Angels, grants, loans or IPOs — what are the best fund-raising options?
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How do tech start-ups, biotech researchers and resources explorers get funding for new ideas and ventures? Fund-raising expert Morgan Barron from Ventnor Capital runs through the options.
What sources of funding are available for businesses looking to expand?
There are many different options depending on factors such as a company’s stage of growth (eg start-up or mid-cap), the size of the business and the market it operates in.
Here is an explanation of the most common sources of capital:
An angel investor provides capital — usually for a start-up — in exchange for equity in the business. A typical funding size is $50,000 to $250,000. Angel investors are usually an individual or company – but some corporates with innovation departments also fund this type of investment.
High Net Worth or Sophisticated investors
An investment from a High Net Worth individual or a sophisticated investor (someone with net assets of at least $2.5 million and annual income of $250,000). A sophisticated investor is allowed by law to take up securities without the usual product disclosure requirements.
There are a number of regulatory considerations that need to be considered when dealing with high net worth individuals – so it’s important to speak with an advisor.
Innovation grants or research grants
State and federal governments have a number of programs to provide incentives for research and development, support for small businesses and tax and duty concessions. If you meet certain criteria, your business may be eligible for accessing funds up to $1 million.
Bank loans, overdrafts, debt funding or convertible notes
A bank loan is a debt financing obligation issued by a bank or financial institution. Banks typically seek some form of security. But often high net worth investors or sophisticated investors will fund secured and unsecured notes at a discount to future valuations. This type of investment has an 8 to 12 per cent interest rate but can be rolled up into equity as well.
Seed capital or venture capital
Venture capital (VC) or seed capital is a source of funding for early-stage and emerging growth companies. Venture capital funds typically invest in companies in exchange for equity. Before investing, VCs typically examine the product or service, business model, barriers to entry, strength of management and exit options (eg and IPO or trade sale).
Initial Public Offering or Reverse Takeover
An initial public offering (IPO) is the process of transitioning from an unlisted company to a publicly traded company. To list securities on the Australian Stock Exchange (ASX) or National Stock Exchange of Australia (NSX) you need to prepare a prospectus, satisfy the spread of shareholders and various corporate governance requirements.
A Reverse Takeover (RTO) involves a private company acquiring sufficient shares to control a publicly traded company. This has historically been popular with technology companies using listed resource and exploration company shells to list on the ASX. But there are a number of regulatory hurdles.
Which is best?
The funding source that best suits a business may include one or more of the above.
We recommend that businesses speak with a qualified accountant or financial advisor before making a decision.
Morgan Barron is a director of Ventnor Capital and Ventnor Securities Pty Ltd.
Ventnor Capital is a Perth-based, independent advisory firm specialising in corporate advice, company secretarial, seed capital and venture capital fundraising to start-up, small and mid-cap public and private companies.
More information: http://ventnorcapital.com.au/
This article does not constitute financial product advice. You should consider obtaining independent advice before making any financial decisions.