Start-up Funding: The Best Avenues to Raise Money in Australia

The Biggest Barrier to a Successful Startup is access to Cash

Rimon Advisory have put together a quick guide to the Australian Start-Up Funding landscape.

Contact Us

The R&D Tax Incentive and Export Market Development Grant Experts

Intro to Startup Funding - The Basics

The crucial asset of a tech start-up is the Intellectual Property (IP) that is being built through the new innovation.

It's the talented people (developers) of the company that have the exciting job of building and creating some of the value of this IP.

But, as we all know, developers are an expensive commodity!

With little or no revenue coming into an early stage tech business, it’s important for the founders to understand the different avenues available to raise those crucial funds in order to be able to grow (and retain!) their Dev Team.

The key to choosing the right type of funding is to understand the pros and cons of each type.

Below is Rimon Advisory’s high level guide on raising or obtaining cash in the Australian tech landscape.

key

Rimon’s top 6 avenues for raising Start-Up Cash.

1. Bootstrap it!

The dictionary definition of bootstrapping is:

Get (oneself or something) into or out of a situation using existing resources.

In startup lingo bootstrapping is the process of building your company without external funding.

Strap up your boots and get to work!

Typically founders will develop the product themselves and not pay themselves any salaries or wages.

It will be done with existing equipment e.g. previously owned computers and often out of their garage, a coffee shop or any other weird and wonderful location.

Bootstrap it!

Pros

No equity dilution
No external investor pressure
Valuation higher on future cap raise
Product is built by founders

Cons

Slower to build
Slower to market
Harder to attract top talent
May need to give equity to attract talent
angel-wings

2. Find the Right Angel (Investor)

An angel investor (sometimes simply known as an Angel) is an individual who makes investments in the early stages of a tech company.

Often in the pre revenue stage.

This type of investment is high risk because the company is unproven due to its very early stage.

When looking for the right Angel don’t only look for money. Angels bring along many things, such as:

  • Previous start-up and scale-up experience
  • A network of very useful connections
  • Other investments to collaborate with
  • Being a sounding board to the founders

A lot of HUSTLE is required when looking for the right Angel Investor. Get ready to network hard and find the best Angels around.

Often Angel investment is raised from “the 3 Fs” - Friends, Family and Fools.

There are some Angel Funds around such as Sydney Angels.

Pros

Cashflow
Experience
Larger Network

Cons

Dilution of Equity
Investor expectations & pressures

3. Venture Capital (VCs)

When people think of raising start-up capital it’s generally Venture Capital Funds that are first to mind.

These funds make big names for themselves from their investments that go on to make it big.

There are very well known VCs in Silicon Valley, San Francisco, however Australia has got some very impressive homegrown funds with impressive investments, returns and deep pockets.

VCs can typically invest in any stage but most commonly would like to give their first “cheque” in the post angel, pre-Seed or Seed stage. Pitching is the most common way of attracting VC funding and a founder needs to have his or her game-on when pitching as you often only get 1 chance.

Some of Australia’s best VCs are: Blackbird Ventures; Aitree Ventures; Square Peg Capital; Rampasand; Telstra Ventures; Carthona Capital; One Ventures and Reinventure Group.

Venture Capital

Pros

Cash Investment
High Profile Investors
PR and Marketing profile
Follow on capital raise ability
Experience in building and scaling
Portfolio of companies to collaborate
Big networks
Ability to increase growth fast

Cons

Dilution of Equity
Investor expectations & pressures
Loss of control
Comparability to other high performers
Regular reporting & Investor relations
Government Grants

4. Government Grants

This is Rimon Advisory’s bread and butter.

Government grants are a great source of cash because they are non-dilutive and non-debt.

Meaning that you don't give up a piece of your company and you don't have to pay the money back (in most cases).

Here are some of the best government grants around in Australia:

The R&D Tax Incentive

  • This is probably the number 1 incentive that all tech start-ups should be considering.
  • Boasting $4 Billion in total funding and 43.5% in a cash back benefit on companies with losses (most early stage tech companies have losses).
  • Make sure to be an incorporated Australian entity and be paying for your R&D through the company.
  • Have a look at our little calculator that explains how the cash back benefit could work for you.

For more information on the R&D Tax Incentive look here.

Total R&D Spend

$50,000 $21,750
$150,000 $65,250
$750,000 $326,250
$1,500,000 $652,500

Your R&D Cash Back Benefit

Contact Us

The Export Market Development Grant

  • From building out your tech to scaling overseas - this grant is for all those tech companies that are growing and scaling.
  • 50% cash back on your overseas marketing expenses.
    • That includes All types of online ad spend; Google, Facebook; Instagram; content marketing … the list goes on.
    • Don't forget any foriegn PR you may be doing too!
  • Have a look at our little calculator that explains how the cash back benefit could work for you.

