So you’ve had a brilliant idea, done your research, and discovered there’s a market for your product or service. The next big question is…how are you going to fund it?
Starting up a tech company is a very different proposition to launching something like a new plumbing business – and it can attract a different set of investors.
We take a look at some various funding options, and their relevant stage in the start-up journey.
In additional to the traditional means of funding – such as savings, retirement accounts, bank overdrafts and equity in your home – a private loan from within your network can be a good option.
In addition to family and friends, you may know a high net worth individual who is interested in your idea. This may be purely as a loan (with all parties receiving independent legal advice), or for an equity share in the business. Under the latter arrangement, you may need to change the legal structure of the business (e.g from a sole trader to a partnership or company).
Research what’s available in your region for start-up support. Two networks that are aimed at tech and innovation companies include Callaghan Innovation, and the Regional Business Partner Network.
While these programmes are more about practical support, rather than a direct financial boost, they can help you save (and make) cash in the long run. There are also low-cost events, such as Google Start-Up Weekends, which could potentially introduce you to that all-important investor or collaborator.
As the name suggests, seed funding is to fund a business in its early conceptual stage. This is needed for product development, establishing the company and management structure, and market research etc.
According to Creative HQ, seed capital in New Zealand is generally in the range of $20,000-$30,000, although it can stretch up to $100,000 in a few cases. The most common groups to approach for seed funding include private networks, accelerators, angel investors or crowd-funding platforms (like Kickstarter or Snowball Effect)
For companies a little bit further down the track (e.g you may have a prototype or product built already), seed funding might not be enough to take you to the next step.
In these cases, angel investment is likely to be more appropriate. This usually comes into play once you’re close to taking your product to market. If needed, it can be broken down into multiple rounds.
There are a few different ‘angel clubs’ across New Zealand; from Ice Angels in Auckland, to Angel HQ in Wellington, to Enterprise Angels, Flying Kiwis, Archangels and many others dotted around the country.
The next stage of funding is where the rubber hits the road. You’ve proven your idea has legs, and you’ve validated its proposition to the market. You will have proven data, customers, contracts, and be operating in a commercial sense.
Series A funding is the company’s first significant stage of venture capital (VC) financing. (The name comes from the class of preferred stock sold to investors in exchange for their investment).
According to Creative HQ, some of the biggest Series A rounds in New Zealand are in the $2-$3 million range. There are a number of VC companies operating in the New Zealand tech space, including MOVAC, GD1 and Spark Box.
Any burning questions?
Send us your burning question on Funding your Start-up, and we’ll be happy to answer it.
Or if you want to know how KPMG Enterprise could help your business, send us an email on SmallBusiness@kpmg.co.nz , or give us a call on 0800 576 472.