If you have an exciting new innovation or idea, you might consider setting up your own startup business. A startup is typically centred around a unique invention or idea, as opposed to a standard small business which (at the outset) usually enters a pre-existing market. However, launching a startup can be a costly venture, and sourcing investors to help you with those costs can be tricky. This article will outline different options for sourcing funding for your startup.
Who Can Invest in My Business?
Your new startup will go through different stages as it gets off the ground. In the beginning, founders will look to family, friends, or angel investors to provide initial funding. Once your startup is more established, you may be able to obtain funding from venture capitalist funds or other corporate investors.
Family and Friends
Funds raised from family and friends can help kick-start your idea. Typically, these investors want to see you succeed and are less concerned about securing a good financial return. To be fair to those people and to protect your personal relationships, it is essential not to overvalue your startup at this early stage.
Alternatively, you might want an investor outside your personal circles to avoid putting those relationships at risk. In this case, angel investors are a great option to support the growth of your business. Angel investors are diverse but are usually successful business people who want to use their money to help support the startup community. These investors will be looking at your potential as a founder and your team. Often, these investors will take a hands-on approach and be open to sharing their expertise.
There are multiple online networks that seek to link angel investors and startups in New Zealand.
Venture capital is another common form of funding for new startup businesses. Typically, you would seek venture capital after your seed-stage rounds. Venture capitalists tend to reserve their investment for companies that have gained traction and are growing fast (often in the tech and software sectors).
The New Zealand government has also been proactive in supporting local businesses, particularly due to a trend of founders taking their businesses offshore after failing to secure domestic investors. One example is Elevate NZ. This $300 million fund invests directly to venture capitalist firms and aims to fill the gap during the early and middle stages of funding for high-growth tech companies.
As a startup owner, always keep an eye out for available government grants. The main advantage of this support is that agencies providing these grants often do not seek anything in return by way of an equity stake. So while the funding may not be at groundbreaking levels for your business, it is relatively risk-free.
An alternative to raising external capital is to look to secure funding from a bank or a finance company. Instead of giving away equity in exchange for this funding, you will be required to pay this money back (together with any interest accrued).
Given that many startups struggle to succeed, banks will often require the loan to be personally guaranteed by you and your co-founders. Generally, security will be in the form of personal property, like a family home. Therefore, providing personal property as collateral can be a significant risk for a new business owner.
Bank loans are typically more suited for established businesses or people with significant business experience.
If you are a hard-working, entrepreneurial person with a unique idea, you may be looking to develop a startup. Before seeking external investment, founders will often look to bootstrap their startup for as long as possible. Once external investment is required, founders often struggle to secure money for their new business venture. Initially, you might ask friends or family or seek a traditional bank loan, though your personal property or relationships may be at risk. Alternatively, angel investors can be a great source of initial funding for your new startup. There are several networks in New Zealand that aim to connect angel investors and new startups. Finally, when your business is slightly more established, you might seek government support or interest from venture capitalists.
It is important to remember that any time you obtain equity (or debt) funding for your startup, you need to comply with New Zealand securities law. Offers of equity securities (i.e. shares) are highly regulated and can be subject to substantial disclosure obligations. Startups will typically only make offers of equity or debt securities to investors who qualify for certain disclosure exclusions. Your lawyer can help you navigate these requirements.