Startup Capital Raising

Building a startup is a monumental task.

It begins with an idea evolving through the development of a minimal viable product (MVP) and grows as you assemble a team, find product market fit and relentlessly drive your vision.

The reality is you’ll need funding to fuel this journey.

The pivotal question every founder faces is whether to raise capital. If your business can sustain itself and grow through earnings from existing customers or other sources, bootstrapping might be the preferred path. Alternatively, debt funding such as borrowing from a bank, or exploring government grants could be viable options.

For those considering raising capital from investors, it’s crucial to understand:

1. What you need the money for;
2. What is the minimum viable amount needed; and
3. What is the maximum necessary amount?

You want to know ‘what you need the money for’ so that you can explain this to investors and generally be best placed to use it wisely. You want to know ‘what is the minimum viable amount needed’ so that you know how much you need to raise to realistically achieve your objective. and then get to the next funding round.

And you want to know ‘what is the maximum amount necessary’ so that you don’t raise unnecessarily too much money and therefore give away more ownership than needed.

In the Pre-Seed and Seed rounds, you might require funds for market research and development of your MVP. As you progress to Series A, your focus will most likely shift towards hiring talent, improving your product and scaling your marketing efforts.

In all the stages, you might find developing a business plan with financial projections particularly useful to you, and investors, when answering those crucial questions of:

1. What you need the money for;
2. What is the minimum viable amount needed; and
3. What is the maximum necessary amount?

If you can’t do that yourself, then we can help.

Now, each funding stage attracts a different type of investor and involves giving away a share of ownership.

In the early stages, funding might come from “Family, Friends & Fools”, Angels, or through participation in Accelerators and Incubators.

In Australia, the total money raised in a Pre-Seed round may be around $150,000 with typical ownership given away of around 5-15%.

Money raised from participation in Accelerators and Incubators might be around $50,000 to $150,000 for around 5-10% equity.

As you move into a Seed round, early stage venture capital may come into play, often led by a “Lead investor”. It’s common in Australia for a Seed round to raise around $1 million in exchange for about 15-25% equity.

For a Series A round in Australia, you can expect funding of around $1-5 million for around 15% equity.

This funding generally requires that you have found product market fit and have annual recurring revenue of at least $1 million.

When raising funds and giving away equity, be mindful that you should reserve equity for key employees. Around 10% may be about right.

Importantly, these aforementioned statistics are simply approximate guides. Further, they do change over time and there are always outliers.

Now, regardless of the stage of funding, it’s essential to remember that securing investment shouldn’t just be about obtaining the funds. Choosing an investor is a significant decision, since you could spend several years partnering with them.

Be comfortable that you can work with them, such that they hold similar values to you and will provide constructive feedback, in appropriate ways. Further, consider if they’ll provide useful advice and connections.

Will they help you grow the business in more ways than simply giving you money?

The raising capital phase is often a time consuming process. Things you will most likely need to do throughout include:

• Create a forwardable blurb. This is a simple, compelling description of your startup that anyone can pass along to a potential investor in seconds.
• Create an investor deck and a pitch deck.
• Be investor ready. This means having all documentation ready for an investor to conduct their due diligence.
• Something that investors appreciate is confirmation from your accountant that your startup qualifies as an Early Stage Innovation Company, which they can utilise for the ESIC tax offset and incentives.
• Get the legal agreements arranged. This can start with a term sheet, evolve into a SAFE and Share Subscription Agreement. Be mindful of the terms and conditions, such as whether the valuation is pre or post money, and the liquidation preferences, to name just a few.
• There is also usually a need for a Shareholders’ Agreement and Intellectual Property Assignment Agreement.

Be prepared for talks with investors to not lead to a “Yes”, but also watch out for a common sin of investors where they don’t give you an outright “No”.

Sometimes your startup in its current stage isn’t right for an investor, but they like to keep the door open so that you might circle back later when you’re a little more progressed and appropriate for them.

Try to find this out early to avoid wasting each other’s time. But… stop on good terms so that you might raise from them later.

So, what happens when you actually get the money?

Very importantly, it belongs to the business. It’s not your’s for personal enjoyment. Investors expect you to use it appropriately to get the business to its next funding round, which might be in around two years time.

Throughout the raise, you should have already developed a plan of how you want to use the money and have talked with investors, about this, so that both parties are aligned around expectations. Be sure to include them in the topic of how much salary, if any, you intend to draw from the startup and how much you will pay others.

Aside from the money hitting the bank account, the company records also get updated to reflect the new share holdings.

In Australia, this involves submitting a lodgment with the corporate regulator, ASIC. This is normally handled by your accountant. I.e. us. Investors might also join the board to help provide advice, oversight and governance.

You should also keep investors informed of progress with regular, perhaps monthly, email progress reports.

As business advisors and accountants familiar with startups, we invite you to a free Get To Know Each Other meeting to see how we may be able to help you successfully navigate ordinary compliance, such as tax registrations, business activity statements and tax returns, and non-routine parts of the startup journey, such as capital raising.

You’re also encouraged to take the spam free Raising Capital (Investor Readiness) Diagnostic to see which areas you might be lacking in relation to a Pre-Seed or Seed round.