So, you've got a startup idea. If it's not "Uber for laundry," congratulations, you've taken an important first step. The next hurdle is to find money, and unfortunately, it's going to be complicated.
Angel rounds, Series A, bootstrapping — a lot of funding jargon gets thrown around with little specificity and the fresh-faced Australian startup scene is particularly guilty of this.
While the American style of venture capital funding is coming under increasing criticism for wasting millions on companies with little more than a clever pitch deck, Mashable Australia spoke with a number of local experts for their views on how the process works in Australia, and to put some figures together on how much startups can typically raise at each stage.
There's more than one way to grow your startup, but consider this a beginner's guide.
If you want to be around like-minded people
If your startup is still in a fledgling state and you need some support, an accelerator may be a good option.
Accelerators accept a cohort of startups for a set amount of time and funding. These are not to be confused with incubators, which are mostly limited to a shared startup workspace. An accelerator program can give the founding team cash, mentorship and networks that speed up the team's learning and growth. In Australia, examples include Muru-D and AngelCube.
IMAGE: MOMENT EDITORIAL/GETTY IMAGES
One reason to join an accelerator is for the camaraderie. "It's very lonely and hard to do this by yourself," Rohan Workman, director of the Melbourne Accelerator Program (MAP), told Mashable Australia. "By being in the room with bunch of like-minded people, when someone is coming up against a problem, there are quite a few people who can help demystify it."
Accelerators usually offer startup teams less than A$100,000. At MAP, top startups get A$20,000, office space and mentoring, Workman said. Many accelerators take some equity — an ownership interest in the company — in exchange for their funding, although MAP does not.
According to Workman, companies will get the most out of the accelerator if they are ready to launch their business to the public.
"They're already talking to customers, they already know what they're trying to do," he said. "When they come out the end of our program, most would be looking to do an angel round of a few A$100,000, up to A$1 million."
If you need some money to get started
Many founders begin their startup by borrowing money from family and friends, digging into their savings, crowdfunding or going into credit card debt. Another avenue can be angel investment.
Angel investors are typically high-net worth individuals that write cheques of between A$50,000 to A$100,000. Sydney Angels, for example, is an organisation that connects its member investors with early-stage startups.
Often this money is combined with a few other sources into what some call an early seed round — money founders can use to get things moving.
"You would collect a few of them together, and maybe some family offices, and bundle that into a round," Mark Tanner, cofounder of the startup Qwilr, told Mashable Australia. "That's what we did last year when we raised half a million."
"I like to think of angel investment as formation capital," Paul Bennetts, investment director at AirTree Ventures, told Mashable Australia over email. "This is usually in the quantum of the first $250,000 to get started."
IMAGE: QWILR
If it's time to kick things up a notch
A seed round is usually the first time startups raise what's known as institutional investment from a venture capital fund, but it can also be combined with cash from a group of angels or a seed fund.
A seed round should help a startup to start to grow and find an audience. "Angel and seed capital is to give a team enough cash runway to manage the chaos period of startups," Bennetts said, referring to the period when founders are in a rush to build a polished product and find their audience.
These days, a seed round usually raises A$500,000 to A$2 million, although it can go higher. One seed round recipient, the Brisbane digital business card startup Haystack, recently raised A$1.1 million.
According to Rick Baker, cofounder of Blackbird Ventures, a seed round usually occurs when a product is out in the market in the hands of a core group of users, with around A$10,000 to A$15,000 in monthly revenue.
Nevertheless, it's possible to raise a seed round with little revenue but a significant number of customers. It just depends whether you can convince investors they'll one day see a return.
If you need to start growing, and fast
Series A funding — a term that typically refers to the first round of significant capital — should help startups begin to grow rapidly, especially by hiring the staff who will help them get there.
"Series A also involves scaling product-market fit," Bennetts said. "Instead of acquiring 100 customers in a month, you'll start trying to acquire 1,000 customers a month."
