Find funding

Start-ups have many potential sources of funding, and you should start by looking widely for funding. Remember, any type of funding has a cost to you as a founder. This cost is the amount of your time and energy needed to educate the investor about your vision and strategy.

To keep this cost down, it’s important to understand the objectives, or investment thesis, of each funder. Choose funding sources whose objectives are closely aligned with those of your start-up.

For example, a start-up with a business plan that depends on low-cost, offshore manufacturers is probably not aligned with a grant program aimed at developing local, high-value manufacturing capability. The investment theses of different investors and funding sources are discussed below.

Self-funding of a start-up is investment from your personal savings or those of your co-founders. It can take the form of cash and/or forgone salary. Many early-stage start-ups rely on self-funding, but it represents a significant leap of faith for you and your family.

A clear founders’ or shareholders’ agreement is important for your start-up if it includes significant self-funding.

Grants are funds that are not paid back and do not force the founders to surrender any control or ownership of the start-up to the investor. These funds are often from government agencies.

As a University researcher, you are probably familiar with research grants. Grants for start-ups are similar.

Government grants are usually designed to achieve a policy objective, for example enhancing university-industry collaboration or accelerating the development of capabilities.

Recipients usually have to:

Because grants tend to cost founders less than other types of funding, they can be very attractive to a start-up.

Many non-research grants take the form of matching funding. This means one dollar of grant funding for every dollar received from other approved sources.

If your start-up benefits from a grant given to the University (rather than directly to the start-up) or matching funding from the University, this money represents an increase in the University’s contribution to the advancement, risk reduction and value of your start-up.

In exchange, it's reasonable to expect the University to ask you for a larger share of any success. For example, more equity in your start-up, or a higher royalty rate.

The availability, scope, terms and other details of grant programs for start-ups often change. This is because they are often driven by policy. Do a detailed search of State and Federal Government websites, and the University website, to find out more.

Debt funding means the borrower (your start-up) makes regular repayments towards the amount borrowed plus interest. The money is usually borrowed from a bank.

The advantages of debt funding are:

Debt funding is usually not available to start-ups because most lenders are not willing to tolerate the risk of forecasting the start-up’s future income and therefore its capacity to make the repayments.

If debt funding is available to your start-up, the interest rate is likely to be extremely high because of this risk.

The disadvantage of debt funding is that the consequences for your start-up of failing to make the repayments are usually severe. The lender could assume complete ownership and control of your start-up, close it down and sell its assets to recover their capital.

For these reasons, debt funding is not an option for most start-ups.

An equity investor invests cash and often makes in-kind contributions to the start-up. This is in return for ownership of an agreed, usually significant, share of the start-up.

An equity investor usually assumes some control of the start-up by taking one or more seats on the board of directors.

Several technology start-ups have raised initial funding using crowdfunding platforms such as Kickstarter.

There are two main types of crowdfunding:

Many start-ups seek equity investment. You’ll need to understand:

Here are the main types of equity investors.

Early investment in a start-up often comes from founders’ family and friends. The investment tends to be small, usually a few tens of thousands of dollars at most.

It can serve as matching funding for grants.

It's usually used to achieve a milestone. For example, creating an early prototype of your start-up’s product.

The investment might be in the form of a loan, with repayments, or conversion to equity, tied to the success of the start-up. For example, you might agree that repayments begin when the start-up’s revenue exceeds a certain amount.

At this early stage, the financial risk for these investors is high. However, their primary motivation is often to provide you with early financial support and a vote of confidence, rather than receiving any financial return.

If your start-up is seeking investment from family and friends, be clear with potential investors about the level of risk. Record the terms of the investment in a written, signed document, preferably with professional legal advice.

Angel investors are individuals with high net worth who seek out founders of early-stage start-ups. They look for opportunities to invest their own money, and often their time and experience.

Many angel investors have become wealthy from their own success as entrepreneurs. They often have start-up experience in the same markets where they invest. Investment amounts range from tens to hundreds of thousands of dollars but can be more.

Angels tend to be motivated as much by the desire to use their start-up experience and contacts to benefit other entrepreneurs as they are by financial return.

