many tech entrepreneurs. However, the downside of venture capital is that the companies or individuals investing in your business are usually accompanied by strict conditions.

These conditions can include forfeiting an equity stake in the company, relinquishing control over the decision-making process, and stringent targets that must be met. However, despite this VC can still be a highly effective and mutually beneficial method for sourcing funding.

1. Perception: Venture capitalists conduct extensive due diligence before investing in a company. Thus, if your tech business can attract VC investment, it serves as a powerful indicator that your business idea is fundamentally sound. In such a competitive market, this is something that cannot be understated in its ability to enhance the perception of the credibility of your business.

2. Bringing in talent and investment: Given that VCs add an element of trust and authenticity to your business, they’re also incredibly potent for attracting high-quality talent and additional investment. Doing so will give your tech business a competitive edge by adding expertise that fuels innovations and opens avenues for further funding.

3. Insight: Venture capitalists not only provide sufficient funding for tech businesses and future growth but they also impart valuable insights on how to succeed in the tech industry. VCs are a great resource for assisting with strategic goals, overcoming challenges, helping to make informed business decisions, and making the most of niche opportunities. Additionally, they often have deep-rooted industry connections that can be extremely useful for accelerating growth.

This is one of the most common sources of financing for tech businesses. Essentially, equity financing involves the exchange of an equity stake in the company for access to financing. The types of companies or individuals that can become equity holders are diverse and can range from angel investors to families.

This method of sourcing funds is common for a plethora of reasons.

1. Zero repayments: In sharp contrast to other debt financing alternatives, equity financing is unique when it comes to repayment obligations. Rather than making periodic repayments, equity investors are partners who own an agreed-upon percentage of the business. Therefore, instead of making costly interest payments, equity investors get their returns by sharing in the profits generated by the business.

2. Aligned agenda: Given that equity investors become partial partners in the business, there’s a convergence of shared interest in the success and goals of the company. This facilitates an atmosphere of collaboration and commitment in the drive for a successful tech business.

3. Flexibility: Equity financing brings partners together with a shared interest in the prosperity of the business. Therefore, this shared risk-reward relationship is the ideal environment for the flexible allocation of resources that other financing options simply don’t provide.

The process of funding a tech business in today’s tech-centric age is as diverse as the innovations they introduce into our lives. These are just a few of the litany of financing options available to transform your tech business from a unique idea to a revolutionary and successful company.

Regardless of what financing pathway you choose to utilize, always ensure that you conduct due diligence before committing. Doing so will give your tech business the best chance of success and help avoid common pitfalls that can result in failure.