Wednesday, July 13, 2011

7 options for Australian startups to raise capital

This post was originally published at StartupSmart.

We've bootstrapped Shoes of Prey to date but we've been exploring the possibility of raising capital to help accelerate our growth. As we've gone through this exploration process we've learnt about some different options for raising capital in Australia which we thought we'd share.

1. Incubators
Incubators provide capital and mentoring services to very early stage startups in exchange for equity. Y Combinator and TechStars in the US lead the development of the incubator model and Australian startups can apply to join their highly competitive to get into programs. 2 incubators have recently launched in Australia - Startmate and PushStart.

A slightly different take on the incubator model is Pollenizer. Pollenizer take a much more active role in the startups they're involved in. With a software development and marketing team in house Pollenizer help to actually build the business rather than just take a mentoring approach. The much larger stake they take in the business reflects this but it allows the startup to grow much more quickly. Spreets is a prime example of where the Pollenizer model worked exceptionally well.

2. Competitions
The University of Queensland Business School runs a competition called ENTERPRIZE. While the competition is open to all Australian residents and their businesses, the competition winners have always been technology related and the site says that the judges are looking "for submissions that best capture the ingenuity and innovation which they feel could have the most significant impact in the market." The winning entry receives $100,000 in seed funding.

Tech23 is another Sydney based competition open to technology related startups. Tech23 offers a range of prizes for Australian startups totalling $150,000.

3. Government funding
The Australian and state governments offers a range of funding programs. This website provides a great list. The ones we've looked into are:

Commercialisation Australia
This program is designed to help fund new innovative businesses developing valuable intellectual property in Australia. We applied for this program but found out that the key to getting this grant is that what you're developing must result in something that you plan to patent. We didn't apply for a patent on our shoe designer so didn't qualify for the grant.

R&D tax concession
The R&D tax concessions provides tax benefits to businesses undertaking risky research and development work. The grant is designed to encourage Australian businesses to invest in R&D. The R&D work must be innovative and risky in that it has a chance of not succeeding as planned, as opposed to making incremental improvements to an existing innovation. The grant can be taken as cash (which generally works best for unprofitable businesses not paying company tax) or an additional tax deduction and franking credit (better for profitable businesses). Shoes of Prey is currently applying for our first R&D tax concession.

Export market development grant
The export market development grant provides a grant to qualifying businesses equal to 50% of the overseas marketing expenses for Australian exporters. The grant is designed to support small Australian businesses sell their products overseas. Shoes of Prey received a $5,000 grant under this program last year and we're applying again this year.

4. Friends and family
Friends and family can be a great potential source of funding for a startup. No one knows you better and generally there will be few people as willing to invest in your business as your friends and family. If you're going to explore this path the key is to not take advantage of the trust your friends and family have and not behave in a way that might damage your relationship in the future. Their investment will be risky and that needs to be clear at the outset. The valuation and the terms of the investment should be reasonable. If your business is not successful that's going to be bad enough, without it damaging family relationships or friendships in the process.

5. Angel investors
There are a growing number of Australian angel investors open to investing in startups. The way we've met a number of them is through personal and business networks but Sydney Angels is a collective group of Sydney based angel investors so that group is worth getting in touch with.

6. Australian venture capital firms
The Australian venture capital industry is still very small compared with the same industry in Europe and particularly the US. From our limited experience the two most experienced firms in the space are Starfish Ventures based in Melbourne and Southern Cross Venture Partners with offices in Sydney and Silicon Valley. The primary thing a venture capital firm can bring to your business is of course capital, but the partners of both Starfish and Southern Cross have significant entrepreneurial experience themselves so can be helpful in thinking through potential paths for the growth of your business.

One of the downsides of raising money via a VC firm is that they'll tend to have more restrictive requirements than the previous 5 options. They'll want a board seat, liquidation preferences, anti-dilution protection and a range of other similar clauses. For a great series of posts discussing the terms generally included in a venture capital term sheet check out this great blog post series from Brad Feld.

7. Foreign venture capital firms
We were fortunate that early on in the life of Shoes of Prey we were a finalist for the 'Best Bootstrapped Startup' in their 2009 Crunchie Awards. Following on from these awards we were contacted by a large number of US venture capital firms and we met either over the phone or in person with around 10 of them. The conclusion we came to with all of them is that they're very open to investing in Australian businesses, however for businesses based outside the US they're generally looking for the business to be worth $20m+ before they'll invest. When they work with smaller startups they require them to be based in the US so they can work more closely with them. One of the VC firms we met with a couple of times was Accel Partners and we've seen them put this philosophy into action with investments in Atlassian, OzForex and most recently 99Designs, all at $50m+ valuations.

While it might not be quite as easy for an Australian startup to raise capital when compared with our US friends, there are a range of good options available to us. And if none of them offer exactly what you're looking for you can always take the same approach as we have with Shoes of Prey, and self fund your business out of your own savings and business cash flow.

Any other options for raising capital that you've come across?

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2 comments:

  1. If you're looking for $1000 no strings capital, maybe to build a prototype of an app or something - the Awesome Foundation has Melbourne and Sydney chapters. http://awesomefoundation.org/

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  2. I would like to add to your article the option of using crowd funding, especially at the very early stages when proof of concept or prototyping are hard to fund due the the speculative nature of the venture (especially at such an early stage). Recognising this led us to starting iPledg ( http://www.ipledg.com ) to fill the gap at the very bottom of the funding ladder, and enabling early stage entrepreneurs to get access to the funding they need and establish social proof

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