Different Types of Funding for Australian Startups

The Beginner’s Guide to Startup Business Funding in Australia

Many Australian startups normally struggle with having access to sufficient seed capital in the early stage as most financial institutions, investors, and venture capitalists are not easy to come by. Not only that, but these small businesses are also not expected to make a profit in the beginning as they have to compete with other startups for funding. In fact, many startups have high-failure rates with 20% of them expected to fail in their first year while around 60% will go bust within their first three years.

In a survey conducted by CBInsights, there are 12 major reasons why startups fail, including:

• ‘running out of cash’ or ‘failure to raise new capital’ (38%)

• ‘lack of market need’ (35%)

• ‘outcompeted by other startups’ (20%)

• ‘flawed business model’ (19%)

Given the figures above, it’s crucial for startups to secure capital financing within the first three years in order to become viable and profitable in the long run.

However, securing capital is not as easy as just finding any investor out there, you have to determine what type of startup funding is the right one that will suit your short-term business needs and long-term growth plans. There is a broad range of capital financing models that you could pursue but you have to figure out the pros and cons first before committing to one. Besides, you need to have a great grasp on how funding for startups works and accessing capital.

Good thing there are various support systems available catered to startups and early-stage companies in Australia in the form of Federal government startup grants and other assistance programs in every State and Territory aimed at providing the necessary tools and resources to run your business successfully.

Types of Funding

Before you start raising funds, you have to know the different funding models - debt, equity, and grant. These have their pros and cons depending on the needs and requirements of your startup.

a. Debt is all about borrowing money in exchange for payment and interest over an agreed-upon time period. It usually involves loans, credit cards, and merchant cash advances. However, it can be a bad choice if you don't have enough cash flow to pay up your debt as interest rates can be terrible. There may be small business loans with favourable terms but these are often restricted to business owners with existing cash flow or some kind of collateral to put up.

b. Equity is giving up a certain percentage of ownership of your business to investors at market value in exchange for funding. But it's not as simple as that, you need to have some perceived value through a proof of concept or a proper business model that shows how you can make money from it. That way, you will be instilling confidence in them as you're asking for their funding. Bear in mind that you will be losing control of the company the more you give up equity.

c. Grants are different from the two categories above. These are government initiatives that aim to boost the startup and small business landscape. However, this type of funding is difficult to secure as you have to meet stringent requirements and oversights. Think about the reality show "Shark Tank" where you have to convince the grantmakers why they should provide funding for your startup.

Startup Fundraising Options

When you're in the early stage of your business, there will be little or no revenue coming in yet so it is important to understand the pros and cons of different ​​startup funding options so you can raise that crucial startup capital to be able to grow and expand.

a. Bootstrapping

In the world of startups, bootstrapping is the process of building your company without external funding. It's simply investing your own money in the business during the early stages. That means you may have to make some personal sacrifices by doing the product development by yourself without getting a salary. The secret to success is keeping overheads to the minimum and investing all your effort and resources in expanding the client base.

Pros:

✔️ No equity dilution and external investor pressure

✔️ Higher valuation on future cap rise

✔️ Product built by you

Cons:

❌ Slower to build and market

❌ Difficult to attract the best talents

❌ May give up equity to attract talent

b. Family and Friends

If you don’t have enough savings to finance your business, you often go to family and friends for an additional cash infusion. This is obviously the easiest startup finance option you can go for as your family and friends will be happier to support your dreams and less likely to ask about your business plan and financial projections. However, it can be tricky when you're mixing your business and personal life.

Pros:

✔️ More support for your business venture

✔️ Easier access to funds

✔️ Less investment pressure

Cons:

❌ Amount of funding depends on the availability

❌ Relationships might get strained if you default or the business fail

❌ Personal issues may get in the way of business

c. Bank Loans

Most Australian startups go for the most traditional startup business funding option - secured and unsecured bank loans. Borrowing money can be tricky if not properly managed, especially when it comes to early ventures. If you can't secure debt, you are more likely to find some type of security through the property and other business assets. Successful startups will be able to save business equity and founders will retain a much larger piece of the pie.

Pros:

✔️ No equity is given up

✔️ No investor pressure

✔️ Cash can speed up growth

Cons:

❌ Need to pay loans

❌ Interest is accrued on every loan

❌ Pressure builds up if the debt is not paid on time

d. Angel Investors

Angel investors might be your guardian angels as they are the type of investors who may want to see you succeed. They are looking to provide seed capital to startups they believe in at the early stages of their growth. Oftentimes, they fill the gap between your personal funding support and larger forms of investment. Although angel investors may not require company equity, they tend to give relatively small amounts. Instead, they may ask for a percentage of their return on investment and offer mentorship support and networking opportunities.

Pros:

✔️ Fill the cash flow gap

✔️ Mentorship support

✔️ Larger network

Cons:

❌ Dilution of equity

❌ Reduced return on investment

❌ Investor expectations and pressure

e. Venture Capital

If you're willing to give up equity in exchange for that needed initial funding then venture capital is something you may want to consider. It's a type of private equity investment with high-growth potential. Expect to give up majority ownership as venture capital firms will be actively involved in every aspect of the business. The only way for you to attract more venture capitalists is to master the art of pitching and presentation.

