If you’ve started your own business and need funding to continue fueling your business’s growth, venture capital might be a solution for you.
The boost in cash flow through venture capital will fuel innovations in your business, allow you to expand on business opportunities and nurture talent.
Our guide will provide you with everything you need to know to gain venture capital financing, its benefits and different legal requirements if you choose to go down this path.
Want to learn more? Keep reading!
Venture capital refers to financing provided by investors to small to medium businesses or SMEs deemed to have long-term growth potential. In exchange for funding, venture capitalists receive equity in the business they invest in. Therefore, this transaction will serve as a type of private equity.
If a venture capitalist invites you to pitch for financing, they will negotiate a deal with you. Along with other stipulations, this deal usually includes a seat on your board of directors and a percentage of the return you earn over time.
Benefits of venture capital for small businesses
Investors and Australian small business owners can benefit from venture capital funding. Some key benefits include:
- Benefits for investors – In return for an investment, venture capitalists receive a stake in the business, Australian Taxation Office (ATO) tax incentives for early-stage investors
- If the company performs well and there is business growth, everyone benefits financially
- Benefits for businesses – a large source of funding to help the business grow fast
- Venture capitalists can introduce other potential investors and partners to the business
- Business owners can get valuable experience from their venture capitalists
- Continuous networking benefits
Types of Venture Capital
The different types of venture capital will depend on your business’s stage.
1) Pre-seed and seed financing
Pre-seed and seed financing is used to support the initial phase of your business. The purpose of seed financing is to assist with the following:
- Support for market research
- Product development and innovation of ideas and services
- Your prototype is developed but not yet executed
- Development costs associated with initial expenses
The type of investment that you could potentially get in this stage could be:
- Pre-seed – $100,000 and $250,000
- Seed – $1 million to $2 million
It’s important to note that the potential investments are not guaranteed and will depend on how excited the venture capitalist feels about your product or service.
2) Startup Financing (Series A Funding)
Startup financing, also known as series A funding, is available for businesses that have at least one full-time member working on a project, and they can prove that the product or service will be able to generate returns.
A venture capitalist at this stage will be looking for the following things
- The product should be in the finalised prototype stage
- Members of the business have proven success in a similar industry
- Management are across all the relevant information about details about the product and service
3) First-Stage Financing
Venture capital for this stage is available for businesses that have their product or service completely launched. To get first-stage funding, venture capitalists will look for:
- Your business has been successfully running for 2-3 years
- Your business is steady, but it’s time to increase sales and production
The purpose of first-stage funding for business owners at this stage is to:
- Funding is going towards building the infrastructure of the business
- Helps with the distribution system
- Covering marketing expenses to fuel expansion
4) Second-Stage Financing
Second-stage financing takes place your business’s product or service is selling well. Your original investors would have seen positive returns and the potential for long-term success.
Funding at this second stage will assist with:
- Expanding your business further
- Further product development and enhancing existing products
- Increased marketing expenses
- Entering new markets
5) Mezzanine (Bridge) Financing
The mezzanine financing, also known as series C funding, is considered the final stage of your business’s venture capital investment. Your original investors have seen the success of your business. At this stage of your business, with the venture capitalist funding have the following opportunities:
- You might be interested in acquisitions and mergers
- It’s possible to turn your business into a company and prepare for an Initial Public Offering (IPO)
- The funding can be used to prepare your business for its sale to another potential company
How to get venture capital for small businesses
To get venture capital for your business, there are a series of steps that you need to take to ensure it runs smoothly. Although there may be more steps depending on the complexity of your business structure, the key steps to getting venture capital are as follows:
1) Introduction
To obtain venture capital funding, you will need to have an initial introduction with the venture capitalist. The initial meeting will be crucial. You must be ready to discuss your business’s product or service as it will determine whether the venture capitalist will be interested in the deal.
2) Call with an individual or partner
After the introduction, whether face-to-face or over the phone, the venture capitalist or a partner in the venture capitalist business will notify you whether they are interested in continuing with the proposal. They may follow up with another call or in-person discussion.
3) Call for a pitch deck
Suppose the capital in step two goes well and the venture capitalist is interested in your product or service. In that case, you will be asked to either present a pitch deck or a presentation outlining your proposal.
