The days of approaching your bank manager for a business loan are all but gone. The number of new bank loans issued to SMEs in Australia have been declining since 2015, and only 27% of small businesses in the UK were funded by bank loans in 2018.
Equity crowdfunding has skyrocketed in popularity and market share so much that it can no longer be described as ‘alternative investing’. Traditional investor types like VCs and AIs have had to adapt to the times.
The modern founder has more avenues than ever for funding new enterprises. The question is: which one is best for your business?
- Crowdfunding is primarily conducted online. Communication is often made in one fell swoop via emails and your website. It can be more efficient than older models of calling and meeting.
- Founders can be much less reliant on a network, or may in fact not need one at all. CSF, especially when hosting via an agent like STAX where investors can browse campaigns, opens up a whole world of opportunity that previously only the well-connected might have had access to.
- Ever-evolving crowdfunding platforms and their tools make it easy (and fun) to generate a buzz. Many of your steps can be automated, and the timeline and viewable milestones create a sense of urgency and excitement.
- The democratic aspects of CSF come with a downside: you might not know who your primary investors turn out to be. You’re likely to be doing business with strangers following the campaign’s close, and with the exception of one or two lead investors, they will purely be contributing funds, not guidance.
- You’ll be facing competition with a sea of other companies trying to get noticed online and raise capital through crowdfunding.
- With a private placement, you’re offering shares to pre-selected investors as opposed to the open market. The notion is similar, but it’s a privatised version. This means less regulation and less hoop-jumping as a result.
- Due to the more relaxed requirements, campaigns led by this type of investment are typically much quicker and cheaper than an IPO offering.
- As the founder, you are not expected to relinquish control. You will remain as a privately-owned company, while still gaining access to liquidity or cash.
- Private placement offerings can only be made to accredited investors. You’ll be bringing a select few high-level funding sources (for example, investment banks or mutual funds) on board, not appealing to the masses.
- Private placement offerings tend to be riskier. You’ll need to appeal to a niche demographic of high-level investors who are comfortable with that risk, and may have a harder task of winning their confidence.
- Angel investors tend to take a more personal approach. They might have a passion for the industry, or for helping young start-ups get their first break. They also bring a lot of knowledge to the table. They’ll be investing within industries they know and understand, and can provide invaluable directional input to your operation.
- The rewards AIs get from investing are not just fiscal. This often translates to them being less risk averse.
- AIs understand if the start-up fails, their funds will be lost. If borrowing funds from a bank, sadly, there will be no such grace.
- AIs will want to see a bigger return for their risk (the effective internal rate of return for a successful AI being roughly 22%).
- They may want to take on more executive control of your company in exchange for their investment and knowledge.
- Angel funds can sometimes come from a little too close to home. Undoubtedly you've heard the expression ‘don’t mix business with pleasure’. A family member or friendly face offering capital can seem like a dream come true, but make sure your relationship is solid, and they won’t try to steamroll (or worse, guilt-trip) you further down the line. Angel funds should never be taken as a ‘favour’, but as a rational, business-minded decision that benefits both parties equally. Think carefully about how personally responsible you might feel to a friend or family member’s investment, and how you’d handle it should things not go to plan.
- Due to the multiple investor sources a VC organisation will be drawing from, they can usually amass a large pool of funds, and quickly.
- As with angel investors and unlike bank loans, you’re under no obligation to pay the funds back should your company go under.
- VCs are knowledgeable, but they may be more hands-off than an AI. Their real advantage lies with their network. They are likely to be closely linked with other investors and VCs that they can rally to get you to your target.
- Venture capitalists will be expecting a return on their investment, so they’ll be expecting you to gear up for an IPO or acquisition. If you want to remain at the helm of your start-up long term, VC is probably not the best option for you.
- You’ll give up a portion of your ownership when you bring a venture capitalist onboard. You may even end up handing over a majority share, depending on what the business needs, and what you are able to negotiate.
Initial Public Offering
- Making an Initial Public Offering, where your company is listed on the stock exchange, creates liquidity in the shares. This makes your offering attractive to a broad cross-section of investors.
- An IPO can be considered ‘the big leagues’. The resulting profile elevation will generate further interest in the media and get you in front of high-level investors. It’s also likely to attract new reach, customers and employees further down the line.
- An IPO provides the opportunity to exit the business if that’s what you desire. You might like the entrepreneurial aspect of founding - IPO allows you to raise funds then hand the reins to the shareholders, freeing you to start another project (or just enjoy the profits!).
- First and foremost, you must be eligible to list. You’ll need to undergo a profits and assets test, submit financial reporting, and form a due diligence committee. The timeline also tends to be longer than a CSF campaign or investor call, with the ASX estimating 4-5 months from application to listing.
- Once an IPO is completed, there is naturally some loss of control. Even if you choose to remain in the business, there are some actions and decisions that will need approval from your shareholders.
- When you enter the stock market, you’re at the mercy of its fluctuations and conditions. Share prices and liquidity will no longer be under your control.
- Possibly the biggest con - making an IPO requires professional advice, underwriting, listing fees, and various other service fees and costs which will not just be one-offs, but consistently required by the stock exchange. These might include audit costs, annual listing fees and share registry fees.
Speak to the STAX Listings team here to find out fundraising option is the most suitable for your company.