Non-dilutive financing trends in 2023 and beyond

September 20, 2023
Non-dilutive financing trends in 2023 and beyond

We’re approaching the tail end of 2023 and one of the most challenging aspects of building a start-up continues to be raising capital. Between tech, talent and marketing, costs can start adding up quickly, and managing them effectively can make or break your business. In fact, out of the 90% of start-ups that don’t make it, 38% fail because they simply ran out of funds.

With non-dilutive financing rapidly evolving in recent years, we’re seeing a variety of funding platforms and alternative capital helping spur the growth of start-ups and SME’s without a loss of equity or ownership. In 2022,  $219 million had been raised across 298 offers, with an average deal size of $733,000.

Let’s take a look at the trends that have emerged over the past year and what the future of non-dilutive finance holds for start-up and SME founders.

Personalised funding and asset leveraging is on the rise

Ditching the traditional one-size-fits-all model, lenders are increasingly tailoring terms to the unique needs of different business types, industries, and growth stages. Instead of rigid policies, terms like interest rates and repayment schedules have become negotiable, and factors like revenue models, risk profiles, and performance benchmarks all come into play when underwriting deals.

Asset classes like intellectual property, future revenue or even equipment are being accepted as security against loans. The ability to monetise these asset types has opened viable alternatives for Australian businesses when traditional collateral falls short.

Revenue-based financing is one of the fastest growing non-dilutive funding options with an expected CAGR of 61% from 2020 to 2027—and it’s not hard to see why. Subscription based start-ups, for example, can leverage the predictability of their recurring revenue contracts to access loans that align to their company's cash flow cycle. As can be seen already, we predict more tailored options opening up in the near future to cater to different industries and business models.

Increased federal budgets for start-ups and SMEs

Federal assistance for Australian start-ups and SME’s is officially on the books! The government’s new Industry Growth Program includes $392 million in funds available to commercialise and grow operations, with $101.2 million to support the adoption of AI and quantum technologies by SMEs to improve their business processes and trade competitiveness.

Speaking on the new Industry Growth Program, Minister for Industry and Science, Ed Husic, said “This will enable emerging businesses to become the big employers of the future – backing our innovators with investment and advice so they can make the jump from brilliant idea to business plan to a growing enterprise,”. He further confirmed that the program will include grants and mentorship.

As a concessionary measure the government is also extending the instant asset write-off scheme for another year. This new write-off will be set at $20,000. Small businesses with annual revenues below $10 million will be able to deduct the entire cost of eligible assets that are first used or installed between 1 July 2023 and 30 June 2024.

Tax incentives for research and development

The Research and Development Tax Incentive (R&DTI) is a government program that provides tax offsets to businesses that conduct research and development (R&D) activities. The rebate is available to businesses of all sizes that meet the eligibility criteria, regardless of their industry.

R&DTI rebate claims will vary depending on aggregated turnover and R&D expenditure intensity. Businesses with an aggregated turnover of less than $20 million can claim a refundable tax offset of 18.5% above their company's tax rate. Businesses with an aggregated turnover of more than $20 million are eligible for a non-refundable tax offset of their company's tax rate plus a premium.

This rebate is a valuable financial tool that can help businesses reap the benefits of innovation, and a positive sign of the government's commitment to supporting R&D in Australia. The program has been growing steadily at a rate of 5-10% p/a in recent years. And, according to the Science, Research and Innovation (SRI) budget tables 2022–23, the government will have invested $12.1 billion in R&D within the financial year, of which $3.2 billion will be invested through the (R&DTI).

Democratisation of sourcing is taking off

Securing funding has gotten a whole lot easier thanks to digital lending platforms. Radically simplifying funding searches, these platforms have successfully automated relationship building between investors and start-ups looking to raise capital. This is a huge win for entrepreneurs who have to spend countless hours on phone calls, emails and industry events to build the connections needed to fundraise.

Using data-driven algorithms and transparent selection criteria, borrowers and non-dilutive lenders can connect within centralised online marketplaces. As a result, Australian businesses are gaining broader access to funding corporations previously out of reach, while funders obtain qualified deal flow. The tech behind these platforms is growing rapidly, so expect improved match-making and faster evaluations and approvals going forward.

Growing opportunities in sustainability and impact financing

As environmental and social issues rise to the forefront, investors are increasingly demanding that their capital creates positive change. In response, specialised funds focused on sustainability, cleantech, affordable housing and other impact areas have proliferated. This pool of "impact capital" allows mission-driven founders to pursue their goals while accessing growth funding.

Impact-based lenders look beyond performance and consider the ability of a company to further the UN Sustainable Development Goals. They're particularly interested in ventures addressing climate change, circular economy, healthcare access and other global challenges. This presents new avenues for start-ups creating impactful solutions to position themselves for non-dilutive deals aligned with their purpose.

An opening for blockchain financing

While still fledgling, blockchain financing looks set to transform venture debt. By automating Conditional Loan Agreements on distributed ledgers, smart contracts can streamline lending and verify repayments automatically based on milestones. A majority of the initial implementations involve asset-backed equipment loans or invoice financing based on future receivable transfers.

Blockchain platforms cut out paperwork and manual processes for both parties. Borrowers gain rapid loan execution, while lenders efficiently manage large portfolios. The tech also provides full transparency around repayment triggers.

Australia’s regulators currently support blockchain innovation, so we may soon see the first cryptocurrency-backed loans appear as the space matures. For now, traditional venture debt remains on top, but blockchain bears close watching.

Specialised vertical funding niches

Generalist capital providers cannot address every industry's idiosyncrasies. Non-dilutive lenders with domain expertise are able to better assess risks using benchmarks unique to sectors like healthcare, fintech or renewable energy.

Australian companies operating within high-growth niches will benefit immensely from dedicated funding partners familiar with their revenue drivers, seasonal trends, compliance needs and growth catalysts. Specialisation raises approval probabilities while minimising friction versus one-size-fits-all deals.

Australian start-ups operating within hot verticals should see more non-dilutive options surfacing with lending terms tailored specifically for the industry.

The future of non-dilutive finance

While venture capital continues to dominate major start-up hubs, non-dilutive financing is fast emerging as a disruptive force, although still in its infancy. Non-dilutive capital has the potential to power domestic growth companies, accelerate start-ups between funding rounds and prepare them for exits like IPOs, while maximising founder ownership for longer. Importantly, it offers a lifeline to weather downturns that increasingly threaten businesses.

As entrepreneur demand grows, these alternative financing options will enter the mainstream. There is also a window of opportunity for Australian financiers to fill this need and better fuel the country's thriving innovation. Success depends on adapting models to support start-ups through changing industry conditions and can strengthen Australia's position globally in supporting high-growth ventures.