by James Hickson | February 09, 2022 | 11 min read
Everything you need to know about raising capitalGet funded
Last updated: April 18, 2022
Let's examine two ends of a company spectrum. On one end, there is the seed company raising money to pitch a business idea to venture capital firms. And at the other, there is the decades or even centuries-old incorporated company with a healthy amount of cash flow. What do they have in common? Both entities must know how to raise capital.
This can be an overwhelming process for many businesses. But it also can mean the difference between success and failure regardless of your growth stage. To remove some of the pressure around capital raising, this article summarises everything you need to know.
We cover its importance, define key terms based on the stage of your company, provide guidelines for raising capital, examine key documentation, and give some key tips on how to raise capital quickly. If raising money for your business is a weak point, read on.
Table of contents
- What does it mean to raise capital?
- Why is it important to raise capital?
- How can a company raise capital?
What does it mean to raise capital?
A simple business definition for raising capital is when a business owner receives money from an investor or several investors to facilitate the start, growth, or daily operations of a business. Again, this can be a burden for some business owners. But most entrepreneurs consider it essential, and the cornerstone for their success.
A business owner might look at different fundraising methods to service different capital needs. These methods fall under two forms of fundraising: equity financing and debt financing – also known as dilutive or non-dilutive.
What is equity capital raising?
Equity capital raising is the process of raising money by selling shares of stock. This offsets the need to borrow money and creates debt. But it also dilutes the current pool of shares by increasing the total number of available shares. For capital raising, there are two types of shares sold: common and preferred.
Common stock shares give investors the right to vote, but that's all. And if the company liquidates or goes bankrupt, other shareholders will have first rights on any payments.
Preferred shares offer no voting rights and limited rights on ownership. Instead, preferred shareholders receive specific dividends before common shareholders receive payments.
When examining equity capital raising, you'll hear common terms like equity finance and equity funding. These all fall under the same umbrella. Equity finance also involves selling shares to investors to raise capital for business operations. But it's more of a blanket term that can include investment from friends and family, an angel investor (business angels) or other private investors, venture capital firms, private equity firms or institutional investors, or an initial public offering (IPO) on public markets.
You'll generally hear equity finance regarding public companies, but it also applies to private equity investment.
What is startup capital raising?
While equity finance can refer to capital raising for both established companies and startups, startup capital raising narrows the focus. When entrepreneurs have a solid business plan or prototype, they can raise capital in a variety of ways.
Startup capital can come from equity financing channels like venture capital, seed investors, angel investors, and institutional investors. But it can also come from debt financing channels like bank loans and bonds. Small businesses may also use credit cards to get things off the ground.
Debt financing can have a higher risk than equity financing, as startups will pay interest as part of their business loan agreement. But the bank will have no control over the company, and on fulfilment of the loan agreement is fulfilled, the contract dissolves.
Startup finance is another interchangeable term for startup capital raising. It includes all the means for a new business to either launch a product or grow the business – including dilutive and non-dilutive financing.
Why is it important to raise capital?
Unless you're sitting on tons of cash or your established business has a healthy cash flow, you'll need more money for growth and expansion plans. Many successful business owners boast that they never had to raise capital from venture capitalists, but it's not necessarily the best course. Here are some key reasons to raise finance for your business:
It's easier to scale your business – If you're beholden to interest payments on bank loans, it can make it difficult to launch a small business or project. Venture capital and equity investment make it easier to scale and often provide more money up front.
Capital gives your company credibility – When venture capitalists or private equity firms invest in your company, it shows others that your idea and business plan are credible. And venture capital firms often release news of the investment to the media to increase visibility.
You could gain access to additional resources – Raising finance often comes with access to additional resources. Think tax and legal resources along with access to extensive industry research.
The funding terms could be helpful – If you opt to work with an equity investor over a business loan, your business could receive better payment terms. You won't have to make monthly payments or pay interest at all.
When should you raise funds for a startup?
Business fundraising rarely happens just once. It happens in stages – known as 'rounds' – and each round has a different purpose and set of parameters. These are the common stages:
Pre-seed – This is the first investment and idea stage where a company has no customers or employees yet.
Seed – There should be a prototype or demo available of your product or idea at this stage.
Series A – Stage that raises funds to put a product on the market.
Series B-D and possibly more – Stages reserved for scaling, growth, and expansion.
Every company has a different path and different needs, so there's no actual premiere time for capital raising. Mostly, you can raise funds when you have a valid problem to solve and the demand for the solution is both viable and verifiable.
However, there are many valid reasons to wait before raising funds. You could need more time to generate interest in a solution before investors will bite. Or you have the funds to finance it yourself for a while. Another good reason to wait is that you may not have the time or resources to invest in pitching your idea to investors.
It's up to you as a business owner to consider the stages and reasoning for fundraising and discern what's best for your company.
How can a company raise capital?
Earlier, we defined what it means to raise capital, so now let's dive into the nuts and bolts of how you can do it for your company.
What are the methods of raising capital?
