Funding

Surprising numbers – Australian Startups, Fundraising & Crowdfunding – iPledg.com

iPledg

iPledg

Andy Tompkins and Bryan Vadas are the founders of the iPledg.com Crowdfunding platform.

iPledg is serious about helping the Tech and Startup sectors get the seed funding they need. As a special offer to Startup88.com readers iPledg are wiping their fees for projects listed before December 31st 2013. Simply go to www.ipledg.com , sign up, login, create and submit your campaign then email us at startup88@ipledg.com to ensure we wipe our fees for your campaign. Good Luck!! 

 

Andy Tompkins - Founder iPledg.com

Andy Tompkins – Founder iPledg.com

The numbers are out, surprisingly only 24% of start-ups seek external funding from any source*. Of these, 57% are successful in securing the funds they request.

This means just over 13% of start-ups are successful in receiving external funding of any kind. Why is it so? And how do we overcome this hurdle to allow more start-ups to get the funding they need to launch, employ, innovate and develop? The answer may well lie in equity crowd funding.

The current Australian economic landscape is a patchwork made up almost completely of small business and start-ups. Despite a huge geographic footprint, Australia is home to just 24 million people. Between them, they are involved in the 2 million businesses currently operating. Of these, 96% are small business, those defined as having 0 – 19 employees. Small business in Australia accounts for just over half of all private sector employment, so their importance as an employer cannot be understated. Add to this the fact that at any time, over half a million people are involved in some form of early stage entrepreneurial activity, and you see that small business and start-ups are the foundation on which the entire economy is build.

Bryan Vadas

Bryan Vadas – Founder iPledg.com

The current misunderstanding is that start-ups are funded through the 3 Fs – Family, Friends, and Fans of the initiator. The truth is actually quite different, with entrepreneurs looking inward and providing the funding themselves, either from personal savings or personal credit card. Completing the list of the top four sources of funding currently used by start-ups, we find personally-secured bank loans, or cross subsidy from another business owned by the founder. In fact, of the top 20 sources of funding for start-ups, money from friends and other external investors rates only as number 11.

The ironic part of the whole situation is that the Reserve Bank of Australia claims that 80% of loan applications made by small business are accepted. In contrast, their figures point out that only a small fraction of small businesses are successful in securing venture capital funding.

The impact of the overall lack of success in small business and start-ups receiving the funding they need cannot be understated. The primary impact is on innovation, with 33% of early stage and start-up businesses claiming that the biggest obstacle to innovation is a lack of access to the funding they need to make it happen. Currently in Australia, the other options for equity fund raising are offers to the public (heavily governed and high cost to prepare and lodge a prospectus), angel investors (with whom start-ups have an average success rate of 1.4% in securing their required funding), and venture capital (which has funded an average of 25 companies per year over the past 10 years).

So the reason why start-ups don’t seek external funding is relatively clear – they believe there is a lack of options open to them. They recognise the slim chance of securing funding from VCs and angels, and the costs and high levels of governance around offers to the public makes them feel “why bother?”. In fact, 76% of start-ups that don’t even concern themselves with seeking external funding. The other major contributor to their lack of willingness to secure outside investment is a lack of education about what external funding will do for them, as many believe external funding means giving up control, something that is not palatable given their emotional investment in their innovation.

Enter Equity Crowd Funding. In Australia, the rules of the game have only just started to be drafted. Regardless of how the mechanics will finally be delivered to the market, equity crowd funding will simplify the access to capital for entrepreneurs and small business. Seeking funds will no longer involve having to bow down to grey-faced men and jumping the hurdles they set. Those seeking funding will soon have world wide access to investors through online campaigns. “Asking” will become much less daunting, as the innovator can approach their “first tier” (family, friends, and fans) to check out the campaign online, rather than going cap in hand and asking for a handout, thus making the whole process for less confronting. Engaging with the “second tier” or “friends of friends” also will become much simpler as the first tier is able to easily pass the campaign on to their networks by forwarding and endorsing a link. Once momentum is achieved, the word can more easily spread to a broader audience through online campaigning. The vast “third tier” or “smart money” can then jump on board and deliver the bulk of the funding, and it is access to this tier that innovators would traditionally never have access to without equity crowd funding.

With the pending introduction of Equity Crowd Funding, seeking funds will become much simpler. First followers will then be able to spread the word to their networks of what they have done by way of their investment, and then campaigns will have a greater chance to go viral and have global reach through the use of social media and the internet. Whilst equity crowd funding is largely unavailable (or, at least, highly regulated) in Australia, the initial noises are being made to hopefully make broad based equity crowd funding permissible in the not too distant future, making it far easier for start-ups to ask for (and to secure) the funding that they so desperately need.

http://www.innovation.gov.au/SmallBusiness/KeyFacts/Documents/AustralianSmallBusinessKeyStatisticsAndAnalysis.pdf

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10 Ways to Kickstart your Startup – Part 4 – Bootstrapping – Convince your first customers to finance your startup

Startup financing cycle

Startup financing cycle (Photo credit: Wikipedia)

Many people don’t think its possible to get a customer to fund your business, but it really is, especially where you have a product or service that is not a commodity.