A pitch deck or a presentation is a brief presentation that will provide an overview to the venture capitalist about the following things:
- Introduction – Introduction of who you are, what your business does, business plan, and why you’re presenting
- Problem – Identify the problem your business’s product or service is trying to resolve. This will include a brief description of your target audience
- Solution – This section will identify the clear and conscience solution to the problem that venture capitalists can follow. A good example is Airbnb’s solution ‘A web platform where users can rent out their space to host travellers to save money, make money and share culture
- Market size and opportunity – The market will determine if you get your funding
- Product – This is the best part, where you can show your product or service that requires funding
- Traction – This should be about the growth of your business
- Team – Who your team members are
- Competition – Show your competitors why you’re different
- Financials – This section should contain your business’s projected growth
- Investment and use of funds – This section should clearly outline what you will from your venture capitalists
4) Term sheet
If your pitch deck goes well and your venture capitalist is satisfied with the overall proposal, you will have the opportunity to receive a term sheet.
A term sheet states the terms for a possible offer of funding. Essentially it is a precursor document that you can use during the negotiation stages of your venture funding. While not a legally binding document, except for clauses like confidentiality and exclusivity, it’s a good way to document your terms.
The things you can include in your term sheet are:
- Details of investor
- Investment round details
- Number and class of shares (preference shares or ordinary shares)
- Investment amount
- Price per share and percentage of equity
- Liquidation preference
- Timetable to complete agreement
- Key provisions of shareholders and subscription agreements
- Details of board members, shareholders
- Exclusivity and confidentiality
If you don’t know how to begin your term sheet or would like extra assistance, you can use Lawpath’s term sheet, which is customisable and ready for use in under 10 minutes.
5) Due diligence
Once a term sheet has been provided, the venture capitalist performs their due diligence. Due diligence involves:
- Investigating your business to determine if it has a chance of being profitable.
- Detailed business and legal screenings
- Involves asking questions and answering a series of questions to evaluate the success of the opportunity
6) Offering documents
Following due diligence, you will receive offering documents if the venture capitalist is satisfied. The offering documents will detail the following:
- The terms of their offer
- Amount of funding
- Percentage of equity they will own
- Whether or not they require a seat on your Board of Directors
- Other items on the term sheet
7) Decision
Once you accept the offering documents, it will be up to you whether you choose to accept or reject the venture capitalists’ offer. If you reject the offer, that will end the process. However, the funds will be transferred to your business if you accept the offer.
Legal documents and requirements when raising capital
Although you understand how venture capital works and the process involved, it’s essential not to forget the specific legal documents required in raising capital.
1) Corporate prospectus
A prospectus is the most common disclosure document with the broadest information requirements. The prospectus is a disclosure document that is given to investors for their investment consideration. It must be presented clearly and concisely to ensure that it is not misleading or deceptive.
Generally, a prospectus must contain information about:
- The rights and liabilities attached to the shares offered
- The assets and liabilities of the corporation
- Financial position and performance
- Profits and losses
- Prospects of the share issue
2) Offer information statement
An offer information statement is similar to a prospectus but has lower disclosure requirements. The offer information statement can only be used for fundraising up to $10 million in aggregate, including any earlier fundraising under an offer information statement. An offer information statement must include a copy of an audited financial report with a balance date within the last six months if you plan to use it.
3) Term Sheet
As mentioned above, a term sheet states the terms for a possible offer of funding. While not a legally binding document, except for clauses like confidentiality and exclusivity, it’s an excellent way to document your terms and provides your investors with an overview of the investment opportunity.
4) Share Subscription Agreement
After you formalise a term sheet’s details, you will need to have a way to offer each venture capitalist an offer. A share subscription agreement is a way to do this.
A Share Subscription Agreement is a document that serves as a contract between you and the investors for the issuing of shares. The share subscription will cover:
- Representations of both you and the venture capitalist
- Amount of shares issued
- Subscription price
- Terms and conditions of sale
- Company representations
- Subscriber representations
- Reliance on representations
- Confidentiality
If you need Share Subscription Agreement, you can use Lawpath’s document, ready to use in under 10 minutes.
Venture capital firms for small businesses
If you’re looking for venture capitalists to fund your business today but don’t know where to look, here are a few venture capital firms that can assist you.