Each method for raising capital falls under the two forms detailed earlier: equity or debit. No matter which method you pursue, it's important to understand the reasoning for your choice.
Is it more helpful for your company to give up some equity in order to meet your goals? Or would your company profit more by taking on debt because you know you can pay back the loan quickly?
Regardless of which category you choose, you'll use the common methods detailed below.
3 common sources of equity capital
Note that the listed equity funding sources are outside of friends and family or money from your own pocket.
Angel investor or private investors – Angel investors are private individuals with a high net worth. They invest in small business startups or directly with entrepreneurs – with excellent business plans – in exchange for equity in the business.
Venture capitalists – These individuals generally work for venture capital firms and invest in businesses after angel investors. They tend to invest for longer terms and focus more on the growth potential of the company, as opposed to a solid business idea.
Initial Public Offering (IPO) – An initial public offering takes your company onto a stock exchange to raise capital from the public market. This option is complex, expensive, and usually only viable for established companies.
3 common debt capital sources
Debt capital comes from financial institutions through three common methods:
Loans – A company borrows money from a bank or government agency and pays it back over time with interest payments according to the loan agreement.
Credit lines – Companies use lines of credit to support growth. Obviously, you'll also pay interest using this method.
Bonds – Bonds are a corporate finance option where established companies allow large pools of investors to lend money directly to the company.
How does a capital raise work?
Capital raising happens when large or small businesses approach investors (equity capital raising), lenders (debt financing), or investment bankers – for both categories, and to process documents – with the purpose of raising capital.
Raising finance for businesses – new or old, big or small – requires tons of preparation and planning. Think about it – you're asking investors or lenders to commit their money to your company based on its potential for growth. You'll need to provide evidence that your business or idea has a high chance of succeeding and you'll be able to pay back these individuals or institutions.
What happens in a capital raise?
Capital raising can be a long process, so don't expect things to happen overnight. Below is a breakdown of both an equity and debt capital raise.
Unless you have a company to take on the public stock exchange, you can sum up the equity capital raise process in seven steps:
Determine your strategy for funding – This is the pre-offer stage where you'll define exactly what it is you're looking for in the capital raise. If you're giving an equity stake, how much are you willing to give up? If you're engaging in debt financing, how much debt are you willing to take on? And how high of an interest rate can your company pay and still accomplish its goals?
Organise your business details – You can't just pitch what's in your head. You must compile research, documentation, and accurate projections of the numbers your business can attain – revenue, profits, customers or users, etc.
Seek out investors – It's important at this stage to do your research and look at your network. Do you have a connection who can give you a solid contact? Or do you plan on reaching out to an investment firm? Working with investment bankers could be another viable option.
Create your pitch – Your pitch is where your capital raising campaign will live or die. It's important to create a presentation that's both immaculate and impossible to refuse. Then, present it to anyone and everyone who will listen and provide useful feedback to perfect your presentation.
Set up meetings – It's a numbers game, so don't expect every pitch to go well. But the more investors you pitch your idea to, the higher your chances are of getting funding.
Post-pitch due diligence – After your pitch, you'll need to follow through and provide even more evidence for the viability of your business or idea. This means possibly reaching out with more data and confirming your commitment.
Negotiation – This is also known as the closing process. You'll have to draw up paperwork and work out the finer details and work out what is in the best interest of both parties.
Sign the agreement – This is where the work begins. It's time to take the capital and put your plan into motion.
The process for raising debt capital can be similar equity financing if you're seeking a bank loan. You'll go through all seven of the steps listed above, but instead of pitching to investors, you'll pitch to lenders.
Otherwise, you'll take on debt through the form of a credit line. In this situation, you probably won't have to give a pitch. Instead, you'll need to show your business numbers to prove to credit lenders that you can pay back your credit loan and interest.
Documents to raise capital for your business
You'll integrate these key documents into a detailed business plan to raise capital for your business.
One-page company profile – Also known as an executive summary, this document provides potential investors and/or lenders with all the essential information they need at a glance.
A Confidential Information Memorandum – An exhaustive document ranging from 40 to 60 pages that details every aspect of your business. It includes your executive summary and lays out the elements of your company that prove it will be a success – product overviews, SWOT analysis, market opportunities, financial statements and outlook, etc.
A pitch deck – A pitch deck is like a CIM, except that it's much shorter – 10 slides – and has a lot of personality. This is what you should use to pitch your presentation to investors and lenders verbally and with enthusiasm.
A financial model – This is a spreadsheet that contains core financial statements and projections of how your company will perform in the coming years. You must include your balance sheet, cash flow statement, and business income statement and be able to show how those numbers came to be.
James Hickson is the CEO and Founder of Bloom Financial Group, the winner of numerous industry awards – most recently recognized as FinTech CEO of the year as well as Payment Service of the year by AI Global Media.
Bloom is a European Fintech company focused on small to medium business lending. With their proprietary technology, Bloom offers e-commerce and retail brands access to revenue based funding (between 25,000 EUR and 3M EUR).