October 28, 2015
9 Ways You Can Fund Your Startup
You have carried out the necessary due diligence, conducted research and now know that there is a viable market for your business idea. It’s an exciting time in the development of your business, but you now realise you need a considerable amount of funds to get started and make your business dream a reality.There is nothing more frustrating than having a remarkable idea for a business and no capital to fund it. Luckily there are many options, some not immediately obvious, that can help you get the investment you need. The following provides a variety of potential starting points for discussion with your business and financial planner.
Please note this information does not constitute financial advice and we always strongly recommend discussing these options with a professional.
During the early stages, many entrepreneurs decide to fund their startups themselves to avoid debt and retain complete control over their business. Starting your business with your own investments means operating leanly on a shoestring budget. Whereby you will have to strive to get the most out of your cash and existing assets by making smart investment decisions with clear mechanisms for ROI tracking. Utilising free and paid services, such as marketing consulting, or business and financial planners can help you to make the most of your financial situation and in many cases help you to use your budget more effectively.
Many entrepreneurs ask for financial support from their own immediate network, such as family, friends and acquaintances. Mutual trust is easier to achieve within your own network, however, as always care should be taken when mixing relationships and business. When looking to external parties for financial assistance, always ensure both parties are entering into it with matching expectations. It is also important to have procedures in place in case plans go awry. It might be beneficial to have an impartial third party involved (such as a mediator or lawyer) to help assist with any issues or roadblocks faced. Your network can be grown and accessed across networking websites, such as LinkedIn. These sites also offer a platform for the promotion of your business during later stages.
Business related grants are often available from local and state and federal entities and in some instances, private companies. You may find that your business qualifies for one or more of these grants which can provide access to varying degrees of funding and support. However, if you do qualify, note that the application process usually requires a significant amount of time, information, and effort, and it can sometimes take months before a final decision is reached.
Don’t waste time on last minute grant applications and instead think ahead, reviewing the grant options available (as they are often run yearly) and starting early on your applications. Some grant applications may even require evidence of assistance from an external firm which of course adds to the time in which you’ll need to allow. Examples of grants available to new companies include the Home-based Business Grants and The Lord Mayor’s Budding Entrepreneurs Program
Crowdfunding is a new alternative, in which finance is raised online from a large number of smaller investors ranging from friends, colleagues, peers, and strangers. There are two key forms of crowdfunding; reward and equity. Reward crowdfunding uses selling arrangements to launch the business idea, meaning the entrepreneur won’t sacrifice to equity or incur debt. Equity crowdfunding sells ownership or share in future revenue in exchange for cash contributions. Examples of crowdfunding websites include Kickstarter, Indiegogo, RocketHub, FundRazr, and GoGetFunding. When comparing crowdfunding websites it is important to look at the small print, which usually involves commission, transaction fees, and other various charges.
Australian inventors Stuart and Cedar Anderson are a recent example of the success of crowdfunding. Their Indiegogo submission Flow Hive recently became the most successful crowdfunding venture outside of the United States, raising more than $12.5 million dollars from 37,088 investors from 116 countries.
There are two primary funding options available from banks; loans and credit. Getting a bank loan is usually the more difficult option, requiring documentation, business plans, and a solid financial record. For smaller startups, using credit may also be used as a short term solution, however, this option limits you to your credit limit which is usually lower than a normal bank loan. As credit card interest rates are expensive, this is not recommended unless you are certain you can pay off the credit card bills in a timely manner.
For both of these options, seeking advice from a business and financial expert and speaking with your financial institution is advised.
Seed funding is raised from a pool of investors. The company from which the seed funding is collected usually expects to have some level of involvement in the business along with part ownership. Seed funding is a very early form of investment, meant to support the business until it can generate its own cash flow, or gain further investments. Recent Australian success story Canva gathered $3 million funding round before launching their online graphic design website. Seed Funding opportunities available include Follow[the]Seed, Startmate, Slingshot, iLab, and AngelCube.
Incubators are companies which provide training and space for startups to operate during their early stages, rather than monetary investments. Services provided by business incubators may include access to mentors, marketing assistance, internet access, accounting and financial management, links to strategic partners, and access to angel investors or venture capitals. Business Innovation and Incubation Australia is an excellent resource to find information about incubator programs within Australia. Brisbane based incubators include iLab, Brisbane Technology Park, Gold Coast Innovation Centre, and QUT Creative Enterprise Australia.
Angel investors are individuals who contribute their personal funds in exchange for equity and a level of control in a company. These individuals usually provide the second round of funding for a startup, once there’s been some evidence of business potential. Angel capital fills the gap between sourcing finances from friends and family, and provides a more formalised source of venture capital. Angel investors also provide non-financial support, through their knowledge and industry contacts. At this level or round of funding, an exit strategy, whether selling or undertaking an IPO, is expected. Angel Investors available within Australia include Innovation Bay, Sydney Angels, Melbourne Angels, Capital Angels, Brisbane Angels, Scale Angels, and Business Angels.
During 2011, Simon Moss from Sydney co-founded his website ImageBrief after securing $3 million in funding. Moss received funding from both angel investors and venture capitalists within Australia and the US, enabling him to establish a successful on-demand photography and video platform.
Venture Capital Funds
This type of funding is obtained from companies who invest in startups as their core business. A venture capital fund manages money from several investors, across a portfolio of businesses usually during the growth stage of a startup. Due to the weight of investment in the startup, venture capitalists often become highly involved providing technical direction and assistance in decision making. Their goal is usually to get the business to a level at which it can be sold or publicly offered.
The money that an venture capitalist contributes is typically used as the basis for the company’s overall valuation:
E.g Ms. X gives $30,000 for 10% of the startup, therefore the startup may be valued at $300,000.
- It is important to remember that the most essential part of acquiring funding is having a clear vision and/or business plan before approaching investors. It is natural for investors to want to know where their money will be going, and what they can expect in terms of growth and revenue.
- It is also essential to make informed decisions based on advice from financial advisers before engaging with any of the above funding options.