At Wattle Partners, we do a lot more than investing in stocks and shares. One of the unique offerings that separates us from the banks and wealth management firms, is the ability to offer our clients the opportunity to participate in venture capital. Tech start-ups that disrupt the status quo have all come from venture capital. These include Amazon, Apple, Facebook and Google. All starting off as a tiny operations in a garage or dorm room but transforming into the unicorns through funding.
That has given investors the opportunity to access unlisted start-ups and take part in seed funding. Seed funding are funding rounds that begin with a “seed capital” phase and follow with A, B, and then C funding. These are stepping stones for the final step which is an IPO on the ASX.
How does seed funding work?
Investors will ask for an equity stake in the business in return for their investment. That’s the usual process. A valuation of the company is derived at this point.
This is the initial money required to start the start-up / new business. Think of it like an analogy for planting a seed for a tree. This is the first round that is required to plant the seed or the idea for the start-up. The aim is to grow the seed into a green money plant. Seed capital can come from the founder personal or from family, friends and investors. The amount is generally small and the valuation is plucked from the air.
At this stage the start-up is not just an idea but will has a business plan and business model to show that it can monetise its idea. Thorough testing has already been completed. Series A is used to raise approximately $1 million to $15 million. Sophisticated, angel investors & venture capital firms
Series B – Build
Is the all about the development phase, taking the business to that next level where is will start to generate money. Capital raised hovers around $7 million to $10 million. Series B is usually done by the same investors as the earlier round with the addition of a new wave of bigger investors.
Series C – Scale
This is the guts of the business. The business should be operating profitably by now. This is the expansion stage. Investors will tip in funds to try and double their return. It’s all building scale, quick and big. Capital raised can be from single digit to hundreds of millions in this final round. This stage is usually in preparation for a future IPO. Private equity firms, VC funds, hedge funds and investment banks invest here.
IPO – Public Listing on the ASX
This is the final stage. The exit. It’s the crucial and final moment for a start-up. And it’s a sign of success. Usually done through a stockbroking firm or an investment bank. The company negotiates a deal with the firm on how much money it wants to raise and how many securities are issued. Ownership is transferred to shareholders. Board of directors assigned. Capital raised can be anywhere from $20 million to $1 billion. As you can see there is quite a process from the first seed capital stage to the exit IPO stage. The difference between these rounds will help you evaluate the potential opportunity as an investor. In Australia there are tax advantages for investing in start-ups.
- Non-refundable carry forward tax offset equal to 20% of the amount paid for their qualifying investments. This is capped at a maximum tax offset amount of $200,000 for the investor and their affiliates combined in each income year
- Modified capital gains tax (CGT) treatment, under which capital gains on qualifying shares that are continuously held for at least 12 months and less than ten years may be disregarded. Capital losses on shares held less than ten years must be disregarded.
It should be noted however that investing in start-ups is very risky, highly speculative, and investments should not be made by anyone who cannot afford to risk the entire investment. So you really need to think carefully about the risks associated before making any investment decision. That aside, investing in start-ups can be very a lucrative and profitable way to multiply your cash over just a few years.