Raising capital is often the first step for leaders with the goal to grow, expand or transform a business. Whether the goal is reaching a new customer base, expanding a product line, undertaking R&D to stay ahead of the competition, or even an acquisition; gaining and maintaining momentum may require external funding. 

Choosing the right capital-raising strategy to provide funds is the first step. You can do this through debt or equity financing.  

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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.  

Capital raising is the process of securing funds from an external source—like a lender, private equity investors or public investors in the stock market—to achieve business goals like financing operations, expansion or investment in new opportunities. Capital raised may be put towards launching new products or services, entering new markets or acquiring assets, including property or intellectual property.

How to raise capital for a business

There are many ways new and established organizations raise capital, from bootstrapping or crowd-funding to grants and sponsorships. However, the two most common types of capital raise focus on either debt or equity. 

What is an equity raise?

An equity raise sells shares of the company to investors in exchange for capital. There are no repayment obligations, but there is the requirement to share profits. 

Equity raise examples 

Examples of an equity raise include an initial public offering (IPO) or investment from a private firm or venture capitalists. 

Venture capitalists (VCs) are private equity investors who 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.

What is debt financing?

Debt financing is where a corporation borrows funding money from lenders, usually a bank or financial institution with the obligation to repay the principal plus interest. 

Examples of debt financing

Examples of debt financing include secured debt, where collateral for the loan can lower the interest rate, unsecured debt, where interest depends on the company’s credit history, or convertible debt, which can be converted to equity under certain conditions. 

Learn more about debt financing 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, then also secure investment from a VC for expansion.

How does a capital raise work?

A capital raise is the first step toward fulfilling a strategic business plan. 

This strategic business plan is pitched to a prospective investor or lender. If interested, the due diligence process begins. During due diligence for a capital raise, the investor will review core business information to assess the suitability of the investment. It can help to have an external valuation at this stage, and ensure the business has a sustainability strategy that ensures future value. The investor asks questions, and once satisfied, negotiations on the terms of the capital raise are determined. 

Step-by-step capital raise guide: Capital raise process

Startup capital raise preparation

Raising capital for a startup takes time, energy and commitment to strategic goals. The process can be divided into clear, actionable steps to ensure your business is ready for scrutiny. 

1. Purpose and timing

Begin by outlining clearly why capital is needed and how it sets the business up for growth and revenue. At this stage, startups may draw up a timeline for subsequent capital raise stages to ensure each funding round begins early enough so the company has sufficient runway to operate.

2. Legal and financial status

When a new business lacks financial history, investors or lenders may look to the financial history of the founders and directors. Ensure that financial record-keeping is in place, with forecasting that takes into account multiple scenarios. Legal documentation is also key, including any intellectual property and obligations of the company, like employment contracts, leases, and so on. All of this information is required for the due diligence process and will inform the preparation and planning for the capital raise. 

3. Business plan and financial disclosure

A strategic business plan is essential to demonstrate to potential investors how they can expect to see returns. Anticipate questions that may be asked, prepare risk analysis and ensure that the strategic plan is comprehensive. 

4. Explore funding options

With a business plan and information ready, the next step is to identify where investment may come from. Networking is key, so founders and leaders should be prepared. A solid pitch can help to secure interest for the next steps. Options available may include seed funding from high-net-worth individuals, usually within the founder’s personal network, angel investment or venture capital. 

5. Prepare a data room

Once interested investors are identified, it’s time to begin due diligence. A virtual data room is the most secure, reliable and effective way to share sensitive business information investors need to commit. 

Look for features like AI redaction, Bidder Engagement Scoring, and remote deletion of downloaded files to ensure the integrity of your deal. The quality of the due diligence and Q&A process can inform the final investment decision, so ensure that the technology provides a seamless experience for guests. 

Begin a capital raise with confidence and fund the next stage with Ansarada’s proven process. 

Ansarada’s platform has been used by organizations like Samba Solar ($2.5B), Azul 3D ($15M) and LinkSquares ($100M) to raise funds while keeping operations moving. Make sure you are fully prepared and ready to optimize valuation during a capital raise with a secure virtual data room, seamless guest engagement and visibility over every step in the process. It’s free to get started. 

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

More on capital raising: 

• Raising capital for renewable energy projects
• Raising capital just got a lot easier
• Has the capital raising slump hit bottom (August 2023)