Money makes startupland go round. No matter the business model, the market, the mindblowing idea, you’re going to need a little (or large) cash injection if you’re going to make your mark on the world. This is our guide to funding options to help you get your startup off the ground.
One of the most popular forms of startup funding is through venture capital.
High-net-worth individuals, giant super funds, corporates and other groups invest in venture funds, which are managed by investors, who invest in startups on their behalf, taking equity stakes in the business.
VC funds are typically looking for startups with high growth potential, but it can be about more than just a return. Many VC firms also have their own specialist areas, and will look for founders they can have a good working relationship with, and businesses they can add value to.
Funding rounds led by VC investment can be huge. The biggest Australian capital round last year saw HR startup Deputy raise $111 million in a round led by Silicon Valley VC IVP.
Aussie employee feedback software startup Culture Amp also secured $53.4 million in Series D funding in July last year, in a round led by Aussie VC Blackbird Ventures.
So far in 2019, we have seen some more modest deals, with Internet of Things startup GoFar raising $1.3 million; software startup Curious Thing securing $1.5 million in seed funding; and, Kiwi edtech startup Kami completing a $1.4 million raise led by Aussie VC Right Click Capital.
Angel investors are typically high-net-worth individuals with particular expertise or interest in a specific industry or technology, looking to make an investment in it.
Often, they will be keen to contribute to the startup’s success with skills, knowledge and contacts.
Some startups will rely on just one angel, but often once one reputable backer is on board, more support comes flooding in. Equally, there are several angel groups such as the Sydney Angels and women-focused network Scale Investors.
However, some in the startup space have voiced concern that angel investment for startups is dwindling. Speaking to StartupSmart earlier this year, Justin Lipman, investment director at Equity Venture Partners, explained that if the economy takes a turn for the worse, there may be fewer angels around.
“People with a few hundred thousand dollars to splash — they just won’t have that cash anymore. There might be a bit of a dearth of funding in early-stage private angel investment,” Lipman said.
Equally, angels may opt for a less risky option of investing in VC funds.
In Victoria, LaunchVic’s 2018 Mapping Victoria’s Startup Ecosystem report found angel investment deals are taking longer to finalise, something that is a cause of concern for LaunchVic chief Kate Cornick.
“Angel investments, which should be the fastest rounds, are taking almost as long as it is to raise VC. There’s clearly an issue there,” she said.
“If you look at best practice, seed capital should be very quick,” she added.
Debt funding offers a cash injection without having to give up any equity in your startup. Instead, the funding has to be repaid over a set period.
Australian VC firm OneVentures launched a new $100 million venture credit fund in August 2018.
At the time, managing partner Michelle Deaker told StartupSmart the fund is intended to allow startups “a longer runway before they go out and raise capital again”, giving them the opportunity to increase their value in the meantime.
According to Deaker, this type of funding is commonplace in more mature markets, with about $5 billion invested through direct credit funding in the US every year.
In the US, Europe and Israel, venture credit represents about a quarter of later-stage financing, and 10% to 15% of total funding, she says. But, in Australia, it hasn’t always been easy to come by.
Friends and family funding
This is a popular route for very early-stage startups, helping them get their venture off the ground quickly, with the backing of family members or close friends.
For the investors, it could be considered less risky, as there’s no mystery about the founders or their history.
Alan Jones, general partner of M8 Ventures, advised founders going down this route to “raise investment from people who know you from previous successful ventures, professional roles or personal relationships”.
These are people who “know you well enough to invest in you, rather than invest in your idea”, he said.
However, bringing issues of money and equity into any personal relationship can be complex, and it’s important to make sure the proper paperwork is drawn up professionally, and to be absolutely transparent about expectations around the investment.
Divvito, a communication app for parents who are separated, was conceived when Wendy Oxenham was in that position herself.
Oxenham told StartupSmart she was speaking about the startup to her family constantly, and eventually, they became her backers.
For Oxenham, it was important to separate business conversations and family ones, and not to let business worries come between you.
