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Tapping Into Funding To Grow Your Business

Thursday 3 May, 2007
Are you looking to start up a business commercialising a new technology, engineering or other innovation? There is help available - from government grants to private equity backing - if you know where to look and how to go about positioning your business to potential backers.

The single most important thing for those with early-stage companies to remember, is that you can access the funds and skills available to budding entrepreneurs, if you're prepared to do a little groundwork in finding and fulfilling the requirements of the funding bodies.

Where to turn for funding?

Some of the funding sources available include:

Grants

There are several sources of government funds. They are definitely the cheapest source of funding (no equity and low, if any, interest) and are a good reference (implied government ‘backing') for future investors. Your business adviser can help you put together the documentation required for these grants. Going through the process is good discipline and useful for your business.

Angel investors

These are high net-worth individuals who invest directly in early-stage companies - typically in the region of up to $1m. Because they do not have to gain board approval, angels can make speedy investment decisions. They may also negotiate directly with a company to take an active role in their development.

Venture capitalists (VCs)

VCs buy equity from high-growth businesses at an early stage, which they will seek to sell at a future date - usually five years or more down the track. They will frequently appoint one or more non-executive directors to your board. While they won't usually become involved in the management of the business, their directors may intervene if the company runs into trouble.

What are investors looking for?

What potential investors are looking for is evidence that there is a genuine need for your idea, and that you are able to reliably provide a product or service that meets that need.

Typically, you will need to pull together a submission for a potential investor or grants body that demonstrates your attractiveness as an investment option. Putting together the submission can appear daunting. However, much of the information you gather is useful for business planning - so every minute you put into this process is a worthwhile investment over the longer term.

Given the purpose of the submission is demonstrating that your company has the attributes required for success, the focus of your submission is substantiating:

Management

That you have (or will acquire) the skills required to successfully grow your business.

Market

Proof that there is a market for your product or service. This might include information on the size and annual growth trends in your market, as well as an overview of your business model (that is, what it is about your company that will propel it to grow in the face of competition).

Cash flow

Make sure that you have enough capital and sales to get you to the next stage of business.

Financial projections

The results your business can realistically expect to achieve. This is a crucial exercise that will help you understand the break-even point and critical factors for your business.

Readiness

How ready are you for external investment?

Exit

VC firms will be looking to you to identify realistic exit options and clarifying the time-frame when those options could be available.

Substantiating these points will require detailed documentation - from shareholders' agreements, employers' agreements and term sheets, to process and systems documentation. Your business adviser can help you assemble these.

What's in the investor's perspective?

While you're going through the process, it is useful to remember that being an angel or venture capitalist isn't a glamour job.

It is hard work carrying out the due diligence it takes to ensure a potential investee has the market and stamina to turn their idea into a market success. Investors typically make a significant investment - in terms of their time and skills, as well as dollars - into each business they are associated with, with no guarantee their contribution will yield dividends.

In short, forming an investment partnership has much in common with marriage. After a decent courtship and, ideally, extensive disclosure on both parts, you and your investment partner can look forward to a close, supportive relationship that takes you both further than you would have gone on your own.

Author Credits

Ivan Kaye is a director of early stage business advisory firm BSI (http://www.bsi.com.au/) which helps companies grow through assistance in strategic business planning, financial management, human capital management and development, corporate finance, research and development incentives and government funding.
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