Thursday, November 24, 2022

How to Start a Business With No Money

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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 am going to show you exactly how to get money for a business venture. But first, I am going to show you how most people start a business with no money. It’s called boostrapping… and it does work. However, it can be very slow.

So before we get into exactly how to get money to start a business, let’s talk about boostrapping, because it is important to understand.

Bootstrapping

“ARE YOU RAISING MONEY? WE RAISE MONEY EVERY DAY, FROM OUR CUSTOMERS.”

Sahil Lavingia, Gumroad

If funds are relatively tight, then you will need to consider bootstrapping your startup – at least in the beginning. Bootstrapping is a term to describe where founders use their own money and maybe some funds from your friends and family to get your venture off the ground. The word ‘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 that you would not learn if you had the available funds. Not to mention, many of the founders later look back on the bootstrapping years as the most fun of all.

Aside from all the fun, some companies that 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 who is the current 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 fund at a later stage. It is very difficult to raise funds without market traction. Of course, you may be successful raising small amounts from family or friends. If that’s the case, you must decide whether to loan the money or issue shares. I recommend that you keep it business-like and have agreements, even if they are family and friends. This will prevent disagreements later. If you are looking for investors, there is a different set of 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 shows 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.

Unless you have an experienced board or founders with exceptional experience in the space, raising any significant capital before you have sold anything is very difficult.

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 a 12-month period.

You can also 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 to the value of $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 will need to get professional advice.

The Stages of Capital Raising

This section is for you if you want to aim big, as it is the path that most companies take who want to grow to 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 on 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 perhaps angel investors.

Before asking for seed money, your startup must prove it has value. At this stage, you should have at least a working MVP with some early adopters using it. You should also have documented feedback from those clients.

The first round of raising capital usually involves angel investors and 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 is usually yet to make significant revenue.

Series A

At this point, the startup is gaining some traction, although  usually has not reached significant market penentration. 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 greater market-awareness who have had more exposure to the product or service. Revenue is showing consistent growth.

At Series B stage the business will have established a large and more accurate vision and culture for the company. The capital that startups raise in the Series B round is based on its performance in the marketplace to date. 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 build increase the sales and marketing teams further. The money raised also helps the business grow and build on 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 to be viable.

The late-stage rounds are used to move more into international markets and to scale faster than in previous rounds. The business could also be involved in a merger or acquisition or to further expand the product line 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

If you are looking to raise capital, then 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 the team don’t have the experience or a track record of success, then getting an investment can be an uphill battle.

There is a common misconception that entrepreneurs find investors overnight. While this can happen, usually the entrepreneur will have known the investor and may have reached out for their help in the early stages of their startup. 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. A little stubbornness can be fine, but inflexibility can raise a red flag.

Investors also look at the expertise of the team. It is important to have the right team because it increases the likelihood of a successful execution. It can also show you have a knack at attracting the right people with complimentary and valuable skills. Skills such as leadership, product management, sales and marketing, networking, 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. The 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 the surfing market, they intend to expand into the skateboard and snowboard markets too. Showing investors a huge upside potential can help to minimise the downside risk, thereby 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 will need to show that your systems works well and your model is profitable. Show data which is backed by market research that indicates a huge upside growth potential in your industry.

As you can imagine, investors are information hungry – especially when it comes to 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 with 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 is in control of the company and its current status.

Grants & Incentives

The Australian Government has been getting behind technology and innovation more in recent years by way of 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 lots of 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 of Australian businesses which is great for the country and economy and also boosts investment into Australia.

If your startup is showing promise, you may be able to apply for a grant. There are many types of grants that are available in Australia. They are also offered at all levels of government including local councils, state and federal levels of government.

Unlike grants, incentives aren’t money in the bank. As the name suggests, they are programs that incentivise, 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 that they spend on R&D.

A word of warning to software development companies. Be very clear on exactly 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 on the basis of 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 for the purpose of generating 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 where you can find grants and incentives throughout Australia – which include all states and territories of Australia.

Export Market Development Grant

The aim of the Export Market Development Grant (EMDG) promotes Australian goods to the world. The EMDG refunds up to 50% of marketing expenses over $5,000. This only applies where there is a minimum of $15,000 of total expenses. My clients have successfully secured this grant. It has been an extremely helpful grant for them to get their products into Japan and the USA.

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Ben Waldeck
Ben Waldeckhttps://benwaldeck.com
Ben Waldeck is a Tech Lawyer and Author of the book Start-Up and Scale.

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