The start-up journey is a marathon, and founders are like athletes, pushing themselves to the limits to complete a race. Successful founders face and overcome similar challenges to their athletic counterparts. Both develop strategies, set goals and plan how to get there. Funding is the number one fuel founders need to reach their destination. So, in this blog, we’re taking a holistic look at funding across the start-up journey. From bootstrapping and loans to angel investors, we explore which types of funding are available to start-ups as they grow. And how founders can combine different kinds of capital to reach their goals faster.
Growth scenarios and stages of the start-up journey
Despite its many ups and downs and twists and turns, the start-up journey is delineated by four sequentially distinct scenarios.[1] [2] Based on our extensive work with start-ups, we’ve given each stage a moniker which sums up that part of the journey.
1. Wild horse
The wild horse start-up is a freshly hatched tech-focused business with one or two founders and a handful of staff wearing many hats. The lives of this founding team are consumed by developing the minimum viable product (MVP). And they regularly burn the midnight oil to make progress. The business is either pre-revenue or generating sales from another income stream. It has either reeled up to $5 million in seed funding or is about to. Business structures and processes are minimal. Any that do exist are fast and loose to maintain agility and momentum. In short, the wild horse is as dynamic as it is risky.
2. Star power
The star-power start-up is an R&D-heavy business of any type or sector that has attracted Series A venture capital. It has an MVP, a proven return on investment for its product or service and an effective sales cycle. The star power is either hiring or has recently filled key roles across different business functions, especially those all-important technical and engineering positions. Headcount is in the 40-70 staff range and the start-up is beginning to assemble its go-to-market team. There’s a distinct buzz about the star-power which it leverages to attract top talent despite the lower range salaries on offer. With $5-20 million in equity funding on board, star powers are focused on hitting investor-mandated milestones.
3. Juggernaut
The juggernaut start-up is a former star power that has achieved significant growth and is enjoying solid momentum. The business has found the product-market fit for its innovation and knows who its customers are. Its investor fundraising capabilities are now in the $20 million+ range. With around 200 staff, it finally has the money to compete with big-tech salaries to attract top talent from the C-suite down. Scaling is next on the juggernaut’s to-do list. Its founders and investors are eyeing additional Series A or Series B and C funding rounds and weighing up potential exit strategies.
4. Supersonic
The supersonic has completed its start-up journey and is scaling fast. A supersonic experiences exponential growth. Its processes and structures are robust, and the business is targeting expansions within existing markets and/or new geographic ones. It may be developing secondary offerings too. Supersonics have several hundred staff and are in the market to raise hundreds of millions of dollars in series D+ funding rounds from venture capitalists, private equity investors, hedge funds and investment banks.
How to optimise funding for your start-up’s journey
At all stages, investor funding tends to be top of mind for many founders and in some cases to the exclusion of other capital sources. This is due to the relatively large sums involved in equity investment compared to the start-up’s size. But it’s not, and shouldn’t be, the only show in town. With that in mind, let’s look at the available funding combinations during your start-up’s growth journey.
Wild horses
If your venture is a wild horse, money can seem thin on the ground. But the reality is your potential sources of capital are diverse. Bootstrapping in the form of your life savings, house and 24/7 sweat equity must be your first port of call for funding. Because if you don’t back yourself, you can’t expect anyone else to.
While banks usually give risky wild horses the cold shoulder, you can borrow money from other lenders. Peer-to-peer lenders (debt crowdfunding) is available from companies such as Prospa and Swoop. This type of finance enables early-stage businesses to access capital at interest rates that are more competitive than bank lending rates. Then there’s specialist finance such as the R&D loans (Radium Advances) that Radium Capital offers. Providing you’re eligible for the Federal Government R&D Tax Incentive (R&DTI), a Radium Advance will let you access it early, smoothing your cash flow and fast-tracking your R&D and business growth. Many wild horses report that the cash-flow-smoothing capabilities of Radium Advances often help them raise seed and Series A funding. The reason is investors view the presence of Radium Advances in the funding mix favourably. If you’re a wild horse that is generating sufficient revenue, revenue-based financing such as that offered by Tractor Ventures is another avenue to explore.
When it comes to equity, seed funding is the investor capital of choice for wild horses. As the name suggests, it’s used to set up or ‘seed’ the business. Angel Investors are a source of seed funding. But it can be supplied by your family and friends, start-up accelerators and, on occasion, incubators. Equity crowdfunding platforms such as Birchal and Equitise are another source of seed money. Crowdfunded equity and convertible notes are great ways for wild horses to get the capital they need. The latter can be treated as loans or transformed into non-controlling shares, and both enable wild horses to avoid dilution or losing control of their business.
