Ahead of our Google Hangout on funding, Australian serial entrepreneur Jo Burston takes us on a whistlestop tour of alternative funding sources for your start-up.
Every entrepreneur wants the very best shot at investment, whether that’s angel, seed, venture capital, institutional or private funding. This means becoming highly investable as an entrepreneur and being deal ready. Most new entrepreneurs struggle to navigate this process and often do not have the knowledge, experience and resources to create a successful first time outcome. There are many ways to fund your start-up, here are some of the most common.
Self-funding is often the most common way for a start-up to fund a venture, usually consisting of small amounts of saved cash or credit card facilities. Mortgaging an asset such as a home is also common if the entrepreneur is at a later stage of their life. We have seen self-funding range from as little as a $1,000 to over $1,000,000. Serial entrepreneurs with proven success and positive cash flow in their existing businesses often see self-funding as the optimal choice.
Contra service swapping
Instead of cash for growth, many start-ups will exchange goodwill and services with other entrepreneurs. I have personally done this many times, as I believe in giving to receive. Keep in mind that many service providers such as lawyers, designers, photographers and small scale vendors will also be willing to work on a goodwill basis. However, they will also have the expectation that once the venture grows and produces a profit, they will then become one of your loyal paid service providers.
Though it can come with caution as a new form of raising capital, providers like Indiegogo, Pozible and Kickstarter serve as brilliant platforms for connecting start-ups to public and private money. Code.org is a great example of crowdfunding, having raised $5 million. Not only does this raise capital and awareness about your brand, it’s also an opportunity to engage return customers. You should pay specific attention to what you are willing to provide and your businesses capacity to meet that.
Friends and family
While it may be considered taboo to do business with friends and family, Mark Zuckerberg had his dad as an early stage investor and the rest is history! Most entrepreneurs will keep a “love list” – those they know that they may call on when they have no other options.
In Australia, banks such as ANZ and Commbank have low interest rates, and no/low security loans for entrepreneurs of value up to $50,000. These loans are usually interest only first year and have little or no security over them. This demonstrates that the big four banks in Australia are seeing the early stage investment into entrepreneurs and start-ups as future large customers.
Seed and Angel investors
Both of these groups are made up of private investors. Put simply: a group of investors create pool funds to back a start-up, or a private single investor may fund a venture. Both would require a well-thought out, polished pitch and excellent business plans, along with the entrepreneur's personal value being equally conveyed. While they are for early-stage businesses, the risk profile for an investor is much higher and investment rounds tend to be smaller until the business has acquired customers, sales and/or proven itself to be a viable investment.
Venture Capital (VC)
VC is usually institutionally driven and often made up of funds from high net wealth individuals seeking opportunities to invest in medium to long term ventures. These funds can carry up to $500 million in disposable investment money and often are looking at already established, highly scalable, global and unique businesses with proven success. Series A investment by VC is usually between $2-10 million, while series D can be over $100m in one round.
Jo Burston is an Australian serial entrepreneur and the founder and CEO of Rare Birds, a women’s entrepreneur movement where women can find the tools, resources (such as access to funding and mentorship) and a like-minded community to assist them in their entrepreneurial journey. Rare Birds' mission is to give every woman globally the opportunity to be an entrepreneur by choice.
Join us next week to explore how to fund your start-up in our next Hangout with Google for Entrepreneurs. With co-founder of Indiegogo, Danae Ringelmann, 500 StartUps founder Dave McClure, and Homejoy co-founder Adora Cheung. #RaiseYourRound.