When speaking about private companies, we often find ourselves using all sorts of industry jargon. To the uninitiated, the financial terminology used when discussing investment opportunities can be confusing and often prohibitive. On top of that, even the most seasoned investors may only have experience limited to one area of finance. Many Australians have at least dabbled in the ASX in some capacity, but very few have been actively involved with early-stage companies.
In this article, we go through the full life cycle of a startup, from founding, to hopefully one day floating!
A stage most are familiar with but fewer have touched. The founding of a company is the first official stage of an entrepreneur’s journey. Of course, for most, the work would have already started long before the official founding of the company. This might include market validation, research and development, and capital raising.
Depending on the company, some founders will need to raise capital before they even get off the ground, such as a technology product a long way from revenue or profit generation. While many are able to bootstrap a business from their own pocket, most founders will need an initial injection of funds to keep the lights on. At this stage, investors will generally have nothing more to invest in beyond the team and the vision. As a result, friends and family are a common source of funds, in addition to angel investors with a keen eye for opportunity.
After a young company has gotten off the ground and has started to kick goals, it enters the seed stage of its life cycle. At this point, the company will have made some achievements, and had its fair share of setbacks. It might have an MVP (minimum viable product), a few trial customers, or maybe some pre-orders.
Seed rounds are usually when things start to get serious, and the company raises capital in order to execute on all of its preparation and plans. Seed rounds are still considered highly risky, so investors will still be backing a big idea, a strong team, and some early achievements, and will be rewarded by substantial gains should the business make it to the next stage. Capital raised here generally goes towards market entry, final tech development or key hires to help the company grow. Equitise often facilitates wholesale capital raises for companies at the seed stage, and even some equity crowdfunding campaigns where the opportunity is suitable.
The growth stage is one of the most exciting times for an early stage company. At this stage, the company has validated its idea, generated some revenue or successfully executed on its initial launch plans. Now it's ready to go full steam ahead with its plans to grow and scale, and can generally attract a wider range of investors now that the opportunity has been derisked sufficiently.
Companies in their growth stage will look to spend hard on marketing or in making key hires that can bring some experience to the table in bridging the gap between a startup and a growth company. The company will also have started to make enough noise to attract most institutional investors, like venture capitalists and angels, in addition to presenting an acquisition opportunity for larger incumbents in the market who might be concerned with its progress! Equity crowdfunding through platforms such as Equitise plays its best role at this stage.
Series A, B…
Many investors would have read about Series A, B, C and onwards rounds in the news for the various private company unicorns in Australia. These letters are simply used to categorise capital raises between seed/growth stages and IPOs. Some companies may only have a Series A round. Others may choose to stay private longer, such as Elon Musk’s SpaceX which is well beyond Series M!
These rounds are when private companies begin to raise serious capital from large, institutional investors from within Australia and further abroad. Hiring and development really start to ramp up and valuations continue to climb. Generally, rounds are large enough that multiple investors will be involved often with a lead investor from a venture capital fund or institution.
For the companies that choose to go public, the first step is a pre-IPO raise. Many investors simply assume that when a company is large enough it will list on an exchange, but this is often not the case. Some companies prefer to stay private, and raise their capital off market. There are a number of reasons to do so, and importantly investors can still see a return through dividends, buybacks, acquisitions and off-market transactions.
Listing on a stock exchange is a costly process. This means many companies will need to raise simply to afford the fees involved with going public. Often this is called a bridging round, and might involve a smaller raise from existing investors to allow the company to complete the listing transaction.
An IPO, or initial public offering, is where a company floats on a stock exchange such as the ASX. This is a costly and time consuming process that rewards the company with a publicly traded status allowing investors to buy and sell their shares with relative ease.
Generally, a company will use a broker or investment bank to facilitate the bookbuild, which is the process of securing investors for the IPO round. There are some more complex ways to list on an exchange without raising capital, but most go for the simple route. Once a company is interested in listing publicly, a wide range of new investors generally become interested due to the increased liquidity. This also often represents an exit opportunity for the very early stage investors.
One important consideration is that companies listing on the ASX need at least 300 shareholders. Even more is often recommended, which will allow for healthy trading upon listing rather than having just a few large shareholders. Equitise plays a valuable role in this space, facilitating what is known as ‘retail spread’. Since we have a large database of investors, brokers will often enlist our help to close out an IPO round with a few hundred investors, allowing the company to meet its listing requirements. These companies often have plenty of capital available to them, but simply need a range of investors on the register. Equitise is able to use technology to do so in a far more efficient way than traditional retail brokers.
Equitise offers a range of early stage investment opportunities, including equity crowdfunding, wholesale and IPO! The companies we work with for equity crowdfunding are generally doing their Seed, Series A, B and C rounds and can go all the way through to IPO’ing with us. Learn more here.