PART 1 | How to take your business from a start-up to scale-up
Raising capital in Australia – what type of investment is right for your business
Over the past six years at ABA Legal Group, we’ve partnered closely with a number of companies as they journey from start-up to scale-up and beyond. This assistance comes in the form of planning, company establishment, operations guidance, aiding in corporate governance, providing corporate advisory services, tax planning, and other legal advice. That’s why we want to share this knowledge as part of a series focusing on how businesses can transform from a start-up to a scale-up and beyond.
Without a doubt, one of the most rewarding parts of the work we do has been witnessing firsthand the journey these companies embark on as they move from ideation to invention, invention to innovation, innovation to commercialisation, and beyond.
We get to work with incredible individuals, amazing teams, and visionary founders as they move forward with their unique approach to business and sometimes life.
Our role is to ensure that they have the right tax advice, legal guidance, and corporate strategy to provide them with the right framework to succeed. One of the most critical junctures throughout this journey is the need to secure investment into your business to accelerate growth.
What is important to understand, particularly as a start-up is what are the separate stages of investment for your start-up as it grows. In part two of our series, we will explore the different types of investment and what this looks like from the perspective of control of your business.
The funding rounds outlined below provide outside investors the opportunity to invest cash in a growing company in exchange for equity, or partial ownership of that company. Conversations around Series A, Series B and Series C funding rounds all refer to growing a business through outside investment.
In Australia, it is important to note that the following rules apply when raising capital:
Public companies (ie those with more than 50 non-employee shareholders) can raise funds from the general public by issuing securities.
Private companies (ie ‘proprietary limited’ companies that have no more than 50 non-employee shareholders) can raise funds:
- from existing shareholders and employees of the company or a subsidiary company, and
- from the general public if the fundraising does not require a disclosure document.
Here is a full breakdown of the types of funding rounds and their names:
Pre-Seed Funding is so early in the piece that it is generally not included among the funding rounds at all. It typically refers to when a company’s founders are getting their operations off the ground and oftentimes the most common type of pre-seed funders are the founders themselves. The rest of the money typically comes from family, friends, supporters, and others in their close networks. This type of funding often doesn’t come with the expectation of equity, with many investors looking instead to ‘back’ a new idea or concept.
Seed Funding typically represents the first official money that a business venture or new enterprise raises. It is the first official equity funding stage and maybe the only time the start-up needs to raise capital. This is because the founders may have achieved their goal and raised enough to get the business off the ground. This type of funding is generally provided by the friends and families of the founders, who believe and support their vision and see the potential of the company.
The amount raised in seed funding can vary in terms of the amount of capital generated for a company. This could see amounts of money produced ranging from $5,000 through to $2 million. Once the funding is achieved the company’s valuation will be raised seeing them achieve a value of somewhere between $3 million to $6 million based on the total amount raised.
Series A Funding occurs once a company develops a successful track record and achieved a certain set of KPI’s including revenue or user growth, data, or unique intellectual property. If further capital is required, the company can then progress to Series A funding. In this instance, a good idea or new concept will no longer suffice for investors. They need to see strong growth strategies that indicate the business can become a revenue-generating business. Typically, Series A rounds will raise between $2 million to $15 million. Last year in the United States, the average Series A funding reached figures of around $15.6 million.
Series B Funding is about taking the companies involved and helping them get to the next level of growth. These companies have passed the development phase and are well on their way to becoming a phenomenon – however, to achieve market dominance it needs the team and assets to get it there. Often involving multiple investors, the average amount of capital raised in Series B can reach up to US$ 33 million, with the businesses achieving valuations of up US$30 million to $60 million. It often does involve a further dilution of equity due to the different investor groups that come into play, so the founding team needs to be aware of what this means from a governance standpoint.
Series C Funding occurs to businesses that are already quite successful. This round is about taking the business to the stratosphere with an IPO often a core goal. A company at this stage of its lifecycle is seeking additional funding to make acquisitions, develop new products or enter new markets. It is looking for Series C funding to invest into the real workings of the business to turbocharge growth. Investors are attracted to this round by the lure of rewards as the company is often ‘derisked’ by this juncture.
At each stage of the funding process start-ups may choose to spend their cash on the following items:
- Further R&D
- Build a war chest and pivot
- Invest in the company’s technology to create money
- Make good products and start saving cash
- Ensure that compliance requirements are being met (legals, insurance, ICT infrastructure)
- Hire talent
We would also be remiss if we didn’t mention that by working with our R&D Tax Incentive team, we can assist you in lodging for non-bank financing with lenders who can provide funding based on the tax offset you receive from eligible R&D activities.
If you are a business looking for the right advice to guide you through the growth process we recommend you reach out to our Tax Law, Corporate Law, and Corporate Advisory team who guide you through this entire process.
Please get in touch to book a complimentary booking and have us help you actualise your true business potential.
The information contained in this blog is general in nature and should not be considered to be legal, tax, accounting, consulting or any other professional advice. In all cases, you should consult with a professional advisor familiar with your factual situation for advice concerning specific matters before making any decisions. By reading this blog, you confirm your understanding of this disclaimer.