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Raising Capital Without Giving Up Equity

Businesses often fail to look past traditional funding models such as raising capital to fund their growth aspirations.  

Our panel explored:

  • Sources for funding that make a huge difference when trying to rapidly scale up
  • What you need to know before you start thinking about accessing grants
  • What you can do to make crowdfunding successful before launching your campaign
  • How to unlock capital already existing in your business
  • Where to get a loan without the hassle of a bank

The Panellists

Peter Nolle – Treadstone
Rhondalynn Korolak – Businest
Aris Allegos – Moula
Sergei Plishka – Outerspace Design
Moderated by Bec Kempster – Chair of the Churchill Club

Special thanks to our event partner Treadstone… accelerating small businesses with government grants and business advisory.

The Insights

What government grants and assistance is available?

There’s a comprehensive database available on both the state and federal sites: 

What is a Business Innovation Grant & how can it be accessed?

The Business Innovation Grant falls under the Accelerating Commercialisation Grant category. It provides up to $1M for businesses to match with their own funding to support a process of development and commercialization, pre revenue.
It’s a highly competitive national program. The challenges:
•    You need to be pre revenue
•    You need to have the money to match (or a Commitment to Fund letter from an investor) – but can’t have too much money; and
•    You need to demonstrate strong IP – meaning it can’t be easily replicated, like a lot of web portals and platforms can be. 
The very nature of software makes it difficult to patent and protect. If you can get a patent, then you’re far more likely to be considered for the grant. 
You need to meet milestones and if you are receiving the grant and want to change your equity structure, you’re required to discuss it with them first.

How can you demonstrate success pre-revenue?

By demonstrating partnerships or endorsements with other businesses who will collaborate with you. 
It’s a lot of work to go through and you often need to be in right place at right time. 

What grants are good for software development?

The R&D Tax Program is a great opportunity for those that have developed software, provided they can articulate they’ve undergone a process of experimentation to get the result. It doesn’t have to be defined as being patentable or different from another piece of software – you simply need to demonstrate a different value or improvement on something else -  or that it services a different market in order to be eligible. 
You do need to have had the money and spent it to be eligible. 
The government does want to give grants to businesses that are going to be successful so they can be part of that publicity story.

What’s the cost of assistance for a grant application?

Treadstone charge a success fee only on ‘entitlement grants’, like the R&D Tax Incentive and EMDG. For businesses applying for more competitive grants, they charge a commitment fee upfront. Currently, the Accelerating Commercialisation Australia grant is the most competitive. 
Some of the Victorian government grants are much less competitive with an unwritten 80% likelihood of success if you get past the first stage. In those cases, Treadstone charge a small commitment fee upfront, along with a success fee.

What is Moula?

Moula is an online lending platform that facilitates an easy underwrite for small businesses. They provide unsecured loans of up to $250K. When determining whether to lend, they examine the integrity and cash flow of your business.  

How are non-bank loans financed and what’s the cost?

In terms of pricing it’s around the same level as credit cards, however the difference is that Moula will provide you with all the information upfront, including a payment plan. 
It’s important to remember that these are unsecured loans. 
You’re also paying back the principal every fortnight – unlike a credit card where you can run it at your limit for the entire period and have not paid any principal down. This makes the effective rate of interest much lower than credit cards and overdrafts.  For example, if you’re carrying a $30K credit card month after month, then you’re probably loosing $1,100 a month in interest payments. 
Being online and platform driven allows Moula to offer small loans. There’s no processing cost, so if the business is turning around $60K pa, they will typically write a loan. Similarly, they’ll loan to businesses with $5-10M turnover. It’s not about the size of the loan, it’s about making the loan available. Typically they’re looking for at least 12 months in business, whereas banks won’t look at you until after 2 years and the application process can be much longer.
Moula will check your credit quality, however unlike banks and other online lenders which typically use this as a primary check when assessing an application, Moula use this as a tertiary check.

How do credit scores in Australia work?

