Equity & where to get it

Your own money

Most people start a business using their own savings but sometimes they dont have enough to get the business off the ground so the owner searches for other sources of equity.

Family & Friends

Are often called upon to support a new or growing business. There are some significant pluses and minuses in such arrangements that are well covered in this article by theBankDoctor which was published in SmartCompany – Is it wise to borrow from family or friends for your business

Angel Investors

Angel Investors are individuals with a passion for entrepreneurship and growing innovative new businesses. They are well connected high net worth individuals, seasoned business people, entrepreneurs and professionals who are prepared to use their own funds and connections to assist a startup or early stage business. Many angel investors invest not just for financial gain but the opportunity to help innovative new businesses succeed. The companies they invest in are often hi tech businesses founded by emerging entrepreneurs who lack the funding and management resources to enable the business to achieve its potential

They invest in the range of $25k to $200k often in conjunction with other local angel investors like Sydney Angels and Melbourne Angels

This BRW article dispels some common misconceptions about angel investors. 

You might also want to check out  Australian Association of Angel Investors  is a not for profit industry company representing the interests of both investors and investees.

The Australian Investment Network is a privately owned global online platform connecting entrepreneurs with angel investors in Australia and overseas.

Venture Capital (VC)

VC sometimes also called Development capital, invests equity to provide the capital base necessary to enable businesses to achieve profitable future growth. They are different to angel investors in a number of respects

  • They usually invest other peoples’ money not their own
  • They tend not invest in start-ups preferring to wait until the concept is proven
  • The sum invested is usually $1m+

Venture capitalists are business partners that bring strategic, operational and financial advice often with a strong network of contacts. They are usually experienced in the preparing a business for sale either by Initial Public Offering (float on ASX), management buy-out or trade sale.

Although they may receive some return through dividends, their primary return on investment comes from capital gain from the sale of their in the company, typically three to seven years after the investment.

Venture capitalists are unlikely to be interested in investing in your business unless they can see a clear exit within such a time frame.

AVCAL is the industry association for providers of both Venture Capital and Private Equity. AVCAL’s website contains information which will help you determine whether this is something for you.

Private Equity (PE)

Private Equity works just like Venture Capital although the companies they invest are usually in a different position. Private Equity is usually about taking an existing company with existing products and existing cash flows, then restructuring that company to optimize its financial performance.  When Private Equity works right, it can save poorly performing companies from bankruptcy and turn them into profitable enterprises.

This article from Forbes magazine explains the difference between Venture Capital and Private Equity in more detail.

There are many PE houses in Australia including:

  • Champ
  • Equity Partners
  • Pacific Equity
  • Archer Capital
  • Quadrant

Crowd-sourced Equity Funding 

(Crowd-sourced debt funding is another matter that is addressed under the heading of Disruptors/Fintechs below)

Crowdfunding is a broad term but essentially it is an internet based activity which brings together individuals who network and pool their resources to support efforts initiated by other people or organisations. It is used for a wide range of activities from business ventures, to community projects, political campaigns and many other purposes. It developed from the idea that creative projects like films could be funded by micro payments from individuals in return for goodwill or insider access but it has subsequently grown to cover much broader markets.

Crowd-sourced equity funding (“CSEF”) involves three groups being issuers (start ups / companies seeking to raise equity), intermediaries (the internet platform providers) and investors

Currently in Australia a business can raise up to $2m from 20 retail investors over any twelve month period (the “20/12/2 rule”) through personal offers without becoming a public company or issuing a prospectus. CSEF via the internet opens up a market of unlimited $s and investors and this is what has the regulators worried.

Governments around the world are implementing their own regulations for CSEF and the Australian Government appears to be taking a firmer line than some others including New Zealand who seem to prefer more of a free market approach. The Australian Corporations & Markets Advisory Committee (“CAMAC”) has recommended:

  • A cap of $2m being the maximum any company could raise in any 12 month period
  • Retail investors could invest up to $2500 per company per year but
  • Not more than $10000 each year.

Many people consider these requirements too restrictive and debate continues although there can be no doubt that CSEF will over time become a genuine option for small businesses to raise equity.

To learn more about participants in the CSEF market you can visit:

Further useful information on Crowdfunding can be found at:

Business Victoria and the Crowd Funding Institute of Australia

 

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