Understanding how to raise capital to scale a business, fund an acquisition, raise a hedge fund or finance a startup is the first step in fundraising for the next big goal. Raising capital can define the success of a deal or venture. The key to success is understanding the options and identifying the most appropriate in a given business scenario. 

There are seven key ways to raise capital, so let’s explore how each one works and when to choose it.

Starting a business, scaling or preparing for a deal all require capital. The source of this capital affects everything from the business structure to how decisions are made. When preparing for a capital raise, it pays to consider how much control owners want to retain over the business, what external advice and support could benefit the company and how much capital is needed for the next growth stage. 

So what is capital raising, and is it better to use debt or equity? Let’s dive in to understand the options.  

What is capital raising?

Capital raising is when a company seeks additional money, through investment, debt or equity. These business funds are used for a variety of strategic goals, such as growth, transforming operations, altering the capital structure, navigating a trying period or expanding through acquisitions. 

This additional money can be realized in two key ways — debt financing (securing a loan) or equity financing (from investors, in return for a share of the company ownership), or a combination of the two. 

Whether raising capital through debt or equity, remember that it takes money, time, creative energy and effort to raise funds. Be prepared for the process to take up to six months or a year, and budget accordingly to make the current capital last the distance.  

How to raise capital: debt or equity?

Raising equity or debt finance takes time and effort — and being prepared is key. To begin capital raising, founders or owners may need a certain level of seed funding to cover the costs of the process. 

Equity financing

Equity financing is when a company raises capital by selling shares (ownership) of the company to the public, institutional investors or financial institutions. 

While selling equity in return for capital funds means that the money does not need to be repaid, there is usually an obligation to consider shareholder interests in future business decisions and to share future profits. Taking a company public through an initial public offering (IPO) is one way to do this, though it’s worth noting that this process is expensive and takes time. 

Debt financing

Debt financing is when a company borrows money from a bank or working capital funding organisation, usually with the obligation to repay the funds, along with interest or a set fee. 

The other way to raise debt is to sell corporate “bonds” to investors, which mature after a certain date. The company must pay interest payments on the bond to the investors until the bonds mature.

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7 capital raising strategies for startups and established companies

Raising capital costs money and valuable time, and it will also limit how the company is managed in some way while creating commitments that must be fulfilled. 

Selecting the right capital raising strategy for the next growth phase is key to success — and delegating this critical process to an advisor still requires owners, founders and management to fully understand the risks and rewards of each fundraising option. The ultimate selection of a fundraising strategy will depend on where the business is at, how established it is and the timeline available to secure capital.

1. Fund it yourself

Dipping into personal savings is probably the easiest way to raise capital for a startup. Of course, funding the business this way carries some risk. However, the fact that the owner and other individuals have enough confidence in the business to invest can encourage investors or lenders to commit funding to the company.

“Bootstrapping” is often an excellent way to prove a business concept and start generating revenue. Invest what you have now, and reinvest profits as you start to generate income to establish a viable business. With operations up and running, the costs of raising further capital can be covered later on.

 

2. Business loan

Small business loans are still a major stepping stone on the road to success for many entrepreneurs launching a new business. However, loan approval is not guaranteed. You will need to meet specific requirements, like having an excellent credit score and being in business for a certain period of time. 

A business plan, expense sheet and financial projections for the next five years can help to increase your chances of securing a business loan. Large bank loans often require stringent audits and independent reviews to validate that inventory and receivables are legitimate, with costs borne by the applicant.

Full transparency is key, including not just the balance sheet by any key person risk, management capabilities and shortcomings, as well as marketing and competitive strategies.

 

3. Crowdfunding

Crowdfunding is a very low-risk option for business owners. Funds are sought from a large number of people in the public, usually through a dedicated website or platform. 

Crowdfunders don’t generally receive ownership in the business and don’t expect a financial return on their money. The reward for the donation is a ‘gift’ from the company, often a product the company will develop and sell, or other perks like meeting the business owner.

Crowdfunding allows business owners to retain full control, and if the plan fails, there’s usually no obligation to repay the funds. Every crowdfunding platform has variations, so read the terms and conditions to understand your full legal obligations before launching the fundraiser. 

4. Angel investment

An angel investor provides initial seed money for a start-up, usually in exchange for ownership equity in the company. These individuals are often wealthy, with a stable income and investable assets of $1-2 million. Angel investors can also be highly experienced in business, and often a personal connection or referral is required to secure their investment. 

In an early-stage start-up, an equity offer to an angel investor may look like 15-20% of the company. A more mature company is able to offer a lower percentage, backed by a proven concept and market traction. 

