17 December 2019
So you want to raise capital
It’s just past midnight and you are staring at your Xero dashboard, stressing about your burn rate. Last month’s MRR growth was negative, and you are on your last packet of instant noodles (not even chicken), wondering how long it will be before you can afford to pay yourself anything, let alone a decent salary.
Welcome to the world of a founder.
One of the enduring questions plaguing any business founder is: ‘how and when do I raise capital?’ We have put together a simple informal guide to the various types of capital raising for startups, scale-ups and businesses of all stages, including some newer, more novel methods, which we are observing with keen interest.
If you get to the end of this article and wonder what you can do to attract the right type of investors (and ‘rule out’ the wrong types), you’ll have to stay tuned for our next instalment!
|Friends, Family, and Fools. Drivers for such investments include undying love, blind faith, and the occasional guilt trip. Can make for uncomfortable family dinners. You’ve got to start somewhere…
|Equity crowdfunding democratises investments and allows your everyday investor to invest in early-stage companies at a low threshold. Typically run by a licensed intermediary platform, a company can only raise $5 million in any 12 month period. In return for their investment, investors receive shares in the business. Suitable for early stage businesses, particularly those which appeal to the masses e.g. hospitality, ride sharing and consumer goods businesses.
|Typically consists of a high net worth individual, or a consortium of high net worth individuals. It is normal for angels to also provide some form of mentoring in an industry or area in which they are specialised. However angel investment appears to be on the decline in Australia.
|If you are prepared to endure lengthy application processes, the rewards will be worth it. Grants are available at the federal level, state level, and can also be industry specific. Some grants provide businesses with funds upfront, while others come in the form of a tax incentive, with the R&D Tax Incentive being the most popular among startups and scale-ups.
|High risk, high return. VC firms are typically looking for high growth businesses (startups and scale-ups), and can provide significant funding. Unlike PE firms, VC firms provide comparatively smaller investments across a larger number of startups and scale-ups. In recent years, there has been a retreat from seed-stage deals, as the average size of VC funds have increased, and they begin targeting scale-ups. Micro VCs are beginning to cater to smaller funding rounds.
|Venture debt is starting to gain traction in Australia. This form of financing allows businesses to take on debt instead of diluting their shareholding (but as an alternative to traditional lenders/banks that may have stricter lending requirements). The loan size is typically 30% of the company’s previous equity financing round. In return, the venture firm may be granted share warrants which are rights to buy a business’s shares at a specific price point within a specific period. A typical term for venture debt financing is one to five years.
|Often confused with venture capital. On average, PE firms tend to offer larger amounts in a single round than VC firms. PE firms generally acquire mature companies (not publicly listed or traded) that are already established, and would typically acquire a majority stake, if not the entire stake, of a target company in an effort to improve the profitability of the company, which may be suffering from inefficiencies.
|Considered by many to be the Holy Grail of exit events (what about me? says the humble and effective Trade Sale). In many circles, it means you’ve made it. It also means opening your company’s books to public scrutiny, complying with ASX Listing Rules, shopping around for investment bankers and underwriters, engaging lawyers to help draft the prospectus, and undertaking a very involved due diligence process. The prospectus must be lodged with ASIC and a formal listing application must be lodged with ASX. It is important to be fully prepared for an IPO and what comes with it, to avoid a WeWork-style disaster.
|A blockchain startup creates and issues digital tokens which can be exchanged for cash or cryptocurrency (usually Ethereum or Bitcoin) as a way to raise funds. Unlike shares, digital tokens can have utility and owners of digital tokens can have access to goods or services. Blockchain startups must release a white paper before they can issue a token, and many run into regulatory hurdles when their token is categorised as a financial product.