Although there is much investment capital available in Australia, raising it can be a tough road for entrepreneurs, particularly for early-stage or start-up companies. Australian investors can be described as more conservative when compared to their American counterparts. YouTube, which received venture capital funding of around US$11m while incurring a cash burn rate of US$1m per month, would have struggled to attract similar funding in Australia.
The reasons for this conservatism can be attributed to one or more or the following reasons:
- Many investors have lost their money on a couple of past ventures, especially technology.
- The Australian market here is smaller and more fragmented when compared to the US, China or Europe (which have tens of millions of people at their doorstep). Therefore, there is less chance of new concepts getting up.
- The ASX was, until recently, doing very well. Why risk your money with a start-up/early-stage venture?
- The pool of genuine angel investors in Australia is small and hard to access. Promoters may need to do dozens of investor pitches in order to find the right one.
In short, it’s not hard to find the money; it’s just really hard to get the investors to part with it.
Tips for raising capital
Here are some tips that are guaranteed to make your road to capital raising easier:
- Understand your marketplace thoroughly and who your direct and non-direct competitors are. Include as much of this information as you can in your business plan.
- Talk with and meet with as many investors and VC firms as possible, even before you are ready to raise capital.
- Get to know the investors’ requirements and appetite. If they have funded any companies that are competitors, or are similar, this will have a big impact on whether they chose to fund you.
- Be clear on how much you are asking for, what the funds are to be used for, and how much of the company it will represent. You must also totally justify this valuation by way of comparable investments, assets, capital and time invested, listed benchmarks and projections. Value is where most negotiations fall down.
- Once you have agreed in principal, get a term sheet or heads of agreement signed by both parties. Then work through necessary due diligence towards the point of funding. Make sure you have adequate legal representation on your side. It’s never cheap but it’s not as expensive as the alternative, should things go wrong. Make sure your lawyer has previous corporate and capital raising experience.
- Ensure there is provision for a clawback in the agreement. This allows you to buy back shares from the investor at a minimal price if you achieve a certain milestone. Most investors will agree to this.
TIP: Don’t forget that 20 percent of something successful is better than 100 percent of a failed venture. In most cases, successful companies are built on a base of investment capital, so don’t be afraid to give up some of your hard-earned equity to ensure that your business idea has the best chance of success.
Reuben Buchanan is a corporate advisor for Sydney based advisory firm Integral Capital Group. His primarily role involves raising capital for both public and private companies, of amounts between $1m and $10m. Previously, Reuben Buchanan started, ran and on-sold Wealth Creator magazine, launched in 2002.
Photo: Luciano Meirelles (Flickr)