Every startup business owner dreams of receiving funding to accelerate their goals and push past the early struggle of slow growth.
However, the path to obtaining funding in Australia and determining the ideal source is a difficult process when considering the length and volume of applications that funders receive, along with the possible chance of rejection.
This article will provide the five most probable forms of funding to simplify the plethora of options available.
Venture capital
A venture capital by nature will invest in startups which promise high growth potential and display unique ideas which fill gaps in the market. It is a private form of equity and usually derives from wealthy investors, investment banks or other financial institutions.
An example of this is one of Australia’s most renowned plant-based meat substitute company v2food. The food business secured $77 million from multiple venture capitalists within the country and internationally when it was still a startup in 2020.
A venture capitalist may also only invest in startups which belong to a particular industry that operates in their area of expertise. This is a good opportunity for startups because they can research prior funding activities of investors to determine if they will potentially fund their business.
One of the only downsides of this funding is that an investor may get a say in your company's decisions if they have equity in it.
Government grants
Although applications for government grants can be slightly complex because of eligibility and other specifications, they can provide significant amounts of funding. The size of the funding also depends on whether it’s at a federal or state level, with one paying more than the other.
For example, last year’s manufacturing modernisation fund delivered grants between $100,000 to $1 million for small businesses. It is important to note that these grants are typically looking for businesses which will create jobs, adopt new technologies, encourage innovation and become more competitive in the market through funding.
The primary challenge of this form of funding is patience and the level of competition. The key here is to actively pay attention to any new programs and funding schemes available.
Crowdfunding
Although not as common anymore, crowdfunding is still a viable option if your business has a strong appeal. While an average crowdfunding campaign may only raise approximately $7,000, this should not discourage your business from attempting it if you believe your product or service truly stands out.
A fitting example of this would be Tile, a Bluetooth connected device which helps find misplaced items. The Kickstarter raised $200,000 in the first 24 hours and reached more than $2.5 million in the end.
It should be noted that the funds are only taken from consumers if the predetermined goal is accomplished.
Accelerator funding
Other than funding, a startup accelerator also provides mentoring, resources, industry contacts and potential investors.
These are programs aim to compress years’ worth of education into a short timeframe and essentially “accelerate” your business life cycle.
The programs can last anywhere from three to six months and target particular niches, which once again is a great way for businesses to increase the likelihood of receiving funding.
An Australian equivalent of this would be H2 Ventures, an early-stage investor of financial technology, data and artificial intelligence businesses. In 2017, the organisation invested in seven startups of which each received $100,000 in return for 10 percent equity, along with six months of expert assistance through its program.
Debt funding
Finally, debt funding involves obtaining finance through a third-party and agreeing to pay the money back with an interest in the future.
This is sourced from financial institutions and has an even number of advantages and disadvantages.
Debt funding allows you to maintain complete ownership of your business, unlike equity financing which gives investors small chunks of ownership. Depending on the size of the loan and your momentum, terms of payment such as interest rates and the time frame may be negotiable.
Another significant advantage of debt funding is the ability to get tax deductions on interests, fees and charges on business loans. Lastly, the only responsibility that comes with this form of funding is paying the loan back on time and doesn’t come with the burden of sharing your profits with investors.
As for disadvantages, banks are often cautious when lending money, especially with new businesses.
Secondly, debt funding requires the commitment of always paying on time otherwise you risk your credit rating, hence also effecting your cash flow due to regular payments.
Lastly, having confidence that your business can pay off the debt is paramount in this type of funding or else you face the possibility of having to be personally responsible for the loan.