Angel investors may act alone or join together to fund a start-up or growing business. While the risks are real, the rewards for angel investors can also be substantial. In the period leading up to 2020, the median initial rate of return (IRR) for investors with 20 company portfolios was around 7%, while 16% of these investors lost money (AngelList). Larger portfolios tend to generate larger returns, and large returns require investors to wait 10 years for an exit like acquisition, IPO or closure. 

With this in mind, companies preparing for angel investment should focus on thorough due diligence and a sharp pitch. Think ‘Shark Tank’ — a solid business plan with financial milestones is key to securing angel investment. 

5. Personal contacts

Networking can be a crucial part of start-up success. After all, someone who understands the current stage of growth, the industry you are in and what needs to be done next is more likely to invest in your business. 

Whether this is family or friends who have been close to the business idea or an investor you meet at a local startup incubator, a personal connection can go a long way in fundraising. Just be sure to consider the broader impact on the relationship. 

You might not feel comfortable asking friends and family members for money but according to Fundable, 38% of startup founders report raising money through their loved ones. Not only that, friends and family reportedly invest the most – more than $60 billion per year.

6. Venture capital

Venture capital firms often fund early stage startups with high growth potential. Venture capital is a subset of private equity investing, and sits between angel investors and more traditional private equity investing in a company’s timeline.  

Compared with angel investors, venture capital firms invest in a lower ratio of businesses that apply for funding - but when they do, they generally invest more money. 

7. Private equity

Private equity investors make controlling investments in distressed companies with the goal of making the subject company more profitable and valuable. Private equity fundraising requires surrendering part of ownership in return for capital to grow.

A private equity firm secures and pools capital from institutional and high net worth investors, identifies investment targets, appoints executives to portfolio companies and oversees the process of creating value from investments. 

Private companies seeking investment will need to undergo due diligence and demonstrate the viability of the business or operation receiving the investment funds.

How to raise capital for a startup without giving up equity 

There are 8 effective strategies:

1. Bootstrapping: self-funding and reinvesting profits to grow. 
2. Crowdfunding: source public financial support from a large pool of people. 
3. Grants and competitions: get a kick-start with non-dilutive funding opportunities. 
4. Strategic partnerships and Corporate sponsorships: secure financial backing from corporate relationships. 
5. Business loans: consider alternative lenders and banks. 
6. Revenue-based financing: share a portion of future revenue with investors (as opposed to equity).
7. Vendor financing: negotiate extended payment terms with suppliers and service providers. 
8. Invoice factoring: convert outstanding customer invoices to cash by selling to a factoring company. 

Raising capital for an acquisition

Capital for an acquisition is often a combination of debt and equity financing, with payment made in a mix of cash and stock. The M&A deal process takes time, so allow for thorough due diligence and an accurate valuation of the target company. 

At finalization of the deal terms, if a company lacks sufficient funds for the acquisition, third-party debt, such as bank loans, SBA loans, or private debt, can provide the necessary capital. 

Additionally, you can consider using owners' equity or exploring a line of credit to fund the acquisition. By exploring these avenues, you can secure the capital needed to facilitate a successful acquisition.

How to prepare for a capital raise

Once the best capital raising strategy is identified, it’s time to begin preparation. When getting ready for a capital raise, the first thing you need to do is get your material information in order. 

Executive summary, company structure, business and marketing strategies, profit and loss statement, balance sheets, tax returns, bank statements and legal documents all need to be ready to secure timely funding. 

Investors will do their due diligence and our capital raise checklist can help you prepare. This digitized template contains all the critical data points that ensure a company is healthy and prepared for investment.

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Now you can control every aspect of your raise from start to finish.

FAQ

What is one way to raise capital?

Traditional funding sources for a business start up include personal savings and personal credit. It may also be necessary to obtain funding from sources like the sale of a security, or receipt of a loan or grant. 

What to do before raising capital?

1. Choose the type of funding to pursue
2. Create a list of potential investors
3. Prepare a pitch deck
4. Calculate your runway
5. Determine the capital raise goal
6. Set your valuation
7. Take time to understand the technical terms and clauses. 

How do small businesses raise capital?

Debt financing (loans, invoice factoring, extended vendor payments) and equity financing (investment) are the most common ways a small business can raise capital. Businesses may use a combination of the two

How do hedge funds raise capital?

Hedge funds raise capital through various methods, targeting investors who are willing to allocate their funds to alternative investments with the potential for higher returns. Here are some common ways hedge funds raise capital:

• Institutional Investors
• High Net Worth Individuals
• Fund-of-Funds
• Seed Capital and Strategic Investors
• Private Placements
• Managed Accounts
• Prime Brokers and Investment Banks