Mobile App Fundraising: The Basics of Equity & Debt

 

If you read a tech publication today you probably read about a multitude of tech startups raising capital – a milestone event for them and just another day for the famous VCs backing them. This onslaught of mobile app fundraising from venture capitalists has created a culture that assumes equity financing is the top path for growing their businesses. In reality, only about one percent of startups have raised VC historically – but the media portrays a much different story.

In order to understand the most viable long-term solutions for small digital startups, founders need to start looking beyond angel investors and venture capitalists for mobile app fundraising.

In essence, there are two types of financing: equity and debt. Each type of capital has advantages over the other based on the stage, size, and capital needs of each company. It is imperative to see how these factors align with the company’s short and long-term goals to gain a full picture on how founders should strategize their mobile app fundraising.

 

Equity

Equity financing is raising capital from Angels or VCs by selling ownership of the business (usually in the form of common or preferred stock). Equity investments can occasionally pay investors dividends, but generally speaking, this type of investment is only “paid back” to investors when the company reaches a liquidity event. Most investors are hunting for unicorns, but few ever find them.

Equity may be more appropriate than debt in the following circumstances:

–  Turning an idea into an actual product – if the founders can not build out ideas on their own they will need to hire a team or outsource the development

–  Moving from bedroom to boardroom – bootstrapping alone might not be enough take a business from concept or MVP to full blown company with a team, operating expenses, offices and more.

–  Sustain operations prior to profitability – if a particular business has not yet monetized or if the business must grow aggressively in advance of making meaningful revenue

Benefits:

–  You do not have to pay equity investors back if the business fails.

–  You can likely tap into an investor’s network for “added value”.

–  Equity investors generally take a long-term view- they understand there will be ups and downs in the business as it grows.

Risks:

– Raising equity can be an expensive and time-consuming process.

–  Equity investors are taking ownership in your company, which likely includes getting some form of control over decision-making.

–  It is hard to place a real value on the equity founders give up- investors may end up taking a large portion of your business and therefore limit your upside.

 

Debt

Debt financing means borrowing money with the expectation of paying it back at an agreed-upon cost over a period of time. Debt is generally provided to by banks, credit card companies, and online lenders.

Debt may be better than equity in the following circumstances:

–  Need the cash quick – debt raises are much faster than equity raises, allowing founders to focus on building the business rather than raising capital

–  Lower capital requirements – debt raises are typically smaller and less complicated than equity rounds

–  Leverage – when capital is needed for specific investments with clear returns (outcomes) for the business

Benefits:

–  The lender generally does not have any ownership or direct control in the business so the business relationship between the borrower and lender ends when the financing is repaid.

–  The interest on the loan is tax deductible.

–  The costs of borrowing are known, so it is relatively straightforward calculation to understand if taking the money is a good business decision.

Risks:

–  Money must be paid back within a fixed amount of time.

–  Debt financing can leave the business vulnerable during hard times if revenues take a dip.

–  Collateral and/or guarantees may be required, meaning that if the borrower fails to pay debts then the lender can take ownership of collateral or try to collect through other means.

 

To recap, founders who need to launch, build, or scale operations without meaningful revenues should focus on equity financing, while those seeking quicker capital for specific initiatives with clear returns, such as marketing and user acquisition, should consider debt financing. Choosing the right mobile app fundraising structure is key to getting the product to market, generating profits, and running a sustainable and profitable business. Before chasing headlines and trying to make a splash with a big equity raise, be sure to know your options and test the market to really understand what is available.

 

Aprenita offers mobile app and digital businesses a variety of mobile app financing options. To learn more email team@aprenita.com

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