“Running a company is stressful, and you can have your ups and downs,” she explained.
“They’re there to help you and be part of the highs and lows … they will just give you a hug,” she added.
“If you don’t have that trust in your family that they will be able to help you through the ups and downs, then don’t take their money.”
A bootstrapped business is launched using the founder’s own cash and sustained by its revenues. It can involve an awful lot of penny-pinching and, crucially, could mean growth potential is restricted.
However, it also means founders don’t have to dilute their equity in the early stages, giving them a chance to grow first. Bootstrapped founders also aren’t obliged to consider anyone but themselves when they’re making decisions, or to spend time on regular progress reports.
If a startup can bootstrap successfully for a while, it means they have more equity to play with, and the potential to secure more funding if and when they do decide to raise.
Aussie unicorn Atlassian, for example, was bootstrapped for its first eight years before raising a whopping $60 million in 2010, and a further $150 million in 2014. It listed on the NASDAQ stock exchange in 2015, and currently has a market cap of $US24.9 billion ($35 billion).
More recently, Melbourne regtech startup Checkbox bootstrapped for two years before securing $1.77 million in angel investment to fuel its growth spurt, while Sydney HR startup HumanForce raised $22.5 million to fuel international growth, after bootstrapping for 17 years.
Accelerator programs can offer early-stage startups a much-needed launchpad into the ecosystem.
Often focused on a particular industry or market segment, the programs provide mentoring, workshops and access to expert advice and industry contacts, as well as a sense of community among their cohort.
While it’s not true of all programs, some Aussie accelerators also offer participants a relatively modest investment, in exchange for equity.
Corporate-focused Slingshot accelerator, for example, provides participants with seed funding and access to corporate partners, while selected participants in BlueChilli accelerators can receive up to $50,000 in pre-seed and $250,000 in seed funding.
The EnergyLab Accelerator, which provides a year-long program for clean-energy focused startups, has partnered up with early-stage VC firm Artesian to offer certain legible startups $50,000 in seed capital, in exchange for 5% equity.
Government grant funding
Once you start looking, there are a whole lot of government grants and tax incentive rebates available to startups – it’s just a case of finding them and securing them.
Government funding can be split into two categories: upfront grants that typically require startups to apply, compete against other applicants and come out on top; and tax incentives, that are available to any startup that meets the criteria.
Speaking to StartupSmart in July last year, Gary Shapiro, co-managing director of Rimon Advisory and all-round expert on government funding, said the competitive, high-value grants — usually offered at a federal level — have very low success rates.
Some of the state-level grants are less competitive, simply because “there are fewer people playing”, he explained.
Tax incentives, on the other hand, are available to anyone who meets the criteria. Here, it’s less about standing out in the application, and more about going through a compliance process.
“Do you meet the rules? If you do, you get your money,” Shapiro said.
A corporate venture fund is essentially a venture capital fund backed by a corporate entity such as a bank or insurance company, focused on investing in innovative startups in that particular industry.
The funds allow corporates to dip their toes into the innovation space and try out new technologies, while also finding potential new partners. Of course, they’re also hoping to see a decent return at the end of the day.
In 2016, IAG launched it’s Firemark Venture Fund and accelerator program focused on backing insurance startups.
In a statement at the time, the insurance giant said the objective was “to invest in, and partner with, both startups and established businesses that have the potential to disrupt the value chain”.
In September 2018, big-four bank NAB allocated a further $50 million to NAB Ventures, bringing its total investment in the fund to $100 million.
Speaking to StartupSmart at the time, NAB Ventures general partner Melissa Widner said the bank is looking for return on investment, but also for strategic value. She also noted the board has been pleased with the innovations it is bringing in the door.
“Large companies can’t move as quickly as startups,” Widner said.
Nab Ventures acts as “a conduit” to make it easier for startups to partner with the bank, and vice versa, she added.
