You have a solid business idea, and you are ready to launch your start-up. The only problem left to solve is money. How you fund your business will determine the trajectory of your start-up. In this article, we will break down the various types of funding available to start-ups, as well as the multiple stages to capital raising.
Often, start-up founders boot-strap their start-up with their own funds or by performing outsource services for other companies to get through the initial start-up phase. Start-up founds also tend to raise initial capital from family and friends as pre-seed funding. The average amount invested by friends and family into start-ups is $23,000 per year, according to Fundable. Yet, it comes with the risk of your start-up interfering with family relationships.
The seed stage is the first round where start-ups raise capital from external investors. This is usually where you start issuing equity instruments to investors in exchange for cash, and it is crucial to ensure these initial investors will bring strategic value to your start-up, instead of just being passive investors. High net worth individuals, known as “angel investors” tend to be active participants in the seed funding stage for start-ups. Angel investors are professional investors that do their due diligence before investing, so they will only invest in promising companies. However, if you secure an angel investor, they can become active and reliable capital sources throughout the life cycle of your start-up. For example, in 2019, Bill Grierson, won awards for being an active angel investor, making 80 investments in 48 companies over five years.
Now the seed of your business has started to grow, it is time to use that developing track record to raise more capital. This stage is all about optimising your customer base and product, and scaling for different markets. Some of your existing angel investors may continue, with the addition of venture capitalists and sometimes accelerators.
Venture capitalists are quickly becoming a popular option in Australia, hitting record levels of funding in 2019 at $1.7 billion. As a form of private equity financing, they are great for early-stage financing for businesses with high growth potential. Each fund comes with a specific set of goals, depending on the start-up’s location, sector and stage of investment. Do your research before applying to VC firms, and understand the risks involved, as VC firms will expect a rapid return on investment in return for the risk of investing in an early stage start-up.
As you continue to scale your start-up, you will most likely need to raise further funds from external investors to maintain momentum. Series B funding is harder to get, as investors look at your assets, market share, revenue, and existing profits, among other things. Most of your money will come from those existing angel investors and some VC firms, giving your capital raising strategy a firm structure.
As the last stage of funding before going public, you are now in the big leagues with Series C funding, helping you buy competitors and scale your company upwards. As funding becomes more complicated and private equity starts thinning out, hedge funds and investment banks start becoming more common.
Key things to remember
When it comes to capital raising for your start-up, remember:
- consider your options before agreeing on a deal;
- get expert legal advice before signing any agreements;
- never put personal finances in serious harm; and
- evaluate your sources of funding at every stage of your start-up.