It’s easily the most common question from new startup folks. “How do I raise money?”. Let’s answer it.
First, we’ll kill the elephant in the room. Raising large amounts of money for an idea with no traction (customers) from a professional investor is not going to happen. You need a proven business model to interest a professional investor, and that means customers. No-one pitches a brand new idea to a roomful of investors and walks away with a cheque, it just doesn’t happen like that here.
The second myth we need to kill is that investment is necessary at all. It’s not. It is very possible to bootstrap a startup from start to finish without ever taking a cent in investment. You will go slower, but have more control and end up with a larger slice of the pie. Bringing an investor in provides money, but also cedes some control of the business. There have been many, many businesses that failed because of a difference of opinion between the founders and the investors. Here be dragons.
The first source of investment for all startups is affectionately known as the “three F’s” – Friends, Fools and Family. These are people you know who can afford to invest money in your business because they know you personally. When you hear of someone raising a lot of money for an idea-stage startup, it’s always from someone they know personally. Your personal network is important, and absolutely is your first point of call for raising money.
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You can apply for accelerators and incubators at this point to see if you can get some investment from them. In fact, I would advise every startup at the idea stage to apply for accelerator programs even if they don’t need the investment, because the free advice and feedback from the application process is worth it. Also the need to get your idea sorted, streamlined, and written down for a good application is invaluable.
However, the investment from accelerators is usually small-ish (<$50K) and very much tied to their curriculum of progress and advice. It also usually comes with strings about how you can spend it (e.g. you can only spend $10K on founder salaries). It may also come in multiple payments, based on your achievement of fixed goals during the accelerator, rather than one lump sum. It’s useful, but it’s not going to get you to the end-game fast.
Crowd funding is popular, because it provides some early-stage funding without needing an investor. It also provides some welcome feedback on popularity and viability of the product. However, you do need to have your supply, pricing and logistics sorted out before you start. It’s a common problem that a crowdfunded project gets lots of backers, only to then find that they can’t make the product for that price, or that the logistics of supplying it are far harder than they first thought. Crowdfunders are technically donating money to the project but they usually think they’re pre-ordering. Be careful with this, it’s easy to get a very bad reputation for messing this up. You can find yourself in a position of wasting a lot of time carefully managing a large set of unprofitable customers who are busy being loudly unhappy about your product.
Of course, if it goes well and you’ve planned it properly, then crowdfunding can really help the business. You get publicity, an easy, well-understood ordering mechanism, and can raise some initial funds for very little effort.
Ross Currie, founder of Squishy Forts and CrowdLoot, and veteran crowd funder, says:
Crowdfunding is a great option if you have a physical product that requires funding for you to hit a minimum order number. It’s less useful as a funding source for apps/websites and startups who attempt to fund their project via this route are usually unsuccessful.
There are exceptions to this rule, but typically startups that succeed in this space already have a large following, or are able to successfully tap into an existing community.
Once you have a working business model, which means you have customers who are paying you money and you know how to get more of them, then you can realistically try for more funding. At this point you’re probably looking for somewhere between $100K -$500K, enough to keep the business going for a year or two as you build revenue to try and reach cash-flow positive.
There is really only one option at this point: Angel Investors. An Angel Investor is someone who has wealth, connections, experience and knowledge that you don’t have, who can fund you and help you get to the next level.
Ian Brown, a prominent Perth Angel Investor, said this about his criteria for investing:
As an angel investor I look for three things in a potential deal: a good founding team, a solid, proven business model with room for growth, and a way for me to contribute and help. This usually means the business is in an industry I’m familiar with, or the business leaders in the sector are within reach in my network, and a product or service that I find personally interesting.
You can either go through the Perth Angels network, or pitch at Innovation Bay event, to make contact with them, or you can do some footwork and find your own Angel out there. Probably the best way to do this is to find successful businesses in the same industry and hunt down their founders or senior management. Preferably look for people who have retired or quit in the last year or so, rather than people actively working in the industry. But your mileage may vary according to the circumstances.
Having said this is the only option, there are some alternatives, like investment funds and VC’s. However, these rarely operate in Perth, and usually require you to move east if they don’t operate in Perth. They also tend to need more traction (customers) and better numbers than Angels do, and will provide much less help, support and guidance than an Angel will. They also do weird things with their entire portfolio, so you may find yourself pressured to merge with a competitor or a supplier because that suits the investor better.
If you’ve got your Angel, they will have opinions on further funding and sources. Angels massively prefer exiting to a trade sale (because they get their money back in a nice easy lump) rather than going public. Going public is generally not seen as an “exit” by an early-stage investor, because there are lots of rules and regulations about selling public shares in bulk (or by executives of the business).
Recently raising money at this level has become easier, with an increased appetite from larger investors for tech business. Matthew Macfarlane, a prominent Perth VC, Angel and startup advisor, said:
An increasing number of sophisticated investors are considering tech holdings in their portfolios following the success of companies like Atlassian and Canva as well as local stories from Seqta, HealthEngine, and Agworld.
This is true, but that doesn’t mean it’s easy, of course.
At this point you’re looking at the $1m+ range, and the choice to make at this point is: public or private money?
Public money means listing on the stock exchange, usually the ASX. This means either an IPO (Initial Public Offering)or an RTO (Reverse Take Over). The first step for either of these is to have a chat with a financial broker and convince them that the business is ready for this. They make a metric sh*tonne of cash from managing this process, but also take on some risk, so they need to be persuaded that the offering will succeed. If you successfully go public then you can raise whatever money you need from that point on by issuing more shares. The downside is that you need to conform to a huge number of regulations and reporting requirements, and you have to listen to your shareholders and the markets.
Staying private means the field narrows to institutional investors. The business needs to be absolutely solid at this point, with a product or service in an established position, with a working business model that generates cash. Ideally you’re cash-flow positive (but re-investing the profits into the business) at this point, and really only need the new money to grow the business faster.
There are a lot of investors around the country who invest at this stage, and there are people who specialise in helping you find them. Some investment funds only invest in certain industries, and some have preferences for certain types of business. You will talk to a lot of people, and get almost no feedback. It’s a long, painful, process, and a huge distraction from running the business itself. Plan on spending at least six months with this as your primary task to successfully raise at this stage.
And that’s it. All you need to know. Now get out there and do it!