Equity crowdfunding legislation was given the green light in Australia in March 2017, allowing individuals to invest small amounts into companies for small amounts of equity.
In September last year, the law was amended, making equity crowdfunding available to eligible private companies and opening up the opportunity to more startups.
But being able to raise as a private company does bring complications, and additional costs.
Speaking to StartupSmart when the legislation was amended, Marina Nehme, a senior lecturer in the faculty of law at the University of New South Wales with particular expertise in corporate law, equity crowdfunding and regulation, explained startups will have to comply with additional regulations designed to protect the investors.
There will be “a cost that is attached”, Nehme said.
It’s a case of “finding the balance between protecting the outsiders and making a business viable”, she added.
Even so, many startups favour equity crowdfunding as a way to include their customers in their journey
Last year, cinema ticket startup Choovie embarked on a campaign to raise $700,000, with founder and chief Sonya Stephen saying the idea was “to get our fabulous loyal customers to become shareholders”.
Wave energy startup Ocean Swell Energy used crowdfunding to raise $1.5 million, to top up its $9 million raise.
“We thought there were good synergies between the type of investors that would normally go through crowdfunding and our type of renewable energy company,” said founder Tom Denniss.
Raising capital for new technology is always difficult, Denniss said, especially when you don’t have a big public profile.
“Crowdfunding is a great alternative,” he added.
“It broadens your potential clientele, and opens it up to many small-scale investors rather than a few large ones.”
It may not be as popular as it was before the equity crowdfunding legislation kicked in, but there are several startups that have used ‘traditional’ crowdfunding methods to (literally) kickstart their business.
Crowdfunding campaigns see backers pledge small amounts of money to a business or product in exchange for a finished product, a small gift, or even just a credit later down the line.
There is no equity involved here, and the funds are only taken from the contributors account if the campaign reaches a critical point.
In 2016, Melbourne headphone startup Nura completed the most successful Australian Kickstarter campaign ever, securing $2.5 million from almost 8,000 backers.
Now, Nura is a fully-fledged and well-funding startup, raising $21 million in an oversubscribed Series A round in November last year.
In 2017, Aussie product design startup Orbitkey ran four campaigns on Kickstarter, raising a total of $1.5 million for its flagship keyring product designed to make it easier to carry multiple keys at once.
The beginning of 2018 saw a slew of blockchain startups raising money through initial coin offerings (ICOs), whereby they would sell their business’ cryptocurrency tokens, which could be used to purchase goods and services from the startup themselves, or traded on the cryptocurrency markets.
In January last year, services marketplace CanYa raised $12 million in cryptocurrency Ethereum in a 30-day sale of its CAN tokens.
Then, in March 2018, Sydney-based blockchain startup Havven raised $39 million in Australia’s largest ever ICO to date, with $US26 million ($36.3 million) pre-sold to crypto investment funds and high net worth individuals, and the remaining $US4 million selling in less than 90 minutes.
More recently, however, crypto prices have taken a tumble and the ICO funding trend has gone with it.
Speaking to StartupSmart in September last year, Caile Ditterich, founder of local agri blockchain startup BlockGrain, which raised $5 million in its 2017 ICO, said he would be apprehensive of raising in the same way again.
“Right now, I think an ICO would be very hard,” he said.
“The market’s completely dropped, and the money previously in the industry is no longer there.”
Small business loans
Perhaps they’re not among the most common forms of startup funding, but it is worth noting that startups would, technically, be eligible for small business loans.
However, it’s the high-risk nature of the business that makes this kind of funding particularly tricky, sending founders looking elsewhere for their dollars.
You can help us (and help yourself)
Small and medium businesses and startups have never needed credible, independent journalism and information more than now.
That’s our job at SmartCompany: to keep you informed with the news, interviews and analysis you need to manage your way through this unprecedented crisis.
Now, there’s a way you can help us keep doing this: by becoming a SmartCompany supporter.
Even a small contribution will help us to keep doing the journalism that keeps Australia’s entrepreneurs informed.