It’s hard to start a business with no money.
There is a variety of funding options available—some funding methods of options that are discussed below.
In this article, I will show you exactly how to get money for a business venture. But first, I will show you how most people start a business without money. It’s called bootstrapping… and it does work. However, it can be prolonged.
So before we get into how to get money to start a business, let’s talk about bootstrapping because it is essential to understand.
Bootstrapping
“ARE YOU RAISING MONEY? WE RAISE MONEY EVERY DAY, FROM OUR CUSTOMERS.”
Sahil Lavingia, Gumroad
If funds are relatively tight, you must consider bootstrapping your startup – at least initially. Bootstrapping is a term to describe where founders use their own money and maybe some funds from their friends and family to get their venture off the ground. ‘bootstrapping’ is derived from the phrase ‘to pull yourself up by your bootstraps’.
Now, don’t worry if you are short of cash. Where there’s a will, there’s a way! Bootstrapping can teach you valuable lessons you would not have learned without the available funds. Many founders later consider the bootstrapping years the most fun of all.
Aside from all the fun, some companies started by bootstrapping and have grown into massive global companies. You only have to look at Apple, Microsoft and Hewlett-Packard, to name a few. In 1998, Google also started in a garage. Interestingly, it was the garage of Susan Wojcicki, the CEO of YouTube. There’s also a generosity lesson in that (always be kind to great coders).
If you decide to bootstrap, it doesn’t mean you can’t raise capital or debt funds at a later stage. It isn’t easy to raise funds without market traction. Of course, you may successfully raise small amounts from family or friends. If so, you must decide whether to loan the money or issue shares. I recommend keeping it business-like and having agreements, even if they are family and friends. This will prevent disagreements later. If you are looking for investors, there are different rules. We will discuss them below.
Raising Capital
Startup entrepreneurs often have misconceptions about raising capital. Some believe they need capital for new offices, vehicles, trade show exhibits and international flights to meet with potential investors. Others believe that capital raising is a natural thing that startups do. I know entrepreneurs who had a great idea and believed they needed a few funds to launch their App at rave parties in Europe. I have also seen entrepreneurs allocate a quarter of their team on capital raising exercises, which is usually a big mistake because it comes at the expense of working on their product.
The above examples illustrate inexperienced entrepreneurs trying to raise capital before they achieve product-market fit.
Raising significant capital before selling anything is very difficult unless you have an experienced board or founders with exceptional experience in the space.
Conversely, it is common for founders to raise money in a ‘seed round’ (which we discuss below) to assist with developing a minimum viable product and, perhaps, taking the new product to market.
Small-Scale Offerings
If you choose to raise capital (money) from investors for your startup, there is a way that does not require a financial service license or a prospectus to provide to potential investors.
Small-scale offerings allow you to make personal offers to people to invest in your company. However, you cannot advertise those offers publicly. Small Scale Offerings allow for raising 2 million dollars from 20 investors within 12 months.
You can also get a minimum of $500,000 from sophisticated investors. To qualify as a sophisticated investor, the investor must have earned over $250,000 in the last two financial years or own assets valued at $2,500,000. Additionally, to raise funds from sophisticated investors, a certificate from an accountant is required to verify their assets or income requirements.
There is no requirement for a disclosure document from professional investors either. A professional investor is a person who has an Australian Financial Services License (AFSL) and manages over $10 million of assets – or is a company listed on the ASX.
There are other circumstances when a disclosure document is not required. However, I have covered the most common ways startups can raise capital on a small scale. If you are contemplating raising money, you must get professional advice.
The Stages of Capital Raising
This section is for you if you want to aim big, as it is the path most companies take to grow into a truly global organisation. Gaining market share is usually a long process. It was 14 years before the online retail giant Amazon became profitable. This doesn’t mean that Amazon didn’t make money along the way. Amazon invested its profits wisely in technology and infrastructure.
Let’s take a look at the various rounds and what they mean.
Seed Round
The first round of capital raising is called the seed round, from friends, family or angel investors.
Before asking for seed money, your startup must prove it has value. It would be best if you had at least a working MVP with some early adopters using it at this stage. It would be best if you also had documented feedback from those clients.
The first round of raising capital usually involves angel investors and is sometimes combined with some venture capitalist funding. Angel investors use their own money to get seed rounds started. This is the riskiest funding stage for investors because the startup usually has not made significant revenue.
Series A
The startup is gaining some traction, although it usually has not reached significant market penetration. During Series A, shares of the company are offered to outside investors. The business concept is working toward finalisation, and the leadership team is closing in on the exact market fit for the product as they continue developing the business model. It also helps pay the salaries of the leadership team. Venture capitalists and angel investors who prefer getting involved in early-stage investing usually provide funding in this round.
Series B
This stage has a similar set of goals as the Series A stage. At this point, the business has not changed significantly other than a more significant market awareness and exposure to the product or service. Revenue is showing consistent growth.
At the Series B stage, the business will have established an extensive and more accurate vision and culture for the company. The capital that startups raise in the Series B round is based on their performance in the marketplace. It is predominantly venture capitalists and those with private equity who are involved in this later round.
