Raising capital is a core part of being a business owner, whether you’re at the beginning of your entrepreneurial journey or the CEO of an established business. A capital raise is an essential step in taking your business to the next level.
Though the process of acapital raise may seem daunting, especially to a first time startup, it can be broken down into manageable stages and milestones. In this knowledge hub, you’ll learn the definition of capital raising, the two main types of raise, some capital raising strategies for startups, and how the equity raise process works.
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Definition: What is capital raising?
So, what does capital raising mean in simple terms? It’s the process a business goes through in order to raise money, so the business can get off the ground, expand, or transform in some way.
How to raise capital for a startup
There are many ways startups and corporations can raise capital, but broadly speaking they fall into two categories:
- Equity raising
- Debt raising
Meaning of equity raising
Equity capital raising is the exchange of a percentage of business ownership in return for cash or funds.
Examples of raising equity
Examples of equity raising include investment from venture capital firms, angel investors, or anyone else to whom a business owner sells their shares.
Today, entrepreneurs and startups can explore equity crowdfunding as a means of raising funds. Similar to the likes of Kickstarter and other crowdfunding platforms, equity crowdfunding places a business in front of a “crowd” that is able to invest money in exchange for common or preferred shares, convertible notes, and more.
Other, more traditional ways to secure investment are through venture capitalists (VCs) and angel investors. The former are private equity investors that provide (usually significant) funds to companies showing high growth potential in return for an equity stake. Angel investors generally invest less and are therefore more willing to take a gamble on an entrepreneur with a less established business.
Learn more about equity raise options: Equity financing
Meaning of debt raising
Debt raising is the exchange of a debt in return for capital.
Examples of debt raising
Examples of debt raising include loans, credit cards, and bonds.
Learn more about debt raise options: Debt financing
Companies often choose a mix of debt and equity financing options. For example, a business owner might take out a loan or apply for a line of credit in order to solve some temporary cash flow issues, but they might also be able to secure investment from a VC for expansion.
How does a capital raise work?
In a nutshell, a raise happens when a business has a strategic plan for growth, which is presented to a willing investor (in the case of an equity raise) or lender (if it’s a debt raise). Once the investing/lending party has completed their due diligence, an agreement for the exchange of funds in return for either equity or debt is negotiated and signed.
Use our step-by-step guide: Capital raise process
Planning for capital raises
As with any business transaction, capital raising requires considerable planning and preparation.
When you're talking about the commitment of large sums of money to a business proposition, return on investment is a high priority. The more evidence a business can provide of its growth potential - in the form of financials, projections, market research, solid business planning, marketing strategy, IP etc - the higher its chances of securing a high-value outcome.
For companies seeking investors or lenders, your best bet is to get your documentation in order and ready for the virtual data room, which is where all this information will be shared. Not only will this make you feel more confident that you have all the material information at your fingertips, but it will also make investors and lenders have more faith in your business.
Capital raising FAQ
What are the advantages and disadvantages of raising capital?
Some pros of raising capital are:
- Provides funding for growth
- Enhanced financial stability
- Increased flexibility to manage operations
- Attracts talent and partnerships
- Improved investor relations
Some cons of raising capital are:
- Dilution of shareholder ownership
- Increased financial obligations
- Cost of capital raise process
- Risky depending on timing and market conditions