Pros:

✔️ Cash investment from a network of high-profile investors

✔️ Follow on capital raise ability

✔️ Experience in building and scaling startups

✔️ Ability to grow your startup fast

Cons:

❌ Dilution of equity

❌ Investor expectations and pressure

❌ Loss of company control

❌ Regular reporting and investor relations

f. Crowdfunding

This type of financing has become more popular with the rise of Indiegogo, Kickstarter, and Patreon. Many small businesses in Australia are turning to these platforms so they can get their ideas off the ground. However, it can also be challenging to raise significant investment capital as you need a lot of people to contribute.

Pros:

✔️ Centralised communication

✔️ Connect with as many investors as possible

✔️ Create momentum for your fundraising initiative

✔️ Create "herd effect"

Cons:

❌ Big marketing effort needed

❌ Heavy preparation required

❌ Business failure could tarnish the public reputation

❌ Need to create hype and buzz to achieve success

Government and Private Grants

Unlike debt and equity funding options, there are government grants and small business programs that could be better options as these offer initial startup funding without the need to give away any equity.

Such grants are basically categorised as competitive and eligibility grants where the former is awarded to the best possible business proposal while the latter is awarded to startups that strictly comply with the grantor's specific rules and complex regulations. Other categories include: Aboriginal and Torres Strait Islander, Art and Heritage Projects, Disaster Recovery, Employment and Training, Green Businesses, Business Expansion, Importing and Exporting, and Research and Development.

Here are the top federal and state grant schemes in Australia:

a. The Entrepreneur’s Programme

This is a popular program that provides up to $1 million of funding to help startups and small businesses innovate, grow, and compete in the market. It also provides access to over 100 experienced advisers and facilitators and lets you get co-funded grants for commercialising products and services.

b. Austrade Landing Pad

If you want your startup to go global in key markets, this is the type of grant you probably want. This helps you gain access to global innovation hubs, local business networks, and professional advice so you can succeed in a new market.

c. Export Market Development Grant

This financial assistance program is designed to encourage small- and medium-sized enterprises to develop export markets. In response to the COVID-19 pandemic, the export performance requirements have been waived and the Initial Payment Ceiling Amount is $100,000.

d. Accelerating Commercialisation

This is a 1:1 matching grant that provides up to $1 million in funding to commercialise a product or service. It is important to note that the disbursement of the funds, at the discretion of the government body, will be made if the complex set of rules, regulations, and requirements have been complied with.

e. State / Territory Grants

Every state and territory has its own small business grants to support startups and scale-ups.

• New South Wales: The MVP Grant offers up to $25,000 to help early-stage startups develop a minimum viable product while the Local Innovation Network is a $2.1 million commitment to develop regional entrepreneurship and support startups in seven emerging regional locations.

• Victoria: The Future Industries supports job creation in high-growth industries particularly in the medical, new energies, food, and construction sectors while the Small Business Digital Adaptation Program allows businesses to apply for a $1,200 rebate upon purchase of a digital product to build digital capability.

• Queensland: The Business Basics Grants Program provides support to help increase your core skills and adopt best practices.

• South Australia: The SA Venture Capital Fund provides a portion of the initial startup funding while the rest of the funding is matched by other funds or investors.

• Western Australia: The New Industries Fund supports and accelerates new and emerging businesses.

• Tasmania: The Business Growth Loan Scheme provides concessional loan funding to support businesses to recover, adapt, and allow new projects that contribute employment to the state.

• Northern Territory: The Business Growth Program helps businesses, not-for-profit, and Aboriginal enterprises receive support from grants and funding outlets.

• Australian Capital Territory: The Innovation Connect Grant provides $10,000-$30,000 support for entrepreneurs to develop and grow ideas.

Startup Funding Stages

There are terms that best describe the multiple funding round structure. Although popular in tech startups, it has spread to other industries as well. Here are the different startup funding rounds:

a. Seed Funding

Seed capital is the initial startup investment, often from family and friends, of about $10,000-$2,000,000 in exchange for equity in the company. It gives you quick access to larger amounts of capital thereby allowing you to grow and scale your startup quickly and gain more traction. As there's no proper valuation yet, the investors typically receive a convertible note that provides equity as repayment rather than interest or stock.

b. Series A Round

After the seed funding, the Series A Round follows once the startup begins generating revenue though not yet profitable. As for their return on investment, the investors usually get a preferred stock that can be converted into common stock later on. Investing in Series A Round would mean taking a substantial risk but if the startup becomes successful, there will be a pretty substantial payout.

c. Series B Round

Once startups have become more established, they can seek Series B Round funding. By then they could be generating enough revenue and carry a solid valuation. In this case, the investors tend to receive preferred stock in return for their capital investment. As the risk is lesser this time, they would receive a smaller return as compared to those who invest in Series A Round.

d. Series C Round

In the later stages of the funding cycle comes Series C Round. Although it works similarly to Series B, investors are looking for a higher valuation than the previous rounds. They want to see a profitable and financially-healthy startup that is already growing and expanding. Payouts are less since the risk is at its lowest.

What’s Next?

With so many capital financing and early-stage funding options available for Australian startups, take the time to know each one of the available choices that will suit your needs and preferences. After all, you're the one in charge of charting the course of your business toward growth, expansion, and success moving forward. Don't hesitate to seek help from professionals so you will be guided accordingly.

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