A Legal Perspective on Venture Capital Investment in Australia

Venture capital investment is an exciting avenue for emerging Australian businesses - and yet - it can be an uphill battle to get to grips with its finer details.

How do legal structures and agreements shape the financial landscape?

What are the pivotal steps in securing funding?

And what do businesses need to prepare in advance?

In this article, we answer your VC FAQs, with a focus on:

• What is venture capital investment?
• What are the steps to secure venture capital funding in Australia?
• Types of venture capital funding available in Australia 
• Common agreements used in venture capital investment 
• How to prepare for venture capital investment

Let's start from the top.

What is venture capital investment?

Venture capital investment provides financial capital to early-stage, high-potential companies in exchange for equity or an ownership stake. This type of funding is commonly seen in industries where there's a promise of high growth, such as technology, health sciences, and in recent years, sustainability sectors. The primary goal of venture capitalists (often simply referred to as VCs) is to enable startups to scale quickly, ultimately leading to significant returns on investment once the company either becomes profitable, is acquired, or goes public. 

In Australia, venture capital is a crucial part of the entrepreneurial ecosystem. So much so that the country has seen an increase in VC investment, with 2024 witnessing an 11% increase compared to the year prior. With governmental backing and an evolving regulatory framework, venture capital investment is increasingly driving the successes of Australia's best and brightest businesses.

What are the steps to secure venture capital funding in Australia?

Understanding the step-by-step process of VC investment can increase your chances of success. Let's take these one by one.

Research your VCs

Focus your efforts on venture capital firms that align with your industry, goals, and growth stage. Look for firms with a track record in your sector, as this can add value beyond mere capital (such as a valuable network).

Polish your pitch deck

Your pitch deck is critical to securing interest. It must succinctly outline your business model, market opportunity, financial forecasts, and competitive advantage. A successful pitch deck tells a captivating story, backed by data-driven insights. 

Relationship-build

Venture capital funding is as much about relationships you build as it is about business plans. Attend industry events, reach out via mutual connections, or use professional platforms like LinkedIn to make initial contact. Personal introductions can significantly improve your chance of getting a meeting. 

Due diligence

Once you have a VC interested, expect them to conduct a thorough due diligence process. Be prepared to open your books, revealing financial statements, legal documents, and operational processes. A transparent and organized approach can help build trust here with potential investors. 

Negotiate terms

If due diligence is successful, you're now in the negotiation phase. Important elements such as valuation, equity percentage, and control rights will be discussed. It’s essential to understand these terms, as they will define the future of your business and partnership.

Finalize contracts

Once terms are agreed, the investment contract needs to be formalized. This contract will lay out all aspects of the deal, including the role of the venture capital firm and the expectations for your business. Ensure you understand every detail before signing. 

Venture capital and other funding in Australia

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The Australian government has made significant strides in supporting innovation, primarily tax incentive regimes like the Venture Capital Limited Partnerships (VCLP) or Early Venture Capital Limited Partnership (ESVCLP) programs, which encourages investors to back high-growth businesses with innovative or disruptive technologies.

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At the state level, some governments operate their own investment funds, such as Breakthrough Victoria, that invest alongside private capital to support local innovation.

Beyond these programs, Australia sees a wealth of investment support through other investment vehicles like private equity firms and corporate venture arms focusing on startups and early-stage ventures in their respective domains, such as technology or health care. These funders bring not only capital but also industry expertise and mentorship critical for fledgling companies. 

Finally, Angel Investors are a vital part of Australia's investment landscape. Often acting individually or as a network, these investors typically support nascent companies, providing the early funding necessary to turn business ideas into viable operations. 

Common agreements used in venture capital investment

When it comes to venture capital investment, agreements secure the commercial interests for all parties involved. In Australia, you will commonly encounter several key agreements that lay out the terms and conditions of the transaction. 

• Term Sheet: The term sheet is a document outlining the preliminary terms of a venture capital investment. It sets the stage for negotiation, detailing the valuation and capital size. While not always legally binding, its specifications guide the binding agreements that follow.
  
  
• Subscription Agreement: This contract (sometimes referred to as a "purchase agreement") between the company and investors is essential for formalizing the subscription for and issuance of shares. It ensures that investors understand the terms of their investment and affirms the company’s obligations.
  
  
• Shareholders’ Agreement: A key document among the founders, company, and shareholders, the shareholders’ agreement covers crucial aspects such as rights transfer and shareholder responsibilities. It often includes pre-emptive rights, drag-along, and tag-along rights, which help align long-term interests within the company.
  
  
• Share Purchase Agreement: This agreement details the purchase of shares between a buyer and seller. It's crucial for establishing the terms of purchase, including price and conditions, to protect all parties involved in the transaction.
  
  
• Non-Disclosure Agreement (NDA): An NDA protects sensitive information shared between parties during negotiations. It's crucial in preserving confidentiality regarding business secrets and proposed terms.
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• Constitution: This is the company’s governing document, setting out rules on share classes and rights among other things. As part of receiving new investment, it is common for the Constitution to be amended to introduce or modify rights for new investors. This can include creating new share classes (such as preference shares) and embedding terms that secure a VC’s liquidation preference.
  
  

For entrepreneurs navigating these waters, tech investment-focused lawyers can offer immense value. They'll work with you to ensure agreements are structured in a way that maximises the opportunity at hand, while fuelling a beneficial relationship between you and your investors. 

How to prepare for venture capital investment

When gearing up for venture capital investment, your preparation journey can significantly impact the outcome. Below we explore a few tips and tricks to setting yourself up for success.

• Financially assess your business: Start by conducting a thorough financial assessment of your business. VCs will want to see evidence of past performance and future projections, so ensure your records are accurate and up-to-date!
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• Competitive analysis: Understanding your competitors and your market positioning is vital. You need to clearly articulate your unique value proposition and how you differ from others in your space - and a competitive analysis will allow you to do just that. This will show potential investors you have a strategic understanding of the market landscape and are prepared to face challenges head-on. 
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• Prepare your business plan: This isn't just a formality - it's a strategic document that outlines your business goals, key milestones, risk factors, and how you plan to utilize the investment. A detailed business plan helps VCs understand your vision and strategic direction. 
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• Mock-pitching: Practice makes perfect. Refine your pitch through practice, take feedback from advisors and mentors, and use the constructive criticism to polish your delivery for the real thing. 
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• Focus on your team: Finally, ensure that your team is ready. Highlight their strengths, expertise, and how they contribute to the success of your business. A strong team will instill confidence in investors.

Conclusion

When it comes to securing venture capital investment, being well-informed and prepared is crucial. You'll want to ensure your business is well-equipped to succeed, alongside ensuring you have the expertise to hand to facilitate a positive outcome.

Tackling venture capital investment? Get in touch to see how we can support.