First Capital Raise Guide for Startups

You must ascertain your startup’s “runway” to make sure it can continue to operate until funding is raised. When choosing when to start your capital raise, it is essential to consider your company’s runway or the amount of months it can function before running out of funds.

A capital raising can take anywhere from three months to as long as twelve months in more intricate cases and is highly dependent on market conditions, so founders should start the process well before the funds are needed.

As a rule of thumb, the capital raise should provide at least 12-18 months runway before another capital raise is required.

The most suitable source of finance for your business needs should be identified once the amount of capital necessary has been established. The kind of investor you select will depend on a number of factors, including the amount you’re aiming to raise, the company’s maturity, and the timing of potential exit.

For startups, the three most typical types of investors are:

Private equity and venture capital firms
Early-stage businesses with strong growth potential can get money from venture capitalist (VC) firms in exchange for an equity stake and some operational control. The Series A+ funding rounds are where VCs often make their investments, and the length of time they decide to keep an asset in their portfolio will depend on their strategic goals. Although they function similarly, private equity firms (PE) typically favor investing in established, mature companies over start-ups.

Angel Investors
Angel investors are those who lend money to early-stage entrepreneurs in exchange for stock in the enterprise. Compared to VCs and PEs, angel investors are more passive and frequently contribute seed money before a Series A round.

Family Offices
A family-owned and managed institution known as a “family office” or “private office” administers private money and other matters for high net worth families. Family offices frequently invest for a longer period of time in high-growth companies and startups.

How much stock and operational control you are ready to give up will be important factors to take into account when deciding which sort of investor to partner with. It’s also crucial to pick an investor that shares your values and objectives.

Prior to beginning the process of raising funds, it is essential to choose the right structure for your company. The company structure you choose will have a number of knock-on impacts for tax responsibilities, asset protection, and building the basis for future international development or a sale. You should also think about which business structure will appeal to your investors while seeking money. It is challenging and undesirable to try to restructure the corporate structure after a capital raising, especially once investors have joined and the company has a market value.

Lack of historical performance data can make it challenging to value a firm, which in turn affects investors’ willingness to put money into it. It is crucial that you create a detailed business plan that outlines a financial model that contains all necessary assumptions. An investor will be able to comprehend the business concept and growth prospects as a result.

You need to think like an investor because it can be challenging to find the right investor for your company. You might want to consider these inquiries:

• Can I express the value proposition for my startup in plain and simple terms?
• What is the go-to-market plan I have?
• What distinguishes my offering from what is currently on the market?
• When and how will my investment pay off?
• Do I have an ESOP in place to motivate and retain my employees?
• Am I utilizing government funds like the Research and Development Tax Incentive to their fullest potential?
• What is my exit strategy, and will an exit occur in Australia or overseas?

Usually, your pitch deck would provide the answers to these queries. An effective pitch deck walks the audience through the startup’s foundations as it grows toward an exit. Investors typically look for the following components in a pitch deck:

• Business strategy
• Go-to-Market strategy
• Competitor research
• Management team
• Financial forecasts and important metrics (financial model)
• Business valuation
• Current accomplishments
• Timeline for major business objectives, and
• Runway and use of funds

The kind of investment instrument to issue is the next choice to be made after the startup and investor have decided to collaborate. In addition to ordinary shares, convertible notes and SAFE notes are the most common instruments that startups use during their first raise.

• Convertible notes (con notes)
  Convertible notes are financial securities that can be converted into equity at a later equity round. They are debt instruments, so they carry an interest rate and a repayment obligation. The conversion normally takes place at a discount, usually approximately 10%, to the price per share of the subsequent round.
• Simple Agreements for Future Equity (SAFE)
  Similar to convertible notes, SAFE notes can be converted into stock at a later round. However, because they are not debt instruments, the business is not obligated to pay back the investor in the event that there is no additional round of investment. The discount for SAFE notes is often higher, between 15 and 25 percent, and may be used in conjunction with a valuation cap because there is more risk for the investor (the maximum amount per share the investor is required to pay for the shares upon conversion).

In recent years, SAFE notes have become the most popular form of fundraising instrument employed by entrepreneurs in Australia. A further advantage of adopting SAFE Notes (as well as KISS and Con notes) is that since shares are typically not granted until a subsequent fundraising round, a startup’s value at the time of investment is typically not required.

You can anticipate issuing preference shares as soon as VCs and PEs join the project (usually in Series A+ rounds). Preference shares, as the name implies, give their owners preferential rights over other shareholders, including rights against dilution, first refusal, drag-along, and priority rights to dividends and capital returns.
The specifics of your startup and the investors you want to partner with will determine which form of fundraising instrument is best for you.

Is your business eligible to be classified as an Early-Stage Innovation Company (ESIC)? Investors could be able to: if your firm is an Early-Stage Innovation Company (ESIC).

• Get 20% of their investment back in tax credits, up to $200,000 each year, and
• Any capital gains realized on share sales within the first 10 years of investing should be disregarded.
  ESIC eligibility for startups can be determined using either the “100 points test” or the “principles-based innovation exam.” Your startup may be able to stand out from competing companies for an investor’s attention simply by virtue of being an ESIC.