For this reason, angels are likely to be very hands-on investors. They usually expect their investment to result in:

Venture capital (VC) comes from professional investors or investment funds. It is most relevant to start-ups with high growth potential.

A VC fund usually raises VC from institutional investors, for example superannuation funds. The VC fund invests in a range of start-ups over seven to ten years. A major attraction of VC is its scope: millions, and in some cases tens of millions, of dollars are available.

VC funds:

VC funds are prepared to lose some or all of the money they invest in many of their portfolio companies. This is because they expect to generate a significant financial return in one or more of them. They expect returns of tenfold or more.

Individual VC investors may be motivated by a desire to support entrepreneurs and the innovation ecosystem. But the VC fund’s primary aim is to generate financial returns for its investors.

VC funds will expect a large equity stake in your start-up. This is often greater than 50 per cent. They also expect some involvement in its governance and exit strategy.

If the start-up is successful, the exit gives the VC fund its financial return. This can be through acquisition, merger or initial public offering. As VC funding comes in over a fixed term, a VC investor may be less flexible than other investors about the schedule for an exit.

Experienced VC investors are professional negotiators and will bargain hard, especially with first-time founders.

VC investors benefit personally from a successful exit of a portfolio company in the same way that an angel investor would. But VC investors are often more inclined than angels to cut their losses if your start-up is struggling.

Some VC investors have personal start-up experience and can mentor you like an angel can, but many do not. However, any successful VC investor has a strong network. They will introduce you to potential:

A VC fund will target one or several market segments of interest, for example life sciences. But VC investors are usually generalists. You’ll need to make a large and long-term investment to develop a relationship with potential VC investors and to educate them about your market.

If you’re interested in VC investment, engage with potential VC investors early. Choose target investors carefully. Choose them based on a clear understanding of their investment thesis and the benefits they would offer the start-up.

Questions to consider include:

If the VC investor is credible and successful and seriously considering an investment in your start-up, they will offer to introduce you to founders of other start-ups they have invested in.

We recommend talking to these founders about their experience of working with the VC investor.

Make sure you do your due diligence on the VC investor. This is what they will do on you and your start-up.

Strategic investors are large, established companies. They invest in start-ups to explore high-risk technologies or markets that overlap with, or are adjacent to, their own.

If the start-up is successful, the strategic investor is likely to want to buy it.

Many strategic investors, like some VC investors, make large, multimillion-dollar investments. They may invest in start-ups as part of a syndicate, often with one or more VC investors.

Although their primary motivation differs from that of VC investors, strategic investors also want a financial return from their investment.

Strategic investors will usually insist on a seat on your start-up’s board of directors. Many prefer an 'observer' seat. This gives them the rights to attend all board meetings but no right to vote on board decisions.

Strategic investors in your start-up have several potential advantages:

But when a single strategic investor is involved in your start-up, this can limit your ability to deal with the investor’s competitors. This can reduce the exit value of your start-up and make it less attractive to VC investors.

Strategic investors have a range of investment goals. It's important to understand these, just as it is with other types of equity investors.

One of the biggest challenges for you as a start-up founder is communicating your vision for the start-up to prospective investors.

Most investors are more time poor. They have less knowledge about the specifics of your start-up’s target market than other potential stakeholders.

You must be prepared to invest weeks or months developing a pitch that communicates your start-up’s vision and the strategy for achieving it.

The concept of the elevator pitch has become a cliché for a reason. An elevator pitch explains your start-up’s vision and value in the same time as an average elevator ride. Your pitch grabs a prospective investor’s attention in a few sentences.

When you condense, clarify and refine your pitch to prospective financial investors, this will also help you communicate with and inspire your start-up’s stakeholders. They are:

And it might help keep you inspired, too.

You can find guidance about how to craft the ideal pitch online. For example, search for 'pitching' at First Search, a curated database of start-up advice.

Start-up incubators and accelerators and special pitch events focus on coaching founders, and many will introduce founders to prospective investors.

It takes months to develop a relationship with an investor. Engage with prospective investors well before you need investment.