The goals for the company during Series B involve scaling market share, which involves raising money that helps add more talent to the leadership team and further increase the sales and marketing teams. The money raised also helps the business grow and build on its established market share.
Series C and Beyond
The last round of pre-IPO fundraising is known as Series C, D, E, etc. Each round is given another letter as the business moves closer to the public offering. At this point, when the company is more established than it was at earlier rounds, the investors include private equity firms, hedge funds, investment banks, and venture capitalists. It is easier for the business to raise money as it has proven viable.
The late-stage rounds are used to move more into international markets and scale faster than previous rounds. The business could also be involved in a merger or acquisition to expand the product line further or expand into other markets. The capital raised in these rounds can also be used to prepare for the initial public offering itself.
What Investors Crave
To raise capital, you best know what investors look for in a startup. It is more than one thing. Unlike what many entrepreneurs believe, it’s much more than a great product.
People and the Team
Investors look at the people who are pitching the idea. Of course, the idea is critical, but if getting an investment can be an uphill battle, the team doesn’t have the experience or a track record of success, getting a common misconception that entrepreneurs find investors overnight. While this can happen, the entrepreneur will usually know the investor and may have reached out for help in their startup’s early stages. You must begin to build relationships early if you want to seek capital.
The other misconception is that investors are only investors. There are plenty of industry experts who invest in ideas. They don’t always invest money. Sometimes, they can become an official advisor and attract investment by using their existing relationships in the industry.
Experienced investors are more likely to commit to an investment with a startup whose founders don’t believe they know everything. Some stubbornness can be fine, but inflexibility can raise a red flag.
Investors also look at the expertise of the team. It is essential to have the right team because it increases the likelihood of a successful execution. It can also show you have a knack for attracting the right people with complementary and valuable skills. Skills such as leadership, product management, sales and marketing, networking, and digital media are all skills that are highly regarded.
Market share
To convince a venture capitalist a startup is worth their money and time, the idea needs to have potential. You will need to conduct market research and have solid proof that the company, the product and the people have the potential to gain its share of the market. Entrepreneur should base their numbers on research rather than speculation.
For example, I have a client who has a surfing product. Once their product gains traction in surfing, they also intend to expand into the skateboard and snowboard markets. Showing investors a considerable upside potential can help minimise the downside risk, making a more attractive investment proposition.
Demonstrating your thorough knowledge of the market and how your product fits into that market is also attractive to investors.
Traction, Plan and Vision
If you are seeking capital, then you should have some traction. You must show that your system works well and your model is profitable. Show data backed by market research that indicates a vast upside growth potential in your industry.
As you can imagine, investors are information-hungry – especially regarding their money. Be sure you can confidently respond to questions such as:
- Where will the capital be spent?
- What are your operating expenses?
- What is your annual net profit for each year?
- Who are your target customers?
- What are you selling?
- What is your pricing and business model?
- What is the lifetime value of a client?
- When will your business begin making money?
- What is the share structure?
- What is the customer cost per acquisition?
Be ready to give accurate answers and make it easy for investors to see the value of investing in your business. Investors want to see that you are across all areas of your company. It is vital to have people who control the company and its current status.
Grants & Incentives
The Australian Government has been getting behind technology and innovation more recently through grants and incentives. A lot of work goes into preparation for grants, and there are several stages, so you must be patient. Also, there are many categories of grants for various types of business.
At a minimum, there’s a requirement to have a business plan, and you’re usually required to be registered for GST. The overall Government agenda is to foster innovation in Australian businesses, which is excellent for the country and economy and boosts investment in Australia.
If your startup is showing promise, you may be able to apply for a grant. Many types of grants are available in Australia. They are also offered at all levels of Government, including local councils, state and federal levels.
Unlike grants, incentives aren’t money in the bank. As the name suggests, they are programs that incentivise and make it easier and less costly to get your venture off the ground or take it to the next level.
Take, for example, the R&D Tax Incentive provides an incentive for startups and other companies. It provides that Australian companies can get a refund of 43.5% of the money they spend on R&D.
A word of warning to software development companies. Be very clear on precisely what research and development are. Here is the definition:
Core R&D activities are experimental activities:
a. whose outcome cannot be known or determined in advance based on current knowledge, information or experience but can only be determined by applying a systematic progression of work that:
i. is based on principles of established science and
ii. proceeds from hypothesis to experiment, observation and evaluation, and leads to logical conclusions; and
b. that are conducted to generate new knowledge (including new knowledge in the form of new or improved materials, products, devices, processes or services)
Confused? Get advice from your accountant regarding the R&D Tax Incentive.
To search for grants and incentives for your startup, check out this resource, – which includes all states and territories of Australia.
Export Market Development Grant
The Export Market Development Grant (EMDG) aims to promote Australian goods worldwide. The EMDG refunds up to 50% of marketing expenses over $5,000. This only applies when there is a minimum of $15,000 in total expenses. My clients have successfully secured this grant. It has been a beneficial grant for them to get their products into Japan and the USA.