For more information on the EMDG Tax Incentive look here.

Your EMDG Spend

$45,000 $20,000
$95,000 $45,000
$175,000 $85,000
$305,000 $150,000

Your EMDG Cash Back Benefit

Contact Us

Accelerating Commercialisation

For those founders that plan on raising big - this one's for you

It is a 1:1 matching grant and is capped at $1 Million.

Meaning that if you are selected the governing body will match your cap raise dollar for dollar up to the $1 Million mark.

This grant is a competitive grant, meaning that the disbursement of funds is at the discretion of the government body.

Unlike the R&D Tax Incentive and Export Market Development Grant that have a complex set of rules, regulations and compliance requirements, however if those requirements and regulations are met then the funds will be disbursed to the recipient.

Pros

Non dilutive (no equity give away)
Not debt (not repayable in most cases)
Recurring (some grants recur annually)
Able to build valuation whilst getting cashflow
Extends the company runway
Can raise debt using the grant as security

Cons

Timeframes of grants are restrictive
Competitve grants can be time consuming
Detailed legislation and compliance

5. Equity CrowdFunding

Welcome to the Millenial world - use the power of the Crowd!

CrowdFunding, although fairly new in comparison to the other 5 avenues mentioned in this piece, has grown in some serious popularity.

The idea - many hands make light work.

In other words, instead of trying to raise funds from a select few, you may be able to raise smaller amounts from a large crowd.

CrowdFunding began when trying to get validity for actual tangible products. Look at MVMT watches for example, they used Kickstarter to raise some money before the first watch was ever created.

However CrowdFunding has evolved into the SaaS (Software as a Service) tech space.

With the likes of OurCrowd, an Israeli platform, (who actually raised their initial round right here in Australia) and our very own homegrown Equitise (Australia’s leading tech CrowdFunding platform).

jordon-conner-tIr-PWgSYB4-unsplash

Pros

Centralised communication
Far reach to many investors
Momentum creation
Could create the "herd effect"

Cons

BIG marketing effort
Heavy preperation required
Failure cold tarnish reputation publicly
Hype and buzz is required for success

6. Debt Financing

Debt has been around forever and a day.

If used properly it can be wonderful but if not it's disastrous.

The difficulty with debt when it comes to early ventures is that the company itself cannot secure the debt or be seen as stable enough to get the debt.

That leaves the founder needing to find some other type of security e.g. a property or other types of physical assets.

If the venture is successful then the debt allows the founder to not dilute and remain with a much larger piece of the pie.

Capital can then later be raised at much higher valuations.

One interesting way of raising debt is to use the R&D Tax Incentive as security on the debt.

The tech company will need a reputable government grant provider in order to provide the financing company with the required comfort that the grant has enough certainty of being attained.

Some of the best R&D Tax Incentive financing companies out there are: Radium Capital; Rocking Horse and Fundsquire.

Pros

Non dilutive (no equity give away)
No investor pressure
Cash can increase speed of growth

Cons

Paying back of loan is required
Interest is accrued on the loan
Pressure can build if debt not paid on time

How Do Government Grants Work?

 

There are 2 types of grants:

1. Competitive Grants

2. Eligibility Grants

Competitive grants:

As the name suggests, these grants are about competition.

Meaning, you could have a great story, be a serious contender, however the governing body decides they would rather give the funds to other applicants.

You wouldn't really have much say on the matter.

These grants generally match funds that the applicant puts in or is raising.

Much like the Accelerating Commercialisation Grant we discussed above.


Eligibility Grants:

Once again, as the name suggests, are about a business being eligible.

There are a set of complex rules and regulations.

However, if these rules and regulations are met then there is a very high likelihood of success.

The funds are also not limited to the number of entrants but rather on an eligible basis.

If a business meets the rules and regulations they are generally entitled to the funds.

A point to note - if the pool of funds available is exceeded the governing body may prorate your benefit.

Both the R&D Tax Incentive and the Export Market Development Grant (mentioned above) are eligibility grants.

Contact Us

Advantages of Using Government Grants

As with any business decision a founder needs to apply their mind before making a decision.

Although, using Gov Grants as a means of Cashflow seems like a bullseye to us.

Some of the benefits of using Government Grants are:

  • Cash in the bank
  • Benefits to current and future investors
    • Investor funds go further
    • Investors view the use of grants as hustle by founders
  • Budgeted cashflow based on eligible activities and expenditure
  • No dilution of equity
  • No repayable debt
Benefits

Remember This

Building a successful tech company is about the people.

Yes, cash is crucial, but don't get lost in the hype and glamour of raising capital and then writing fancy articles about your raise and the valuation you raised at.

Heads down, grind and cockroach your way to success!

And yes, raise some impressive capital along the way.

Good luck - from the Rimon team