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Startups – how to find the funding you need

Cash is often the difference between a startup idea taking off or biting the dust.
But securing investment is only part of the job – it also matters where you get
it from. Here’s how and where you should look for funding. 

In just 10 years, Alec Lynch’s online design business has gone from a bootstrapped one-man startup operating out of a garage to a tech success that is pulling in revenue of almost $20 million a year.


He admits it would not have been possible without funding assistance from angel and venture-capital investors.


“It’s really been the rocket fuel for us to scale internationally,” says Lynch, founder and CEO of DesignCrowd, a crowdsourcing platform that engages with almost 600,000 graphic designers and which has uploaded about 15 million designs for clients around the world.


A game-changer


Some entrepreneurs sell their homes or cash in investments to launch their enterprises, while crowdfunding is also a popular option for many. But businesses often see real change when they turn to angel investors or venture capital firms.


Angel investors are typically successful business people who invest their own funds into what they see as a potentially rewarding business opportunity. While venture capital firms give funding to early-stage companies, in particular, in exchange for equity in the business.


Lynch, a former business consultant with Booz Allen Hamilton, says DesignCrowd has had multiple funding stages: an initial two years of self-funding; then $30,000 in loans from family and friends; a seed round of $300,000 from angel investors; series A funding of $3 million; and subsequent venture-capital funding rounds of $9 million.


The VC funding, he says, has been a “game-changer”. The number of employees in the organisation has grown to almost 50, and about 80 per cent of revenue now comes from overseas. But the benefits of working with their investors are larger than just about money and growth. “It is also about the expertise our venture-capital partners have brought to the table,” says Lynch.


How to find a trusted partner


Christine Kaine is the founder of Business Angels, a service that connects businesses looking for funding and private investors willing to offer cash and guidance.


Kaine advises entrepreneurs to do their due diligence when searching for an appropriate funding partner – “They come in many guises” – and to be willing to accept strategic advice from others.


“What they need to do is come sooner rather than later for assistance and to recognise that they don’t always have what it takes,” she says.


Kaine nominates a checklist that angels should meet. They should have complementary skills that can enhance the growth of the business; they must be professional and have a proven track record; and, most of all, they should have strong business networks which they are willing to share.


“The profile of the angel investor space is often focused on money, but in fact it should be focused more on the people and the networks.”


John Dyson, one of the founders of venture-capital firm Starfish Ventures, which has helped finance DesignCrowd, adds that there should be “economic alignment” and a shared vision between the investor and the business owner.


“You don’t have to be best friends, but there needs to be a level of respect in the relationship.”


Dyson says putting a business proposition in front of experienced investors is a great way to “road test” an idea and learn. He believes entrepreneurs need to be comfortable with the prospect of working with an investor for years.


“Once they take money from a third party, you can guarantee the organisation will change,” he says. “Hopefully it will change for the better, but some investors promise a huge amount and deliver very little.”


What investors want


Great market concepts, realistic business plans and strong revenue projections – any angel or VC investor will value such strengths. However, Dyson puts another quality – transparency – at the top of his must-have list for startup owners.


“I just want the entrepreneur to be transparent and honest and do whatever they need to do to deliver the plan,” he says. “If you come up with a good idea and demonstrate that you can execute, the capital issue resolves itself.”


He favours business people who are reliable, well considered, have common sense and good judgment, and are open to feedback. They should also appreciate that getting cash from investors takes time (typically three to six months) and be able to recruit quality staff, because additional talent will be essential as a business grows.


“If you back quality people you get good outcomes,” says Dyson.


In assessing potential entrepreneurs, Kaine does not overemphasise the requirement for a perfect business pitch.


“Pitching is a bit overrated,” she says. “I’m inclined to say, ‘Don’t pitch, just sit down and have a personal conversation’.”

Once they take money from a third party, you can guarantee the organisation will change. Hopefully it will change for the better, but some investors promise a huge amount and deliver very little.

Valuing the business


Putting a value on a business and any equity stake causes the most angst in startup-investor negotiations, according to Kaine. Most innovators, she says, overestimate the value of their business and forget that “one per cent of something is more valuable than 100 per cent of nothing”.


Kaine says smart entrepreneurs appreciate the potential that the right partner can bring and take the view that “if it’s an angel investor I really want, I’ll give them more equity for less money”.


Likewise, Dyson argues that investors who try to “screw down” a startup at the first capital raising are making a mistake because the entrepreneur needs a financial incentive to stay motivated.


In determining a business’ value, a range of factors come into play, including the stage of its development, whether it has a unique market proposition and the business’ potential for international growth.


Lynch says valuing fast-growing technology businesses is part art and part science. Traditional accounting methods may not apply. He advises monitoring the value of equivalent enterprises, domestically and overseas, to get a gauge.


Tough taskmasters


A finalist in Ernst and Young’s Entrepreneur of the Year competition in 2014 , Lynch is proud to have been able to build a global online business from Australia. At the same time, he acknowledges the contribution that DesignCrowd’s angel and venture-capital investors have made to that success.


As the business seeks to develop new products and services in coming years, Lynch has no doubt that his VC mentors will continue to run the rule over all aspects of the operation.


“Part of what good investors bring to the table is a certain set of expectations,” says Lynch. “Taking on professional investors is a really positive thing and it helps push the company – but also the founders – to the next level.”

 

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