So, you’ve made the leap of faith to have a go at your own startup. You’ve begged, borrowed and relied on the benevolence of friends and family to raise enough money to get off the ground. You’ve had a taste of success, but realise it is going take a lot more capital and investment to fulfill the potential of the business you’ve created.
This is a classic startup dilemma and one that can be difficult to navigate, particularly for founders that do not have a background in capital markets or experience in sourcing external funding.
I’d like to set out a few basic steps to help move forward in the right direction.
Step 1: Ensure your startup is “investable”
Your startup needs to be able to give external investors a threshold level of comfort that your business is working to a strategy and business plan and has at least basic governance in place.
Basic things to consider:
- Is there a documented strategy or business plan that is clear and complete?
- Can the business structure facilitate external investment? Structures such as trusts and partnerships may have certain benefits, but may be difficult for a new equity investor to come into.
- Is there a basic financial model that shows operating and capital expenditure requirements over the medium term (say 2 to 3 years) so that investors can see the funding requirement?
- Has the intellectual property (IP) or any sensitive commercial information been appropriately protected and registered? and,
- Is there an exit plan or pathway to monetisation? Ultimately this is something all investors will want to understand.
Another key area many startups often overlook is risk management and governance.
Have the key people in the startup applied some thought to risk? Is it captured in a risk register and is there a mitigation plan? Nothing destroys investor value faster than impacts from avoidable risks.
Even the earliest startups should look to find experienced people that could form an advisory board to assist with particular areas such as advice on technology, marketing, operations or funding. Often there are experienced people available who would be happy to assist a passionate entrepreneur at no (or no great) cost.
Step 2: Understand valuation
Startups can be difficult to value.
Conventional methodologies such as capitalised earnings or discounted cashflows can be challenging to apply given that many startups are loss-making and assumptions underpinning forecasts are volatile.
Be reasonable and sensible with the valuation that you are prepared to offer new investors into your startup.
Early-stage investors take a big risk backing entrepreneurs and startups and the valuation and dilution should generally reflect that. Nothing irks a venture capital investor more than a new startup that is using trading multiples of ASX200 companies for comparative purposes.
Using Afterpay or Apple or Amazon as your comparator will detract from investor confidence that indicate that you perhaps don’t have the grit it takes to see your startup all the way along the difficult road to success.
Step 3: Learn to pitch
This is a skill that many startups and founders of new businesses overlook. At the startup stage, most investors will be backing the people and the addressable market for the concept.
Practice your pitch to investors, invest in a great pitch deck and at all times be enthusiastic, yet humble. Allow potential investors to ask questions and answer with confidence. Never go on the offensive (or overly defensive) if an investor doesn’t quite understand. It is their money, and they choose how they invest it.
Step 4: Choose good advisors
Early-stage startup funding can come from a range of sources including:
- High net worth individuals;
- Family offices;
- Venture capital funds (as opposed to private equity funds focussed on larger and more established companies);
- Government grants; and
- Special situations funds.
It is important to choose an advisor that understands this part of the market and has relationships and networks that can assist in facilitating the introduction of investors and help you be prepared for investment.
In conclusion, there is an active and vibrant market for startup funding in Australia and many early-stage companies have seen success on the ASX and internal markets. But accessing capital requires more than just a good concept and it is a skill that every resilient startup will need to develop.
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Author – Craig Amos.
Craig is a Director of RSM’s Corporate Finance division in Perth.
Craig is an experienced Chartered Accountant with over 20 years’ experience in finance, strategy, merger and acquisitions, and corporate development. Craig also spent 10 years outside professional practice as CFO of both ASX listed and large private companies, as well as in Strategy & Corporate Development roles.
As Non-Executive Director at Pentanet, Craig assisted the founders from startup through to 3 pre-IPO capital raisings and a successful listing on the ASX in January 2021. With both professional and commercial experience, Craig is uniquely placed to advise organisations on a range of transaction services.
