Startup Financing Options

Looking at starting a new venture and need to sort out the financing? In a recent webinar Jana Mathews from the ANZ Innovyz Start program in Adelaide went through the five main startup financing options.

Bootstrapping

The goal of bootstrapping is to generating enough money inside the company that you do not need to find other sources of funds. All expenses are minimised and pursuit of cashflow is critical. Not all companies can bootstrap – large initial CAPEX requirements can often preclude it.

If you’re selling a product, get an order first, if you’re selling a service get a contract for it. The goal is to generate cash flow asap, earn profit and reinvest in company. Another option for bootstrappers is factoring receivables where you give up a percentage of future cashflow for cash in the hand now.

Debt

Traditional debit. Where you borrow from yourself, friends, and family, from the bank via credit cards, and business loans. Banks will often require collateral such as your home, equipment or receivables.

An interesting point that Jana made was that the “best time to borrow money is when you don’t need it”. Asking for funds when you really need them can be tricky as your books may not look that great.

Grants

Grants are a great way to get free money. However they require a whole lot of preparation, paperwork and meetings. Some grants will only match your contributions, or provide tax breaks. Jana recommends checking out Commercialisation Australia as well as city, state and federal governments. Often there are industry specific grants available.

The paperwork required can be significant but there are many consultants out there that can help you through the process, for a fee.

Equity

Exchanging equity for cash or services is probably the most publicised of the startup financing options. We hear a lot about it, but Jana states that it is actually not as common as we would believe – many more are bootstrapped or use debt financing. Equity is often given to founding partners, employees, friends, families and fools (the three f’s) in exchange for starting capital. Angels, Seed funds, Venture Capital, Corporate Investments and Corporate Venture Capital all expect equity for their involvement.

Partnerships and Joint Ventures

Partnerships and Joint Ventures are where you share equity, revenue as well as the risk of the project. Sometimes this can involve advance funding. A partner may bring in specialist capabilities in marketing, manufacturing, or services. It is normal for these arrangements to include some form of revenue sharing.