Cash is your oxygen: A guide to funding your early-stage startup
Thursday, October 25, 2018/
Whether you’re an established business or just in the early stages of starting up, there’s one resource more critical than all the rest.
That’s right: cold, hard, cash.
Without it, you simply cannot operate.
It’s why we see startups pitching at all stages of their evolution. Ultimately, they all have the same requirement: a cash injection via fundraising. But before taking that wad of cash from an angel, seed or venture capital investor it’s worth identifying the different funding sources for your early-stage business and understanding the pros and cons of each.
Self-funded and operating through cashflow
I’ve always said the funding source of revenue from your customers is preferred!
This is could be the best and most ideal way of funding your startup. You’re not taking any outside investment, have to answer only to yourself (or significant other), and if you’re hugely successful will still own 100% of the business you’re building.
However, this can be a slow road.
If you’re reliant on building technology, a product for your market and need to recruit staff, the early-stage revenue you can accumulate will likely be small. Your growth will likely be slow and the inability to hire staff to build technology could mean you never really get off the ground.
Join an accelerator
Being accepted into an accelerator programme is awesome. I recently mentored QUT Creative Enterprise Australia’s Collider programme in Brisbane where 10 startups were accepted into the intensive three-month programme. There are so many benefits to being involved in an accelerator: receiving a (usually) small amount of funding, free office space and facilities, world-class mentors taking you through a dedicated programme, constant pitch practice, and building a close network of like-minded people from the cohort of other businesses in the programme. You’ll have opportunities to meet investors and other influential people in the startup ecosystem.
Apply for government grants
Over the past 10 years, Australia has really improved the way governments support Australian startups. There is now a range of both federal and state government support available. Have a look at the federal government’s grant information page first, and then the relevant page for the state or territory where you work.
There’s the opportunity to start with a Business Growth Grant from the federal government that provides up to $20,000 matched funding. Once you’re up and running and if you’re exporting, the Export Market Development Grant (EMDG) is a must, as it provides a reimbursement of up to 50% of any promotional expenses incurred through attempting to grow your international sales.
In NSW if you’re not yet generating revenue and are identified as a promising startup you can apply for up to $25k via the Minimum Viable Product (MVP) Grant to help take your proof of concept to MVP. Both the Queensland and Victorian governments have similar programmes.
Beg, borrow and steal
Let’s park the beg and (especially) steal, and discuss borrowing money to start your business.
Starting a business is hard. Bloody hard! And statistics show upwards of 80% of new ventures fail. I say this not to scare you off, but to provide context for what I’m about to say next.
Anything you borrow you have to pay back. Irrespective of your business being successful or not. And if it’s your business and you’re a director, you become personally liable for any debts incurred by the business if things go badly. I’d strongly advise against borrowing to start your business, whether that’s from a financial institution, or from friends, family or fools. If you’re planning on borrowing against your house and have a stack of equity built up, just remember you’re still going to need somewhere to live whether your business is successful or not.
A debt facility will be available to you at some point. Just ensure there’s a product built and sustainable revenue in your business first so you can service a loan through the business and not have the stress of repayments too early in your startup journey.
This is where there’s a lot of focus in the startup community whether you’re a founder or investor. In a nutshell, startups want investment so they can operate, and investors want to get involved in startups in an attempt to drive a 1000x return. If only it was that easy!
When you’re raising money for your startup, the investment path looks like this.
1. Angel investors
These can be friends, family and fools you convince to give you some money for a small share in your business. Or there are multiple networks of angel’s prepared to back very early-stage businesses. Typically at this stage, you’ll be looking to raise $150k to $250k, with each angel giving you between $25k and $100k.
While there’s networking events and pitch nights, such as Sydney Angels and Seed Money, getting in touch with anyone that could potentially be an angel investor is hard. This is where you’ll need your absolute best networking skills on hand so you can uncover as many of them as possible. Ask for referrals with every person you meet that shows interest.
2. Seed investors
These will be similar to your angels, and in some cases will be the same people. At this stage you’re probably six to 12 months into burning through your angel round, have a product in the market and are starting to generate a small amount of revenue. You want to prove at the seed round the scale in your target market, unit economics, customer acquisition costs and the value you’re delivering to your customers. At seed stage, you’re likely to raise about $500k at a company valuation of $3-5 million.
3. Pre-A or Series-A round
This is when things really get interesting. It may not always be as linear at this (you might have had several seed rounds prior to getting to your A-round). Series A is when you’re really going to turn on the gas and drive growth — both product, geographic and sales expansion. You’ve proven your market and operating processes, and are ready to take the 10-15 staff in your business on a period of rocketship growth. Your Series A will likely raise $3-5 million (sometimes more), and it’s usually at this stage you’ll bring in a range of sophisticated venture capitalists who will provide both a chunk of cash but also a huge amount of strategic value to your business. If you don’t have one already, it’s at this stage you’ll create a formal board for your business and ensure you really start operating as a ‘grown-up’ business.
Do the hard work
Depending on how quickly you want to grow your business, the size of the market opportunity and the cost of doing so will both determine what funding source you focus on. My advice to all startups is to do the hard work first prior to asking for outside money. Show that you’re scrappy and can develop something (albeit small) with your own funds to start with.
As attractive as outside investment is, it’s difficult to secure, takes time and raises the level of expectation on how quickly and effectively you can deliver. Build your own confidence first through perfecting your product and go to market approach. Then practice your pitch to investors (and practice again and again) to give you the best chance of fundraising success.