This is a quick guide to the stages and sources of startup funding. Try to self fund (“bootstrap”) as much as you can. Raising capital can be a long drawn out process, you dilute some of your control and you might not get what you were hoping for.
Incubators and Accelerators
An accelerator program will usually provide some initial cash to an idea, and provide important mentoring and networking. To get the idea in a viable state and ready to pitch to the next level of investors.
Pre-seed – Self funded/Family and friends
This is your starting point. Try not to raise money until you really have to. Raising money is a slow and time absorbing process. Time that can probably be better spent on the business. Try to hang on to control as long as you can before your start to dilute your ownership.
Angel investors are high net worth investors who typically group together to pool funds and invest between $50,000 and $250,000. One Angel investor will lead the group and carry out due diligence on behalf of members.
Be very careful setting the value and terms in the first round of funding. This will influence future rounds of funding. Give to much away in the first round and you won’t have much left later on in the process. Try to limit it to less than 10% of equity.
The seed capital is to get the business polished. Ideally the business is already in traction and generating some revenue. Seed capital is usually the first source of institutional investors – venture capital
This is the first round of serious money and you need to be letting go of larger chunks of equity, anywhere from 15% to 25%. Each round of funding should last your 18 months to two years. At this stage your startup is starting to grow rapidly and hire staff.
In the next round of funding, Series B, you are looking to raise more than in Series A. You are looking to scale up your business model. Overseas investors might get involved at this point.
About the Author
Simon is a CA Accredited Business Valuation expert, Chartered Accountant and a Certified Fraud Examiner. Simon specialises in providing start-up, virtual CFO and valuation services. Prior to founding Lotus Amity, he was a Forensic Accounting partner with BDO Australia and led their National Forensics practice. He has worked as a forensic director for a major offshore forensic accounting practice which included assisting in multi-billion-dollar litigation in relation to giant Bernie Madoff Ponzi scheme. Simon provides valuation services in disputes, for raising finance, for restructuring, transactions and for tax purposes.
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