In no particular order, some venture capital firms that you can look into are:
1) Blackbird Ventures
Blackbird Ventures is one of Australia’s largest and most active venture capital funds. Blackbird ventures seek businesses:
- With big ideas that aim to be the best in the world
- Businesses that have low expansion capital requirements
- Businesses with the ability to scale rapidly in other geographies
- Focused on technology – software, online platforms, hardware
Investment from Blackbird could range from:
- Seed stage – ($250k-$1m
- Series A – $2-5m
- Growth stage – $5-50m
2) AirTree Venture
AirTree Ventures is an early and growth-stage venture firm investing in technology-enabled businesses in Australia and New Zealand. AirTree provides capital for the following types of businesses
- Invests at all stages of the startup lifecycle
- Wants to be the first to assist a young promising business
- Looks for world-class entrepreneurs who want to build iconic companies
AirTree has success investing in the following areas:
- Global Saas businesses
- Next generation finance
- Digital Commerce
- Media and marketing platforms
- Disruptive technology looking to reshape traditional industries
3) Square Peg Capital
Square Peg Capital, a venture capital firm based in Australia, supports entrepreneurs in solving important problems. Square Peg Capita provides investment for:
- Businesses with a passion for tech
- Invest from Series A with some exceptions for other phases
- Businesses that are solving significant problems in big markets with a demonstrated product and market fit
- Ambitious teams that are self-aware, curious and resilient
4) Grok Ventures
Grok Ventures is a private investment firm. Grok Ventures invests:
- In fast-growing technology-enabled businesses
- Focus on food and energy companies
- Provides private, patient, long-term capital
- Funding for early-stage or seed financing through to late-stage funding rounds
5) GBS Venture Capital
GBS Venture Capital is a venture capital firm founded in 1996. GBS provides assistance to:
- Medical development and life science-based start-up businesses
- Investment in medical devices and diagnostics-related businesses
- Invests in private or public businesses, whether at a start-up stage or later stages
The list of venture capital firms is endless. It’s recommended that you do some additional research and find a firm that suits your needs and requirements to ensure a smooth and successful venture.
Other finance options available
Other than venture capital, there are other funding options that your business could pursue.
1) Friends and family
One simple way of financing your business would be to get money from friends and family, whether it’s your mum, dad, siblings or cousins. This form of business finance is probably the easiest form of finance for your new business. However, it’s important to know that there could be potential issues with mixing business and personal life.
2) Government Grants
Australian government small business grants could be another potential option for funding start-ups. Grants can offer your business:
- High growth potential without giving away equity
- Startup funding that can be easily acceptable
- Great option for a short-term fix
- No need for repayment
You can check out the government’s national and grant schemes for more information.
3) Equity Financing
The third option for funding is equity financing, also known as equity investment.
Equity Finance is the process of raising capital by selling your business’ stock to investors. Essentially your investors will receive a percentage of your business’s shares, and in return, you will gain capital. The benefits of equity financing are:
- Equity financing will provide you with the opportunity to meet new people or even create potential partnerships
- Mentoring and network opportunities
- Attain professional advice from investors
- Great option for early-stage start-ups
Sources of equity finance can come from:
- Friends and family — If you can offer a partnership or share of your business
- Private investors — A private investor is a person or company that invests money into their own company
- Public float — Business’ can issue an Initial Public Offering (IPO) on the stock market to publicly offer shares to individuals and institutions to raise capital.
4) Debt Financing
Debt financing means you are sourcing money from a lender. Essentially, you are putting yourself in a position of debt to receive the funds you need now. The same way credit cards and home loans work. Debt financing can come from:
- Financial services — Bank loans
- Credit unions
- Friends
There may or may not be interest rates associated with the repayments. The interest rates and how much they depend on the loan or negotiation you achieve with the lender.
5) Crowdfunding
Crowdfunding is a way for businesses to raise funds through payments made by members of the public. This is generally facilitated through the use of crowdfunding websites. This would involve posting your business idea as a pitch to potential backers on one of these websites.
The benefits of crowdfunding include:
- There is no initial cost for you to start a crowdfunding campaign for your Australian startup
- As an owner, you would maintain full financial control of the business, as opposed to distributing shares
- A lower risk is present as your personal funds are not being invested for your old and new products
Frequently asked questions (FAQs)
What is an angel investor or an angel investment?
An angel investor provides capital before a venture capitalist does. An angel investor can invest at any point, but they are usually most present for the seed funding and early series rounds. Because angel investors tend to invest a lower amount of funds than a venture capital firm, they are also easier to source funding from.
What is the difference between raising funds in a public and a private company?
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
- For the general public, if the fundraising does not require a disclosure document
Conclusion
A boost in cash flow for your business will allow you to expand on your business opportunities, fuel innovation and nurture talent. The steps required in obtaining capital for your business through a venture capitalist firm won’t be difficult if you follow the steps outlined in this guide.
However, just with anything, if you get stuck choosing the right venture capitalist for your business or have questions about the legal requirements before attaining funding for your business, hire a lawyer to ensure you’re on the right track.
