What early stage startups need to know about raising investment in Australia

money piggy bank

One of the most talked about topics in our conversations with first time startup founders is raising investment in Australia.

There are many misconceptions and common misunderstandings about fund raising (eg: when to do it, why you should do it, how to do it). With this in mind, this listicle will hopefully help new startup founders when thinking about seeking investment in their startup.

We plan to add to the list over time. If you feel there is something that should be added please comment below.

1. You will need to bootstrap
In almost all cases you will have to get started on your own funding your startup from your own pocket. You may have read about US based startups raising investment at the idea phase or after developing a very rough prototype. That doesn’t happen very often and almost never happens in Australia.

If you are at the back-of-a-napkin stage (idea stage) you’ll either need to develop the product yourself (if you can code), find a co-founder who can code or outsource the development of your startup. If you are outsourcing to an Australian application development company you’ll usually need at least $20,000 to get started (idea and requirements dependent). You can read more about what it costs to develop a startup and how long it takes to develop a startup on our blog.

2. If you can’t bootstrap approach the 3 Fs
If you need money to get started and you don’t have 100% of the funds yourself the common place to start looking for investment is not from angel investors and venture capitalists, it’s from the 3 Fs.

These are friends, family and fools (after all if someone is investing in your startup at the idea stage they are taking a giant leap of faith).

3. The usual stages of investment

  • Getting started: invest your own money or raise money from the 3 Fs
  • Pre seed: 3 Fs or angel investors
  • Seed: angel investors or venture capital (VC)
  • Scale up (series A, B, C): VC

4. The 4 numbers that you must have to raise money
A big misconception is that angel investors and venture capital firms only need to see a great idea to make an investment decision. To make wise investment decisions they usually want to see the 4 Numbers You Need to Raise Money:

  • Revenue (or Monthly Recurring Revenue if you have that)
  • Churn
  • CAC (cost of customer acquisition)
  • LTV (lifetime value)

Take Innovation Bay for example, in their guidelines for submitting an application to their angel dinners one of the requirements for the application video is:

Traction (include relevant metrics; ie active users, revenue, etc)

And there’s also this …

5. Revenue is cool
The earlier you take on investors the more equity you stand to give up. Investors love startups with revenue. It gives them more certainty and gives you more control.

6. Angels that invest very early
Angels do sometimes invest very early but this usually happens when the founder has deep insights into a big problem and has a proven track record of success.

This means that the founder has previously had a successful exit where investors made a lot of money. Often in these cases the founder who is raising from angels will already know them and the angels will know the founder.

7. Finding angel investors in Australia
If you are looking for angel investors in Australia simply turn to good old Google, or look through AngelList or look through this Google sheet made by Airtree (a Sydney based Venture Capital firm) - An Australian startup funding/investor list for the ecosystem.

In your search you’ll come across both angel groups (e.g.: Innovation Bay) and individuals (e.g.: Adrian Stone).

8. VCs don’t buy ideas
Approaching a venture capital firm at the idea stage is almost always a bad idea. You would usually approach a VC when you know:

  • your tech works
  • you know the customer
  • you know that customer base can be profitable for you

One of Australia’s largest VC fund managers, Blackbird, offer this advice on their website:

Even at the seed stages we rarely back a business plan. We’re looking for businesses with real-life metrics and paying customers.

9. A list of Australian Venture Capital firms
See the Airtree sheet in number 7 above.

10. Sage advice from the horses (VCs) mouth
Here are 3 excellent blog posts you should read before approaching venture capital firms in Australia:

11. Warm intros are best
Most VCs prefer warm introductions from people they know as opposed to cold calls from founders they don't know. However, some are more open about how to contact them ...

12. Learning the VC process
Before you approach a VC make sure you understand their world and the terminology they use. This becomes very important if they place a term sheet in front of you.

If you have never been through the venture capital process, or don’t know much about it, then I recommend doing this free course on EdX: Understanding Venture Capitalists: How to Get Money for Your Startup

In the course you will learn about the venture capital process and understand how a VC fund manager operates and what their motivations are. You’ll also learn important terminology that could save you from losing millions of dollars if you are not wise to them (you should be aware of these if raising money from angels too).

Some of these provisions are:

13. Forms of capital raising

Launch Lab develops startup applications for non-technical founders.

We offer a fee-based service where we become trusted, and close, partners with our startup clients. We also sometimes take a small equity stake in the startups we work with in return for reduced development fees.

If you are getting started contact us. We've built many startup applications and have a long list of happy clients. We'd love to discuss how we can help you get your startup to market and beyond