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 capital raising strategy in a given business scenario. 

There are eight key ways to raise capital, so let’s explore how each one works and when to choose it. But first, let’s consider the impact of raising capital and the factors to consider before choosing a capital raising strategy.

Essential considerations for choosing a capital raising strategy

Starting a business, scaling, entering a new market 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
• how much capital is needed for the next growth stage. 

When raising capital to fund expansion and innovation, be aware that the capital raise process takes time, requires due diligence and will potentially dilute control. 

Be prepared for the capital raising process to take up to six months or a year, and budget accordingly to make the current capital last the distance. Startups may require seed funding to undergo further capital raising. 

Let’s look at how to raise capital and the different strategies companies may pursue.

What is capital raising?

Capital raising is when a company secures external funds to finance operations, growth initiatives or strategic objectives such as acquisitions or market expansion.   

Companies typically raise capital through equity financing (selling shares to investors in exchange for capital) , debt (loans or bonds) or hybrid instruments like convertible securities. 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. 

Stages of capital raise for a startup 

A new business typically undergoes multiple funding stages as the company enters the market, defines its customer base and gains traction. 

Seed funding

Seed funding is the initial funding, often provided by founders themselves (also known as ‘bootstrapping’), through crowdfunding or by angel investors. Seed funding is used to develop products, undertake research and gain market entry. 

Series A, B etc. 

Once the business concept is proven, Series A, B and further funding rounds may be sought from venture capital, institutional investors or public markets. This funding is used to scale operations, undertake research and development and enter new markets. 

IPO

An initial public offering (IPO) lists the company shares on a stock exchange, where broader investor pools can contribute capital. 

How to raise capital: debt or equity?

To select a capital raise strategy, ensure that the funding method aligns with the business goals, for example, equity is more suitable for high-growth ventures, while debt suits asset-backed projects. 

It’s also important to ensure the company can meet regulatory requirements, particularly for public listings. 

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 organization, 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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8 capital raising strategies for startups and established companies

Selecting the right capital raising strategy for the next growth phase is key to success. Delegating this critical process to an advisor still requires owners, founders and management to fully understand the risks and rewards of each capital raise strategy. The ultimate selection of a capital raise strategy will depend on the maturity of the company, the availability of assets to use as security and the timeline available to secure capital.

1. Boot-strapping

Initial funding may be provided by founders, depending on the type of business, founder wealth or equity, and the level of investment required for entry. When the owner and other individuals have enough confidence in the business to invest, this can demonstrate their confidence in the company and may mean investors or lenders are more likely to provide capital.

“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

A business loan provides capital without diluting ownership. The price of using debt to gain capital is the interest paid over the lifetime of the loan. Longer-term or larger loans typically require security, while short-term loans for immediate capital injection may be unsecured. 

A line of credit is another way to draw capital for operational needs, and there are specialized loans for equipment finance or invoice finance and factoring that can also provide operational capital. 

To be eligible for a business loan the company will need to demonstrate the ability to repay and meet other lending criteria. 

A business plan, expense sheet, and financial projections for the next five years can help to secure a business loan. A lender may also request visibility of risks as well as marketing and competitive strategies. 

3. Crowdfunding

Crowdfunding is an alternative capital raise strategy with a very low-risk option for business owners. Typically used by startups or for specific projects with a community element, 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. 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 the legal obligations.

4. Angel investment

An angel investor is a high-net-worth individual who provides initial seed capital for a start-up, usually in exchange for ownership equity in the company. Angel investors may 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 can 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. 

Potential risks and rewards for angel investors can 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. Grants and competitions

Government grants or competitions can secure non-dilutive capital. Grants may be available in certain industries, especially those focused on innovation and sustainability. Local or federal governments, universities and startup incubators are great places to begin to learn more about the grants or competitions available.

6. Venture capital

Venture capital firms often fund early-stage startups with high growth potential. A venture capital firm is a professional firm that pools funds from multiple investors (limited partners). The funds are managed by general partners who oversee the investment decisions. Venture capital firms often invest in tech and innovation and provide strategic guidance or mentorship to the company and its leaders. 

Venture capital is a subset of private equity investing, and sits between angel investors and more traditional private equity investing in a company’s capital raise timeline. While angel investors typically provide between $25,000 and $100,000 of capital each in the initial funding stages, a venture capital firm may offer several million to tens of millions, usually in Series A rounds and beyond. To secure venture capital investment, a company must have established traction and be ready to undergo extensive due diligence.

7. Private equity

Mature, established companies who seek to raise capital to restructure or improve operational efficiency can consider private equity capital. Private equity capital may be an option for traditional companies that seek transformation to turnaround underperformance or low valuation.

Private equity investors often ask for a much larger equity stake than venture capital investors. These investments often focus on traditional industries like manufacturing, agriculture or retail.

A private equity firm secures and pools capital from institutional 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.

8. Shares or rights issues

One way for a company to raise capital is to issue additional shares or new shares to either existing investors or directly to institutional investors. This option is available to publicly listed companies or to companies with private shareholders. There may be limits to how much dilution is permitted for public or private companies. 

This type of capital raise does dilute ownership in the company. If a company is listing publicly for the first time, the initial public offering (IPO) timeline is often three to six months and requires extensive due diligence and regulatory compliance. 

 

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 the 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 raise strategy is identified, it’s time to begin preparation. When getting ready for a capital raise, the first thing 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.

Ansarada Deals™ brings together a purpose-built set of solutions into one fully integrated platform that delivers value across the complete deal lifecycle. Centralize your capital raising activity with Deal Workflow™, project management tools, advanced data rooms, and AI deal insights.

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?

• Choose the type of funding to pursue
• Create a list of potential investors
• Prepare a pitch deck
• Calculate your runway
• Determine the capital raise goal
• Set your valuation
• 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