Article: Funding a software startup company

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Funding a software startup company

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Definition of topic funding a software startup company

The act of providing capital to a business that has recently began to operate in the software business industry is called funding a software startup company.

Types of funding for a software startup company

There are various types of funding that a startup company can seek for. These types can be divided into two different classes of funding, namely equity funding and debt funding. [1]

In debt funding, the money is borrowed from a person or company for a specified amount of time, and eventually paid back with interest. The money can be borrowed for either short-term use or long-term use. In the first case, the repayment can be made after the loan period, and in the second case, the money is usually paid back in several smaller repayments. The most common source for debt funding is a bank. [1]

In equity funding, a part of the ownership of the startup company is given to the person or company providing the money for the startup company. The borrowed money does not have to be paid back to the investors, not even in the case if the company goes bankrupt. However, the investors will be granted a share of the business profits. [1]

Different financial phases of a startup company
Different financial phases of a startup company

Different types of equity funding:

Different types of debt funding:

  • Banks
    • Personal guarantees
    • Company shares as guarantees
  • Raising money from family and friends

Different financial phases for a startup company are:

  • Seed capital
  • Early stage
  • Later stage









Relevance to software business

Raising funding in the software business industry differs from other industries in the sense that software startup companies usually require a small amount of funding as the cost to produce software is very low, and promise a high return on investment. [2] A small amount of funding is needed in the sense that software startups can grow rapidly even with a limited investment of capital, making the software startup companies more scalable than businesses in other industries.

Example of the phenomena

In 2006, The Finnish Funding Agency for Technology and Innovation (TEKES) invested €465 million in R&D projects made by companies, universities and research institutes. Out of these companies, one fifth were micro-companies employing less than ten people. More than half of all the funding went to small and medium-sized enterprises. [3]

Theoretical approaches

In theory, every software startup company needs funding, as the total development costs of a software product or service are high and the first revenues can be only seen after the product or service has been developed.

Currently interesting research questions

Future research on the subject could consider the following questions: [4]

  • How long do the positive characteristics of a self-funded firm's culture last as the firm transitions to different funding sources?
  • Has the slowdown in venture capital funding during 2001 resulted in more self-funded firms? Has the growth in corporate-funded firms slowed?
  • Are there combinations of funding types that lead to a more effective culture?

Links to related articles

See also

References

  1. ↑ 1.0 1.1 1.2 H. Cox, "Debt vs Equity Funding", EzineArticles.com, 2007.
  2. ↑ G. Irlam and R. Williams, "Software Patents: An Industry at Risk", The League for Programming Freedom, 1994.
  3. ↑ TEKES, Annual review 2006
  4. ↑ R.H. Hamilton, "E-commerce new venture performance: how funding impacts culture", Internet Research: Electronic Networking Applications and Policy Volume 11 - Number 4 - pp. 277-285, 2001.
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