IMAGE: CANVA
Generally, a Series A can raise A$3 million to A$7 million. It can, of course, go much higher. Sydney-based graphic design startup Canva, for instance, raised a $15 million (A$21 million) Series A in late 2015. The round included U.S. investors, including Felicis Ventures.
"To be confident of getting a Series A up, you want to be at around $2 million annual recurring revenue," Baker said. "That's the textbook Series A, but most companies don't follow the text book."
If you're well on your way
If you're still growing rapidly and need a cash bump to maintain momentum, it may be time for a Series B round — simply the next round of funding after a Series A.
According to Bennetts, at Series B, startups should hope to raise at least what they raised at Series A and more. In April, for example, Australian security startup Bugcrowd raised a $15 million (A$20 million) Series B funding round that followed a Series A that raised $6 million (A$8 million) in 2015.
Between Series A and B, startups should be figuring out how to sell their product at a significant scale, Baker suggested. "You're looking at A$3 million to A$5 million in annual recurring revenue," he added.
Series B is also the stage when overseas investors might get involved. "If you've got A$5 million in [annual returning revenue] and you're growing really nicely, the U.S. guys will absolutely take notice of that," Baker said.
It's only recently, in fact, that Australian venture capital firms have had enough money in their funds to participate in Series B rounds that can often top A$10 million
"What's quite common is to do your Series A in Australia, then you go to the U.S. and all the U.S. guys want to call it a Series A, so you do a Series A 2," Baker added. "The VCs over there want to be seen to be leading the Series A."
If you don't need to raise money, don't
If you grow your business without outside investment, that's known as bootstrapping. It's an approach popularised by revenue-funded Aussie success stories such as the software company, Atlassian. The startup, which went public in 2015, did not take outside funding until its eighth year.
If you can bootstrap, you can save yourself a lot of trouble. Wooing investors takes up a lot of energy that could be spent on building a product and finding customers.
You are also likely to give a portion of your ownership of the company each time you raise money. If you can avoid it, it's likely to bring a bigger payout if your company ever goes public. If you're a passionate entrepreneur, you'll also be able to retain more control over the decisions that get made.
"In the pre-seed stage, you should be bootstrapping as much as you can for as long as you can," Baker added. "You don't get any dilution and away you go."
IMAGE: ATLASSIAN
If you want to raise money down the track, bootstrapping also indicates to investors that you have a solid business model. "If you can revenue fund any business you should. Period," Bennetts said.
Nevertheless, one problem with bootstrapping is it can preclude startups from being able to grow quickly and dominate their market. You risk being outplayed by another startup who did accept a large funding found.
"In some industries that works really well," Baker said. "The big risk right now is that things move so quickly ... it's often really hard to get enough scale to win a market and become a serious business without taking capital."
Don't give it all away
While each startup will have its own approach, a funding round should typically fund a startup for around 18 months to two years.
"You need that length of time to get some significant milestones so you can raise the next round," Baker said. "And you've got to have some tolerance for not hitting your milestones the first time."
Not only that, it will help make sure you don't get addicted to money and give away too much of your company before you've even started.
What @MelanieCanva look 4 in her #investors @shasta@felicisventures @blackbirdvc @airtreevc buff.ly/1ZDrvN2
Startups should be careful around angel investors, in particular. A good looking deal can sometimes come with fine print. For example, some angels expect that after they've added their $50,000 they'll have a fair amount of sway in how the company is run.
Workman has seen founders make plenty of mistakes in this area, costing their business more investment down the line. "Sometimes people have raised money on terms that will not allow future investors to participate," he said. There's little motivation for new investors to put in the legwork if a startup gave away 70 percent of their company at the seed stage.
"Whenever you raise capital, you should expect to give away 15 to 25 percent of your company, except in the very first round," Baker said. At that stage, less than 10 percent would be preferable, but it depends on the startup's circumstances.
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