Six sources of funding that can help your startup grow
Your high-growth startup needs funding to to hire people, to build product and to find and service customers. But where do you get it? And when are which sources appropriate?
The truth is there are multiple sources of startup funding. You will have to be as good at ‘fund hacking’ to raise funds, as you are about growth hacking to grow your customer numbers.
- Venture capital
- Corporate partners
- Personal resources
- Family friends
What sources of funding are available to my startup?
There are five sources of funding that might be available for your startup. This information will be covered in more detail in this month’s workshops.
The five sources are: Traditional debt (bank loans), government grants & tax incentives, crowdfunding, angels & venture capital.
Borrowing from the bank is called ‘traditional’ because banks are conservative. This is why startups don’t usually mix with banks. 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.
Traditional debt also has some positives. Your fixed costs are known, and you aren’t giving up up a share of your company in exchange.
Depending on your type of startup, and your current stage, many state-based grants may be able to help you. Examples include the MVP program in NSW and the industry-specific Clean Energy Innovation Fund.
How government grants work
Government grants often ask you to match up to 25 per cent or 50 per cent of the funds. This means you have to raise that money before it can be matched. It’s also likely that you will have to spend money and claim it back, though some grants do give you up-front funding to get you started.
The application process can also be lengthy and even difficult. Funding rounds in grants are competitive, so you are not guaranteed to receive it.
Two dedicated Federal grants for startups are:
Startup tax incentives
The R&D tax incentive is the largest source of funding for Australian startups. This is because it is easy to access; with platforms like PwC’s self-service Nifty R&D making it simpler for founders.
The R&D tax incentive is for early-stage product development. It is not competitive, but you do have to meet eligibility criteria. See this page about the R&D tax incentive for more information.
R&D forward financing
Research and development forward financiers are emerging in Australia’s startup funding scene. An example of one of these is Rocking Horse Group.
When you are almost certain that you will receive the R&D tax incentive cash-back at the end of the financial year, R&D financiers will lend to you so that you can do R&D throughout the year. You pay it back at the end of the year.
This kind of financing may mean that you don’t have to raise as much capital.
If you are familiar with crowdfunding, you will know it tends to work for specific projects. That is, you raise money for a fixed outcome. It is great for creative projects (like films or albums), but not suitable for software as a service (SaaS) companies. If you have a hardware product startup, though, it is well worth exploring. A good example is the Pebble Watch, which raised $20m long before Apple Watch was around.
Crowdfunding is an awesome way to see if you can get traction before you invest in full manufacturing and distribution. The other great thing about doing this is that it ticks the traction boxes that venture capital investors want to see.
Equity investing: Angels and venture capitalists
Equity investing is when an investor owns shares in your startup. The investor wants the valuable upside of your startup and will (largely) share the risk if things don’t go to plan. This is unlike debt: In traditional debt scenarios, you own all of the risk yourself.
An angel investor is usually a high net worth individual who is already successful in his or her own right. Angels typically invest between $25-$250k via shares (equity) or a convertible note. A convertible note is debt that converts to shares. Unlike venture capital investors, angels are also wanting to invest their experience and connections.
Self-made investors are great to get, but angels can be difficult to find. Many 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. (Startmate is an accelerator into which Atlassian Founder Mike Cannon-Brooke has put money).
Venture capital firms 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, they often want to invest around $250k. Think For later-stage investors, you can think in the range of $500k-$1m+. There are some leading names in this area: Blackbird Ventures, Bluesky Funds and SquarePeg capital. The industry group AVCAL has a full list of the VCs.
Your aim with fund raising is not to raise funds
Remember, the funds are not the end-game. You are raising funds to do other things: hire people, build your product, find and service customers.