Whether you’re able to fund your enterprise with your own cash will depend on your industry, your overheads, and your operational requirements. In the case of most startups, who seek to disrupt, innovate, and scale rapidly, using personal savings (or ‘bootstrapping’) is simply not enough.
For many, the next port of call is friends and family. Neither of these small-scale routes require scary pitch meetings (depending on who your friends and family are) or going into debt with bank loans. Both of them allow you to keep control and ownership of your company. But friends and family investment should be exactly that - an investment. Not a donation. Family investment is often made as a gesture of goodwill, but they’ll expect to see a reward for their risk. The value and solidity of personal relationships should always be considered when embarking on this course of action.
So, you can’t scale enough without external investment, and you don’t want to mix friends with business (or you’ve already rinsed them for all they’ve got). What’s the next funding move for an Australian entrepreneur?
Government grants and incentives
The good news is Australia is world-leading in terms of state support for new businesses. Before approaching individual investors, always check if you’re eligible for a government grant. This is money that you won’t have to pay back. In order to qualify, your enterprise usually needs to serve a particular societal need. This might be the need for clean energy or agricultural technology. If you’re not eligible, you may still qualify for tax incentives. However, these are usually claimed at the end of the year, so may not serve your immediate funding needs. KPMG provides a great downloadable breakdown of grants and incentives here.
A financing route that’s gathered steam in recent years, equity crowdfunding or crowdsourced funding (CSF) opens your investment scope to a wide range of contributors. Conducted largely online, it bypasses the need for ringing round and meeting investors in person, and doesn’t rely on the founder having wealthy or C-suite level connections. With small starting contributions, anyone - and any number of people - can invest. Brewdog famously got its start this way, as did AI-based contract management solution providers ContractPodAi.
CSF campaigns can be used in tandem with marketing and social outreach to generate investment-building hype. Platforms like STAX can help you list your campaign, while also providing an easy-to-use, easy-to-browse platform for investors to diversify their portfolio.
Crowdfunding can be a competitive route to take. Equity crowdfunding platforms have exploded over the past decade, and you’ll be up against thousands of other startups vying for investors’ attention. It’s essential to combine this fundraising route with a strategic marketing plan.
Venture capital is the ‘big leagues’ of startup investment sourcing. You’ll be dealing with high-level executives, often at the top of their fields. A venture capitalist will be able to provide not just large sums of money, but professional guidance and valuable connections. Often, they are not using personal funds, but managed funds that they pool from a range of clients.
Taking this route means you do not have to pay back your VC investor should your startup fail. Because of this, they will have a highly focused, vested interest in your success, so you should expect to relinquish a portion of control. They will expect you to have a bulletproof exit strategy, like a plan for acquisition or an IPO. If you’d rather stay at the helm of your company long term, this might not be the option for you.
Bringing an angel investor on board is similar to the venture capital process. Similarly, if the startup fails, the investor’s funds are lost. Angel investors motives vary slightly from that of VCs. They are often passionate about a specific industry or product type. They might invest based on personal beliefs, usually using their own funds. They are also more hands-on, often playing a mentorship role for startups (hence the term ‘angel’ investor).
Because AIs operate independently, and focus on passion projects rather than cold hard cash, their risk level is higher. This means they are likely to expect high returns (many want to see at least 20%).
You might also consider an angel syndicate. This route is a rough middle ground between venture capital and angel investment. An angel syndicate is a group of angel investors, less formal and structured than a VC firm, but often with hugely beneficial expertise, specialisms, and cash pools.
A startup with their sights on an IPO will be attractive to a broad range of investors. When you make an IPO (Initial Public Offering), your company is listed on the stock exchange (like the ASX or NASDAQ). This process creates liquidity in the shares, elevates the company profile, and generates media interest that’s likely to fuel future rounds of investment. An IPO is a good way to free yourself from a startup business in order to repay investors and pursue other projects.
Naturally, there is a substantial administrative aspect to this process. Your company will undergo rigorous checks, and you’ll need to provide extensive financial reporting. The process can take several months from application to listing (usually around 5). If you successfully float on the stock exchange, you’ll have shareholders to answer to. Changes in the market and your share price will be beyond your control. Going for an IPO is a big deal, so it’s recommended that you consult with an advisory firm like STAX who can assist and advise from start to finish.
If you’re not ready to contend with the animal of a stock exchange, you might consider a Private Placement offer. In this scenario, your investment opportunity is offered as an unlisted security to private investors (as opposed to the public market). These investors must be accredited investors. They might be individuals, or could be a family office or mutual fund.
Because the requirements and regulation surrounding this option are less stringent, the process tends to be quicker and considerably more affordable. As with VCs and angel investors, the investor takes on all the risk. If the startup fails, they won’t get their money back. Private Placement is a good way to raise funds without the scrutiny and media attention of IPOs, or the hype and fanfare of crowdfunding.
The sheer variety of funding avenues, and knowing which one will work for your unique startup, can feel like a minefield. But it’s crucial to get it right. Speak to STAX for expert consulting, advice, and connectivity to a pre-established investor pool.