The “Investors will fund your app idea” Myth

App idea funding by VC firms

It’s a very appealing proposition — You come up with the app idea and someone else will pay to build it. After all, why wouldn’t they? It’s a great idea! Unfortunately for the ideas people out there, it is never that simple.

Pre-seed investment in app ideas by venture capital (VC) firms is rare, especially for first-time app entrepreneurs.

The “Investors will fund your app idea” sales pitch is used by many unscrupulous app development companies to lure inexperienced entrepreneurs into expensive workshops. It’s a way to extract what little money an app newbie does have, on the promise of introductions to investors and assistance with making the app idea “investment ready”.

In reality, until you have an app on the App Store with some promising user and sales data, interest from professional investors is not very likely, no matter how good the idea is.

It’s not all bad news though. Apps are still being developed every day and the funds to make them happen are out there. Those funds are just much harder to acquire than many app development salesmen will have you believe and getting your hands on them will take hard work and creative thinking.

The most common ways to fund app development are self-financing and investment by friends and family. Applying for credit cards and taking out personal loans so you can self-finance your app or asking friends and family for money might not sound like much fun, but like it or not, this is how the vast majority of app startups get their first product to market. This includes most of the apps that are now household names and attracting billion dollar valuations.

Get an app to market

Getting something out into the market is a crucial first step for any app startup. Even if is just a proof of concept and not the full version with all the bells and whistles. Validating the idea first by building a user base and making some initial sales is proof of potential and that proof is what VC firms are looking for.

Even Facebook only received VC funding after Mark Zuckerburg and Eduardo Saverin proved its potential by launching it and building a user base at Harvard University.

So if self financing is out of the question, how do you go about getting your app idea off the ground so you can validate the idea and get the proof of potential VC firms are looking for?

Speaking as someone who has successfully raised capital for an app startup before, I’d put it down to four key factors — the four Ps. Getting these four things right is extremely important, whether you are targeting family and friends or you happen to find an angel investor willing to hear your pitch. The same basic principles apply to raising money through a crowdfunding platform like Kickstarter or Equitise.

Raising capital for an app with the 4 Ps

1. People
2. Preparation
3. Proposition (Unique Selling Proposition)
4. Passion

PEOPLE

People invest in people. If you don’t have the right people involved you won’t attract investment, no matter how good your idea is. By ‘right people’ I mean people who understand the market you are entering and have the knowledge, skills and experience to realistically pull it off.

PREPARATION

Never approach a potential investor without first doing your homework. You might only get one chance to impress them. Make the most of every opportunity by having answers ready for any question they may throw at you. Know your target market inside out. Know your competitors. Know your numbers.

PROPOSITION (USP)

What makes your app different from your competitors? Why would someone use your app over another app or service? Defining your unique selling proposition (USP) is crucial to your success. If you don’t have a compelling reason for people to use your app over your competitor’s, getting buy-in from an investor will be extremely difficult and you probably need to rethink the viability of your idea.

PASSION

Let your passion and enthusiasm for your app shine through in everything you do. Show investors that you live and breathe it. Give them confidence that you’ll do whatever it takes to make your app successful. Your passion will show in your attention to detail, the way you present the opportunity, your business plan (yes, you’ll need one) and in the hardships you’ve overcome to get to where you are. Don’t be afraid to talk about the challenges. Just make sure you’ve got strategies to overcome them.

…

As the director of an app development company, I’d love to tell you that if you get these four things right you are guaranteed to secure funding for your app idea through a VC or angel investor. But, I’d be lying to you if I did. The fact remains that most successful app startups either self-fund or get family and friends to fund their first app release.

App strategy workshops are an important phase in the app design and development process, but they rarely lead to early VC investment. Take claims to the contrary for what they are — a sales tactic. Until you have a product of some kind in the hands of your target market, attracting professional investors isn’t a realistic option for most first-time app entrepreneurs.

The best advice I can give to hopeful app startups is to scrimp and save. Call in favours, use a credit card, partner with co-founders and pool your resources to get something to market. An MVP (minimum viable product) or proof-of-concept doesn’t have to be fully featured and it doesn’t have to cost hundreds of thousands of dollars. Develop something really simple and do a good job of it. Validate the idea and prove its potential. Do that and getting VCs to fund the growth and commercialisation phases will be much more realistic.

By Joe Russell – Founder and Director at DreamWalk App Development, Melbourne.