How do I fund an Aussie Startup? — Here are 5 ways to go about it!
Over the past few weeks, I attended a few networking events around Melbourne that focussed on securing Startup funding, a vital area in the startup lifecycle which often leaves founders at loss. Based on what I learned from these events and through my own research of the web, I have come up with these five funding channels which any new founder will find relevant.
1. Family, friends and social networks
Traditionally referred to as FFF for Family, Friends and Fools, it is unsurprising that people who know us the best are probably most likely to invest in an early stage venture before it has properly demonstrated the all-important proof-of-concept. In this age of social media, our personal circles of reach typically include hundreds who are connected to us via Facebook, LinkedIn, Instagram and Twitter. To appeal to these networks, you need to be able to articulate your vision in a clear and concise way. Before you ask your parents to dip into their retirement savings and your friends to bust their gap year budget, it is a good idea to have a realistic plan of what the project is about. Moreover, for social media sharing, a few well-written paragraphs describing your venture with visual aids that can be easily shared will go a long way in convincing well wishers that you are setting off on an exciting journey and how they might be able to support you.
Angels are early stage investors who either operate on their own or as part of networks. They are generally individuals with extensive experience in a particular field or industry and who are willing to use their resources and business acumen to back young companies and founders. In addition to funding, angels are a great source of talented and experienced mentors whose advice and networks can play a vital role in trying to get the business off the ground. Angels would invest in your company in return for equity (shares) or convertible debt (debt that will convert into shares usually at the option of the debtholder).
Angels often frequent startup networking events and are also attached to Startup Accelerators. Alternatively, Australian Investment Network is a website where founders can sign up, post their project and connect with angels. Startmesh is an international network of investors and mentors based in several cities including Sydney and Melbourne and work with startups in between the stages of validated idea and sustainable profitability. Angels value creativity, passion and clear goals. So make sure you practice your pitch before you knock on their doors.
3. Government Grants and Tax Incentives
There are several grants that startups might be able to apply for, some of which are Federal and others funded by State and Territory governments. One prominent grant is the Accelerating Commercialisation Program awarded to businesses, entrepreneurs and researchers in order to commercialise novel products, processes and services. Dedicated commercialisation and business development advisors attached to this program can also help with the commercialisation and business building processes.
This grant is especially useful to those companies trying to commercialise a medical, scientific or engineering innovation by moving from the lab to the marketplace. A look through the previous grants awarded in 2015 shows that individual companies have received up to $1 million in funding. A well-written application that demonstrates the scope of the core intellectual property in a compelling way in layman terms is key to success in getting these grants.
In addition to grants, Research and Development Tax Incentive is a very useful tool for all companies and most certainly startups to maximise their funding in the preliminary years. Under this scheme, the ATO provides a tax offset on certain Research and Development costs based on set eligibility criteria. The Nifty R&D Tool developed by PwC is a simple and powerful web-based application that can be used by companies to fill out the R&D Tax claim in less than half an hour!
4. Venture Capital
Venture capital comes from private equity firms and individuals who will invest in a startup in return for equity. In this funding strategy, the investor would typically want to play a hands-on role in the management and strategy of the company and take part in board meetings and have voting rights. Thus care must be taken to ensure that the venture capitalist and founders can work together. Lee Hardham, founder of Bumbl, had a very useful piece of advice about choosing his funding partners. For him, having shared values ranks above how much funding he is going to receive when choosing to enter into a funding arrangement. The exit strategy for venture capital firms is when the company goes into IPO or is acquired by another company.
A recent Startup Grind event in Melbourne featured Elaine Stead of Blue Sky Venture Capital, a VC fund who follow a technology and industry agnostic approach to investing and have a diverse portfolio of businesses they support. They are looking for late VC / early expansion stages of development, meaning that companies would need to have established their competitive edge in the sector and would be under competent and experienced management.
Crowdfunding is the newest kid on the block in terms of funding channels and has been growing in leaps and bounds. This practice essentially involves sharing one’s project idea through an online platform, setting a fundraising target and asking people to donate towards it. More often than not, a reward is associated with each donation, which can range from a simple thank you note to limited edition copies of the book that you are looking to self-publish. I personally find the idea of crowdfunding the most exciting since it has democratised fundraising and has opened up a way for potentially anyone with a creative idea to seek out a potential market while simultaneously raising funds.
In addition to being a creative source of funds, crowdfunding as certain intrinsic advantages. The first and the foremost is the building of a community around a product or idea in the very early days of startup. If you are able to successfully carry through a campaign, it means that enough number of people out there are interested in your offering, thus demonstrating proof-of-concept. This success can be used to raise money through more traditional means down the track. In order for crowdfunding to be successful, a compelling story about your idea, preferably a short and high quality video explaining your product a and well-stocked list of rewards are some of the essentials.
There are over a hundred crowdfunding platforms in the cyberspace today out of which the best known is Kickstarter. For relevance to Aussies will be Pozible, headquartered in the hip inner city Melbourne suburb of Collingwood. I recently attended an information night at Pozible HQ and came away with a bunch of tips on running a successful crowdfunding campaign. That will follow in a later post.
Crowdfunding critics will be weary of a system where netizens have to simply trust the pretty words of a founder before reaching for their credit cards. According to Claire Marquita of Pozible, over 10,000 campaigns have been run on their platform since their inception in 2010. None of these campaigns have been alleged to be fraudulent as yet. Crowdfunding does seem to operate on a great deal of trust and so far it seems to be working!
For other articles by the author please visit www.shusgreenpatch.com/blog.