As a high-growth startup, it’s likely that you will need more funds than you, or your family or friends, can provide. You’ll need to be as innovative about ‘fund hacking’ to raise funds as you are about growth hacking to grow your customer numbers. To be successful, you have to explore multiple funding sources to support your growth.
The problem is, some startup founders seem to regard the raising of funds as a badge of honour. It might get good press, but raising funds isn’t the goal of raising funds. Your goal is to achieve results.
Remco Marcelis, partner at startup accountants Standard Ledger and General Assembly’s “finance guy” talks about the types of funding sources, when you might access them, and how they apply to you.
Raising funds is about unlocking the next stage of growth
The point of raising funds is to achieve results at each stage of your startup’s life. What those results are will clearly depend on the types of goals that you set.
Many startup founders don’t realise that there are different sources of funding. Where you go for funding will largely depend on where your startup is in its journey.
Remembering that at each stage you’re really trying to grow your startup successfully, what you are trying to do is achieve traction and increase the value of your company.
During your ‘fund hacking’ stage, you might borrow a small amount of money to prove a concept.
Your most likely source of funds, once you’ve exhausted family and friends is traditional debt.
Banks are called traditional because they’re, well, conservative. Startups and conservative funding from banks don’t usually mix. But, if you’re in the position of having collateral (such as a house) that you can leverage, and can demonstrate your ability to repay the loan if your startup fails, then it’s still worth a conversation with a bank.
If you are pre-revenue, it’s probably not going to be much help to you unless you have a source of income that can help you repay your debt. But if you can borrow money, it’s non-dilutive (ie you’re not giving up equity), and at least you know what your fixed costs are.
Once you’ve proved the concept, you might run a crowdfunding campaign to show that your concept has traction.
Crowdfunding typically works on a project basis: You raise money for a fixed outcome. While this is perfectly suited for creative projects (think films and albums) and not really for software as a service (SaaS) companies, it is definitely worth exploring if you’re a hardware product startup. A good example is the hit Pebble Watch which raised $20m long before Apple Watch was around.
You can use the Australian platform Pozible or the USA’s kickstarter to promote your product and take pre-orders. It’s an awesome way to see if there’s enough interest in your product before gearing up for full manufacturing and distribution. A successful campaign shows there is traction, which is what venture capital investors look for too.
Now that you’ve demonstrated traction, you unlock angel funding that you can use to match funds for a grant.
Equity investment is the most likely source of capital for matching funds for grants. Most grant programs need you to be able to provide either 25% or 50% matching funds, so you will need to find a way to raise enough money to match it. You will probably also have to spend money and then claim it back, although some provide funds up-front to get you underway.
This is where angel investors come in.
Angel investors are typically high net worth individuals who have been successful in their own right. They typically invest between $25-$250k via equity or a convertible note (debt that converts to shares). Angels invest money as well as bring their experience and connections.
Angels can be somewhat reclusive and hard to find. A number of them operate indirectly through seed funds like Right Click Capital, collaborate through the female founder focused Scale Investors network or invest into early stage startup accelerators like Startmate (in which Atlassian Founder Mike Cannon-Brooke has put money). Innovation Bay also runs startup pitch nights for angels around the country.
Meanwhile, being eligible for the R&D tax incentive, you are able to increase your runway.
The R&D tax incentive is the largest source of funding for startups in Australia, largely due to its ease of access. One example of that is PwC’s self-service Nifty R&D platform.
The R&D tax incentive is non-competitive. And if you’re in your early pre-revenue stage, you will receive 43.5 percent cash back for the amount you spend on R&D. This is managed as part of submitting your tax return.
The other source of capital raised for development work is R&D forward financing. It’s an interesting, recent emergence in the startup funding scene in Australia thanks to financiers like the Rocking Horse Group.
In circumstances where you are ‘near certain’ that you will receive the R&D tax incentive cash-back at the end of the year, R&D financiers will lend you to do R&D throughout the year. Then, you pay it back at the end of the year. may also mean you need to raise less capital and that means that you get to keep more of the upside of your startup.
And your final stage is to dive into raising VC funds that use to hire people and expand off-shore.
Investors want the valuable upside and (largely) share the risk if things don’t go to plan.
Venture capital firms are finance professionals. They are professional managers running a fund on behalf of their investors. Their investors are typically superannuation funds that have allocated a minuscule portion of their funds to this strange alternative asset class called venture capital.
Seed stage VCs won’t look at less than $100k investment, but typically want to invest around $250k. Think $500k-$1m+ for later stage investors. You’ll recognise the leading names Blackbird Ventures, Bluesky Venture Capital and SquarePeg capital. You can find a full list of the VCs via their industry group, AVCAL.
As you can see, there are many sources of funding. But when you access them will depend on the reason for raising money. Raising funds is never an objective in its own right.