Star-powers
Equity, in the form of Series A funding, from a Venture Capital company such as Rampersand and AirTree Ventures or Angel Investors, for example, Southern Angels and Sydney Angels, tends to take centre-stage for the star-power start-up’s funding strategy. But that doesn’t mean that you should overlook other capital sources. R&D finance, for example, a Radium Advance, is an option for start-ups with an aggregated annual turnover of $20 million or less. The great thing about R&D finance is that because it’s secured against your expected R&D tax refund, it leaves the door open to other debt financing. By now, revenue-based financing will be an attractive addition to the financial mix. And banks may come to the party once a start-up is venture-funded. So, depending on your circumstances, you might be able to add credit cards, bank loans and overdrafts to your financial arsenal.
Juggernauts
Juggernauts are moving at pace and targeting significant growth which requires significant funding. By now in the journey, scaling is on the horizon with exponential growth the goal. Mezzanine debt could be an option if your start-up can service higher debt levels. However, if you default, the lender can convert the mezzanine debt into equity that trumps all other shareholders. It could limit your company’s access to other funding streams, so beware.
Additional Series A rounds and Series B and C funding will enable your juggernaut start-up to consolidate its position before entering new markets and scaling. Although your juggernaut is late-stage, so long as it has an aggregated annual turnover of up to $20 million, you can still use R&D financing to access your R&DTI refund early. Beyond that $20 million threshold, your venture may qualify for a non-refundable R&D tax offset. The larger and more established your start-up becomes, the easier it is to get substantial overdrafts, business credit cards with large limits, and sizable, secured loans from banks and other lenders. But keep an eye on the security requirements for your debt funding. This can impact your ability to access other loans (current and future) or even your capacity to attract and retain investors. While revenue-based financing will be less relevant, self-financing growth, when your juggernaut funds growth from its revenue stream, can become an important capital source at this stage too.
Supersonics
The full spectrum of funding sources and amounts is available to your supersonic venture as it scales exponentially. Everything is bigger and better from your ability to self-finance your growth to your debt and equity capital volumes and sources. Mezzanine debt is definitely in the picture. On the equity front, private equity firms and investment banks are joining your VCs to back your business. R&D financing may still be an option, if you’re eligible for the R&DTI refund.
Whichever stage and scenario your start-up has reached, let’s look at a few golden rules when it comes to combining and optimising your funding mix.
Dos and don’ts of start-up funding
The trick with funding for your start-up journey is not to burn through your funding options too early or fail to bring in capital when you need to.
Dos
- Seek advice from an R&D tax consultant and accountant.
- Build a diverse and suitable capital stack to fund each scenario your start-up will face as it grows.
- Watch your burn rate and cash flow position like a hawk.
- Read the fine print on all investor and loan agreements and complete your due diligence for each funding source.
- Remember that funding options are seldom either/or scenarios and can be combined to optimise your growth.
- Talk to other start-ups in your ecosystem about their experiences, and which funding sources they were able to utilise.
Don’ts
- Avoid raising capital from VCs too early and becoming too diluted.
- Ensure security over any debt funding doesn’t limit your access to other sources of debt, or other funding options or linger after you’ve repaid your loan or switched lenders.
- Avoid funding options that limit your start-up’s capacity for future growth.
For detailed tips on potential financing pitfalls, read our article, Seven important areas to probe when choosing an R&D financier. And for an overview on the importance of having a diverse capital stack, see How to build the best R&D capital stack for your business.
Shaping a funding strategy for success
Not having your eggs in one basket is one of the key takeaways here for funding your start-up. Another one is that a rising tide lifts all boats. All start-up funders, whether they’re lenders or investors or revenue-based financiers, want the same thing. They want your start-up to succeed. So, they can, and do, complement each other and work together at many points during your funding journey. So, take a holistic approach to funding like your backers do. If you think long-term and maintain sufficient, suitable capital, you stand every chance of completing your start-up’s journey faster and more easily than you ever thought possible.
[1] RBCx (2023). What Are The 3 Stages of a Startup? [online] RBCx. Available at: https://www.rbcx.com/ideas/startup-insights/what-are-the-three-stages-of-a-startup/
[2] YC Ultimate Startup Job Guide. (n.d.). Stages of startups: YC Ultimate Startup Job Guide | Y Combinator. [online] Available at: https://www.ycombinator.com/library/Ek-stages-of-startups.