We all have a credit score which is made up of numerous factors including how many credit cards you have, how many times you’ve applied for a credit card, how many loan enquiries you make, etc. Every time you take one of these actions you effectively diminish your score. Known as ‘Credit Kamikaze’. 
Your score can also be affected by other businesses running credit checks on your business as an ‘enquiry’ when they should instead be running a soft credit check. 
Australia operates in a negative credit reporting regime because of control by the big four banks. In contrast, the US and Canada have positive credit reporting regimes – meaning both the good and bad are reflected. Your FICO score is something to be flouted there - here no one knows their score. 
For a better measure of a businesses’ ability to service a loan we should be looking more to the data that can be extracted from cloud accounting software rather than credit checks. 

What sort of challenges are online lending platforms having to overcome in regards to customer awareness and customer trust?

This is one of the most critical concerns for online lenders as many in the industry arose out of pay day vendors like Nimble and businesses that were acting in a more predatory context. 
When Moula came to market they intentionally chose to lend in a responsible way with rates that are affordable and sustainable for small businesses. Unlike the US model, which is driven by credit bureau data, they opted to use accounting data. Our lending system in Australia has become more dependent on accounting data which is a good thing as it leads to a more responsible lend. 
When Moula started running surveys of awareness of their segment it was running at around 4-5%. Awareness now only sits at 8-9% which is still low meaning there’s a large communications piece still required.

What’s the bad debt experience of Moula? 

Over past two years the default rate has sat at around 2%. Much of the success can be attributed to being really good at using the Xero API to assess applications. 

This compares well to automated online finance loans in Hong Kong which have default rate of around 20%. 

How can you unlock cash sitting within your business?

Poor processes, strategies and decisions can trap money in your business. 

Real Cash flow is not the money sitting in your bank account or the money you forecast to come in. It’s the difference between the money that flows in during a period of time and the money that flows out. 

It’s much more valuable to find where the money is trapped in your business than to waste your time trying to forecast it in the future which is a guess about what might happen. 

Key areas where money can be trapped include:

  • Old inventory – how long has stock been sitting on the shelf?
  • Accounts Receivable - how long on average does it take you to collect your debt?
  • Accounts Payable - don’t pay in less than the stated terms in which you owe the money, unless there’s a good incentive to pay early. 
  • Pricing – don’t be scared to increase your prices

A business is like a cease-pool of places for cash to get stuck. All you need to do is know where to go looking for it which is a much easier first step then going out looking for new business.

You’re never going to get a good equity deal or interest rate if your cash flow is poor. 

Working Capital versus Cash Flow

Cash Flow is about how much money is available in your business – money coming in and money going out. Working Capital is about requirements in the future. So if every time your business expands by $10,000, and the Working Capital requirements are 38% - then every time you sign a new deal to that value, you need an extra $3,800 in the bank to finance it. 

A lack of Working Capital is a big challenge to start ups and small businesses looking to scale up.

How much capital can you raise before you need to consider giving up equity? 

To scale up quickly, sourcing outside investment will allow you to access larger sums of capital. 

Moula had a first mover opportunity and had bootstrapped the platform to a point where they could show it around. In Australia having a track record is essential – people are looking for you to have the ability to demonstrate what you’re doing. Secondly look to Friends & Family and the sources where you wouldn’t expect. 

There's limited funds available in Australia when compared to UK and USA markets. 

What’s the ideal company structure for start-ups in terms of protecting your interest and being attractive to investors?

If you’re looking for capital, consider keeping your cap structure as basic as possible. Think in terms of setting yourself up for additional rounds too so that you don’t create a greater challenge when seeking subsequent capital.

Be transparent about how your business operates. Tell it like it is and don’t oversell the proposition. 
Be aware that the R&D Tax Incentive is only applicable to a proprietary limited company, not available to trust companies. 
You also need to look at what you have to protect. You may consider multiple entities if you want to park the technology in one and operate out of a second company. 
Our advice: speak to a credible accountant

Is it common when seeking capital from VCs that they expect you to have a cash flow positive business?

