Ah, money… It makes the world go round. No-one wants to talk about it, which is why you find yourself woefully unprepared about how to get it when you decide to go and launch a startup.
Without that dirty cash, your big dreams will remain just that – a scrambled collection of electro-chemical reactions, playing hopscotch with your neurons and axons, having absolutely no influence on the outside world whatsoever. So, how can you bankroll those ideas and create something amazing?
We’ve put together a two-part cheat sheet series on funding your startup, to give you some clues. In Part 1, we’ll cover the steps involved in startup funding, what you need to know and how to pitch. In Part 2, we’ll give you a head start on where those pots of gold might actually be hiding – and reveal who you should approach at each funding stage.
Before you get cracking…
Here’s a little bit of fuzzy self-love talk you should try to remember: as you rise through the ranks of these funding rounds, take a step back from the nerves and trepidation to remind yourself that the fact you’ve gotten this far is a sign you’re truly onto something. You haven’t maxed out your potential, your startup is still growing, and there’s no sign of the bubble that you’ve oh-so-carefully cultivated bursting anytime soon. You’ve totally got this!
Plant the seed with angel investors
Before you launch your killer idea onto the general public, you’ll need a little cash to kickstart operations. But the money tin beside your bed is looking awfully bare, and the bank isn’t interested? That’s where a seed round comes in.
In a seed round, you can gather the funding you need to get your startup off the ground, and put all those pivotal wheels in motion that you’re going to need down the track. A seed round is also important because it allows you to grow your idea with a little more flexibility, as you’re not bound by the stringent conditions or ownership requirements that often come with funding from big firms.
Without that first injection of capital, you might struggle to conduct adequate research into where your product could fit into the market. It could also enable you to hire a couple of experts to help you fine-tune your vision, or get a prototype off the ground to attract further funding.
The funds you raise from angel investors in your seed round can be directly invested into these vital steps, propelling your startup forward. They could take the form of a once-off investment, or an agreement to provide ongoing cash flow to keep your business ticking along until you start generating some income. No wonder they’re called angels!
What do angel investors want in return?
At this early stage of the game, the success of your startup isn’t assured, so you’ll need to sweeten the deal to encourage those angels to come to the party – such as a share in the business, or convertible debt.
You could also turn to crowdfunding for those seed dollars, but remember ASIC regulates this niche pretty tightly, so it’s wise to check with them first before going down this route.
Don’t need a seed round, ‘cos you’ve already got those bases covered? Give yourself a pat on the back, and read on…
Get back to your ABCs
Now that you’ve explored your idea deeply enough to know that a market exists for it and it has genuine potential, you can start seeking out some serious funding to launch.
No, it’s not a football league. Once you’ve put those seed funds to good use and developed a cracking prototype with a solid strategy behind it, it’s time to seek out those mysterious creatures: the venture capitalists. These savvy risk-takers could take a punt on you and your idea to the tune of up to $10 million. The funds could be earmarked for further research into distribution channels or untapped markets, or a stellar launch of your debut product.
With everything you learned in Series A behind you (yes, even your mistakes) and an epic vision for scalability, in your Series B round you’ll aim to rake in up to $50 million, to help you hire more staff, ramp up your marketing and take your business to the world.
Now you’re really showing that grumpy old relative who scoffed that you’d never grow up – your business has matured, like a ridiculously expensive wine nobody wants to open, and it’s time to go after the big guns. Those firms and banks who didn’t want to know you back in the seed round days should now be falling over themselves to offer you millions, so that you can expand your market share, acquire other brands, or create new products and services to add to your repertoire.
Perfecting your pitch
Now, everything we’ve described so far involves putting yourself out there in front of people who could potentially change your life, so it’s imperative that you put your best foot forward. At every stage through the funding process, the way you present yourself and your ideas to investors could make or break your startup. Dr Elaine Stead, of venture capital fund Blue Sky, has heard countless pitches from eager entrepreneurs, so she knows what works, and has a couple of hot tips that should leave your closing argument ringing in investors’ ears long after your meeting has ended.
Firstly, it’s important to define the problem your product will be solving, so you can demonstrate the viability of your startup – while investors are willing to accept some risk, they still need reassurance that there’s a market for the product or service.
“We often get people pitching who are in love with their product, but they can’t articulate what the problem is that is going to drive the consumer to pay for their product,” she says. So be sure to hone in on the problem you’re solving, and include this in your pitch.
Elaine also says good research is priceless, so you don’t find yourself barking up the wrong tree. “You’re better off pitching to investors who are likely to be interested in what you’re doing,” she advises. “Do your research on the investors you’re pitching to… it’s amazing how many people don’t do that,” she adds. The time spent staking out your investors before you pitch will pay off when you secure that funding from a likeminded firm.
Her final piece of advice? Network like your life depends on it! Unlike male entrepreneurs, who often have the ‘Old Boys Club’ from school, uni or sporting clubs to fall back on, female startup founders tend to rely the networks they create for themselves – networks like Business Chicks.
“This is why you need to be involved in industry groups, so you can get a warm introduction to someone who might be helpful or useful to you,” Elaine says. “Getting that kind of introduction instead of having to approach people cold is a huge advantage.”
There’s nothing holding you back now, so just open the damn wine already – you’re a successful entrepreneur, you can always buy another one!
Coming soon: part 2 in our funding cheatsheet series, which offers a nuts and bolts guide to funding options and places to go to get your startup financed.