Georgina Toomey, General Manager NZ and Practice Group Leader at LegalVision, outlines the different options for sourcing funding for your startup In New Zealand.
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.
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.
Angel investors
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
Venture capital is another common form of funding for new startup businesses. Typically, you would seek venture capital after your seed-stage rounds (the initial small round of fundraising to build your product and cover expenses). Venture capitalists tend to reserve their investment for companies that have gained traction and are growing fast.
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.
Crowdfunding
Crowdfunding is a scheme where projects, ventures or startup companies seek donations from the public. Investments and donations are usually made through public marketplaces and the marketplace operator will usually coordinate and administer the fundraising.
There are three main types of crowdfunding: equity-based – raising money by issuing shares; donation-based – asking a crowd to donate to a project or business in exchange for non-monetary rewards; and debt-based – asking a crowd to donate to a project or business in exchange for a possible financial return at a later date.
Crowdfunding helps people and businesses gain money by reaching out to a broad, public audience. It can help you source funds more quickly and efficiently compared to traditional channels, which can be beneficial for businesses that are otherwise having difficulty finding funding.
However, crowdfunding can also expose your ideas to potential imitators and raise several legal and taxation requirements. This is particularly relevant with equity crowdfunding where you also need to engage an approved intermediary to assist, which can be costly.
Government grants
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 ground-breaking levels for your business, it is relatively risk-free.
Bank loans
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.
Key takeaways
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.
If you need help finding investors for your startup, LegalVision’s startup lawyers can assist as part of the LegalVision membership. For more information, call 0800 005 570 or visit legalvision.co.nz/membership/.
Originally published in the September/October issue of The Shout NZ.
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