It often depends on what you want it for and how you justify it. You don’t necessarily need to be cash flow positive, but need to be on verge of something big and to demonstrate there’s something of value in the future.  

What’s the take-up by females compared to males, of these types of capital?

Women are 22-24% less likely to get a bank loan than their male counterparts. In 2015, women got 4.2% of investment capital. We all need to be aware that there is unconscious bias in capital raising.  
In the experience of on online business lending, Moula’s data indicated a split of 60:40 in favour of males.
For grants, the experience of Treadstone indiciates the split is more like 80:20 however there is a bias as these grants tend to be for technology applications, which are typically developed by males. 

How successful has the Fusion Guitar crowdfunding campaign been?

Using the Indigogo platform, Outerspace Design raised around $500K through selling 1,000 units. 

Key advice when undertaking a crowdfunding campaign?

Partner with a marketing expert. It’s easy to underestimate how much marketing goes into a successful crowdfunding campaign. 

Crowdfunding is unique, typically millennial driven and a reflection of the ‘share economy’. Rather than getting a large amount of capital from one person, you’re receiving small amounts of capital from many people making it a democratized market. They believe in your idea, your ability to deliver it and are highly engaged with you and your product. Mostly it’s a pre-purchase. 

The advantage is it gives you direct engagement. Here you have a captive audience. 

What crowdfunding platform should I choose?

Kickstarter is the biggest. Speak with platforms directly to get advice and see if they can sweeten the deal as it’s a competitive marketplace. 

You can also transfer to other platforms once you’ve raised a certain amount with one platform, providing you’re being open and transparent. Many platforms have their own followers, so jumping platforms allows you to leverage these communities.  

Tactics for creating a successful crowdfunding campaign

Consumer goods are likely to be much more successful than service or B2B opportunities. Typically they’re trendy, innovative and impulse buys. 

  1. Set a lower target than what you actually need to raise – this creates the perception by backers that if the targets not too high, then it’s likely to be achievable and they’re actually going to get the product that they’re backing. Can be risky if you don’t smash your target.
  2. Run a pre-campaign – this allows you to build hype around your campaign and product without taking backers, so every one of your 30-day campaign is spent raising money, rather than waiting for momentum to build
  3. Successful campaigns jump up the ranks – if you end up on the first page of the crowdfunding site then you’re more likely to end up in their newsletter which will generate even more hype
  4. Extend your campaign – some sites will allow you to flip over to an ecommerce site where you can take ‘pre-orders’ for your product once the campaign has finished
  5. Have a working prototype – this will demonstrate to potential backers that the product can actually be built. This is now a requirement on Kickstarter if you have a gadget that requires manufacturing
  6. Leverage your captive audience – your backers are your best ambassadors for getting the word out about your product. If you’re still in product development mode, consider sending them a survey to ask what features they’d like
  7. Consider a marketing video to help get the word out
  8. Get all your marketing in order, social channels, etc, well before your campaign launches
  9.  Profile your team – demonstrate that there’s credible experts behind the product
  10. Finish your pitch with a call to action - “we need your help”

Check out Agency 2.0 who specialize in marketing of crowdfunding campaigns. Particularly if you have a product that’s a tech gadget. 

…and finally

What should you prepare prior to undergoing capital raising?

  •  Understand what’s in the marketplace in the way of government grants but also understand what you want to do with your business. 
  • Government grants are not there to ‘support your business’ - it’s only if your business meets the specific criteria and the grant fits your business model
  • Don’t underestimate the time and preparation involved in setting up a crowdfunding campaign. This includes developing a prototype,  creating visual assets and setting up social media channels
  • For established businesses get your cash flow and working capital in order to prove you can manage your money well. This will put you in a much better position to negotiate
  • Not every option is going to be right for your business – understand that first
  • As everything is data driven ensure your business data is always up to date
  • Knowledge is everything