Startup fundraising announcements are a regular feature of tech and finance media, but not all headline numbers are created equal. Often, the headline number can be a mix of equity, debt, and other creative instruments designed to optimise terms for the investor while ensuring the funding supports the goals of the business.
There has been a spate of fundraising mega-rounds announced lately. At the outset, these large numbers may come as a surprise to the community, who have watched funding rounds dwindle over the last couple of years, decreasing by two-thirds in 2023 from 2021 peaks.
However, headlines like these can be misleading if taken at face value, as a closer look often reveals that only a small percentage of these raises consist of equity financing, with the rest made up of various debt instruments.
So, what are these instruments, and why does it matter? And why might startups present such a large number as their headline figure?
Firstly, let’s start with an explainer of the different types of fundraising as they traditionally pertain to startups and scaleups.
An equity financing round is the most common type of fundraising for early-stage companies. As the name suggests, these rounds involve investment in a company in exchange for an ownership stake (shares), effectively making the new investor a shareholder. These shares are created when the transaction is completed, which leads to an overall dilution of existing shareholders’ ownership.
The amount of dilution a company (and existing shareholders) endures depends on the terms of the investment but tends to reduce over time as the investment is de-risked.
Examples: Blackbird, evp, Giant Leap, Rampersand and Square Peg are all well-known Australian equity investors.
The key distinction between a primary and secondary fundraising round is that the new investor in the current round is purchasing shares from existing shareholders in the company, such as employees, founders, or investors who want to take some money off the table. This means there is no new creation of shares, which is desirable for existing shareholders as they suffer no dilution.
However, secondary rounds are typically limited to later-stage companies with a strong valuation and enough liquidity to attract interest.
While secondary transactions have been commonplace in the US for decades, these transactions are newer in Australia. Second Quarter Ventures — founded by seasoned investors Ian Beatty, Leigh Jasper, Andrew Sypkes, and David Tarascio — are leading the charge as Australia’s only dedicated secondary funds.
Recent notable secondary rounds include Canva’s, where long-time investors opted to sell part of their holdings, demonstrating both liquidity demand and investor confidence in the startup’s long-term prospects.
Debt funding allows companies to raise capital by borrowing money rather than selling equity, thus preserving ownership. Debt typically makes up only 2-4% of early-stage funding in Australia according to Cut Through Ventures’ State of Australian Startup Funding report, but it has become more appealing as startups look to avoid dilution.
Venture debt is a form of financing provided by specialised venture capital funds or lenders, which is designed for VC-backed companies. It offers startups capital with no dilution but comes with payback terms and interest obligations. This type of financing often supplements equity rounds, allowing startups to extend their runway.
Revenue-based financing is an example of venture debt, and aligns repayment with the company’s revenue milestones, which is advantageous for startups with fluctuating cash flows. Repayments are directly tied to revenue, allowing companies to maintain cash flow control in slower months while increasing repayments when income rises.
Examples: Tractor Ventures and Mighty Partners are examples of venture debt providers in Australia.
If you want to learn more about venture debt, including pros and cons, this resource is a great place to start.
A debt facility is a line of credit that provides the startup with flexible access to funds, typically for growth or covering working capital needs. This structure enables startups to tap into funding when needed rather than taking a lump sum all at once. Debt facilities are usually reserved for companies with more predictable revenue streams due to the risk appetite of lenders.
Warehouse financing offers a pool of capital that businesses, especially those in fintech or lending, use to provide loans to their customers. These businesses earn a net margin on the funds they lend out, while investors in the warehouse facility receive a return on their investment.
Examples: The aforementioned Tractor Ventures and Mighty Partners are examples of venture debt investors who have taken on warehouse financing themselves to then lend out to startups.
Mezzanine financing is a hybrid of debt and equity, typically used by late-stage companies or profitable startups for expansion. This financing option is higher risk and comes with higher interest rates. It often includes an option for debt to convert into equity, providing lenders with a fallback in case the company cannot repay the loan.
For a comprehensive list of debt providers, the Startup Funding Database is a great resource.
Each funding type has implications for control, repayment, and long-term growth of the company. For early-stage startups, equity rounds are more common to fund initial growth, whereas later-stage companies might prefer debt to avoid dilution and leverage predictable cash flows.
The fundraising structure also has serious implications for investors, which, depending on the instrument used and stage at which they invested, dictates any returns they receive during events like liquidation, sale, or bankruptcy. This is known as the liquidity preference stack.
Typically, debt holders are repaid first since their investments are secured by the company’s assets. Preferred equity holders follow, given their contractual priority over common shareholders, and common equity holders receive any remaining funds last.
Simply put, big numbers generate buzz. Announcing a large funding round can elevate a startup’s visibility, attract top talent, and build credibility with customers and investors.
Larger rounds also tend to attract media attention, particularly from high-quality publications, creating an impression of strong investor confidence that appeals to prospective employees and future investors. This perceived financial backing and stability also builds customer trust, fueling growth.
While there’s nothing inherently misleading about fundraising announcements, understanding their nuances helps you to interpret them more effectively and allows for a more informed comparison between different funding rounds.
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Claire Bristow is an ex-academic turned founder and venture capital investor. Her goal is to make venture capital more accessible and break down barriers to entry.