Recently when mentoring a startup I suggested this and they were shocked, they didn’t believe it was possible, however some months later they had managed to get one of their new business customer to accept the idea of paying upfront for the still to be completed product (and the revenue arrived before the fundraising they were holding out for).

Many entrepreneurs are stuck hoping and wishing they can raise capital, truth of the matter is it can take 3-12 months to raise your first round (or never), customer revenue on the other hand could only be a few weeks away.

 

If you are solving a difficult problem and you can convince a few customers you have a compelling new solution (albeit with some rough edges) there is every likelihood that you can convince them to pay up front or pay to develop additional features that meet their needs (which hopefully just happen to be in your roadmap).

This concept is missing from the Startup Financing Cycle graph above and there is every chance that tapping your customers for finance will get you through the Valley of Death or at the very least reduce the amount of capital you need to raise and allow you to retain more equity.

 

Given you can only grow a business as quickly as you can turn cash (I will go into more depth on how to accelerate your funding later in the 10 Ways to Kickstart your Startup series) bringing revenue forward by getting customers to pay upfront is much more common than you might believe.

 

Kickstarter is the modern consumer incarnation of this method but it has happened for as long as companies have existed, Kickstarter has just found a mostly frictionless method to facilitate this on a global scale and connect non businesses or would be startups and consumers.

Kickstarter

Kickstarter

When I started my first business I would insist on payment in advance, we turned over $4m in our first full financial year so I simply didn’t have the cash to fund this and there was no other way for me to do business.

 

Surprisingly very few people actually rejected this, especially when you explained to them that you were growing so quickly this is the only way you could fund the growth. You have to be ready to be a bit embarrassed about this, but you have to suck it up as it may be the only way for you to succeed.

I am not anti Venture Capital, quite the opposite, however I tell most Startups I meet that their ability to retain their equity is a function of how much pain they are willing to put up with and they are better off turning to VC when they are growing so quickly they can’t fund the working capital required to support the growth, which is a fantastic position to be in.

So a few suggestions on how to do this (primarily for the business market)

  • If you are selling a new technology or type of product, explain to the customer exactly what stage you are at, show them the product, tell them what the risks are and what your plan is, assuming you meet their previously unmet needs and they trust you and they can see the product is going to work for them, ask them for a deposit or get them to place and pay for an order. If the tech guy tells the purchasing and finance guy this is the only way to get the problem solved then often they will simply pay you, it’s amazing to see this turn up in your bank account.
  • If you are selling an existing product and its a large order (above your financing capacity) ask the customer what you can do to make the deal more attractive, for example is there an extra service you could throw in if he can pay upfront, something that might save their team a lot of time but might not take your team much time, or can you coordinate a late night or weekend install/upgrade?
  • If you are selling a service ask for a commencement fee.
  • If a customer has a particular need, tell them you are happy to build it to their requirements if they can fund NRE (Non Recurring Engineering) costs. Ideally the feature you develop will be part of your roadmap and you have managed to get the customer to help fund your development costs.
  • In large roll-outs, get customers to pre-purchase and pay for large orders and release it from your stock as they need it. It’s pretty easy to convince them you will keep it ready for them and they don’t have to worry about delays, you get paid both for the cost of the product and your profit (if you are working with a distributor, place an order on the stock and get it secured but ask them to only part ship for you, that way you only pay as you use it, but you have the customers cash, I will give an example of a sophisticated version of this below with Dells supply chain)

Dell

English: Dell Logo

English: Dell Logo (Photo credit: Wikipedia)

One of the best corporate examples of this is Dell. Dell gets paid in advance for the majority of their orders.

When you place an order you pay upfront via the Website (which everyone thinks is normal) but they don’t supply the product for another 7-21 days.

When you place your order they usually don’t even own the parts that they will use to build your product yet.

Here is how it works

  • You place your order
  • You pay upfront
  • The order is sent to the factory
  • The suppliers are required to be within 50km of Dells assembly plants and have their parts and trucks ready to go.
  • Dell orders the parts to make the batch of product they are scheduling that day
  • The supplier trucks are all lined up on one side or outside the plant.
  • When the truck rolls across the plants threshold, Dell now owns the product (note, most companies are invoiced when a shipment leaves the supplier warehouse, not Dell, suppliers don’t get to invoice until it hits their assembly line).
  • They assemble the PC and ship it to you
  • They pay their suppliers in normal commercial terms of >60 days (according to an analysis of their accounts their average debtor days could be as much as 80 days http://www.mysmp.com/fundamental-analysis/days-payable-outstanding.html)

So if you can convince your customers to follow some or all off the above methods there is every chance you can get your startup off the ground and be doing business without seeking external funding. Good luck

As always I welcome questions and comments, leave a message below and I will respond

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