Capital Raising Strategies: What Are They and Why Do You Need Them?
In an ever-changing business landscape, the ability to raise capital can be the difference between exponential growth and crashing failure.
Despite the fact that growth potential can be constrained by a range of issues like poor management, lack of technology adoption, market instability; for most businesses, capital is the bread and butter for sustained success and profitability.
This ideally means that raising capital is probably a Chief Executives’ most important, tedious and time-consuming job. Without further ado, this article aims to provide a comprehensive overview of the basics that entail capital raising.
What is Capital Raising?
Generally speaking, capital raising is the art of engaging, pitching and soliciting investments from a range of financial backers to support the activities and operations of a company. Unfortunately, the lack of capitalisation has quite possibly been one of the major deterrents to business growth for years.
Why do you need to raise capital?
Capital raising is necessary for any business owner where undercapitalization is the principal cause of failure for most small businesses, however, it is not what makes a business successful.
Business owners need sufficient capital to form the infrastructure of the business and support it until it breaks even. While many companies are initially bootstrapped with personal savings from the founders, additional funding tends to be required over time, depending on the scalability efforts of the business.
Business owners can make many non-monetary investments into a startup company in the form of patents, product conception, and free labour typically referred to as “sweat equity”.
Even if your business seems stable, if it’s on a growth trajectory, there will come a time when you’ll need some capital injection to keep up with demand or competition.
As such, the most prevalent reasons for raising capital are working capital for growth, acquisitions, new product development, service or market development, capital expenditure or restructuring.
6 common capital raising strategies for startups
Capital raising can be handled in different ways. This means that it is imperative to know the distinctions that lay therein. Typically, sources of capital are divided into two key groups: equity finance and debt finance.
When money is invested via equity, it goes directly into the capital of the business. As such, investors receive shares for their investment accordingly and gain some control of the company, but concurrently tolerate and share risk.
On the other end of the spectrum, financers who fund via debt remain outside the company.
They are typically linked to the company by a contractual agreement, incur lower risk and demand interest, thanks to collateral and seniority of their claims over equity.
Unfortunately, most startups cannot easily access debt finance since they rarely have collateral or stable cash flows to insure their debt. Not to mention the fact that debt financiers typically shy away from innovation and R&D products because they have borne high credit risk with uncertain cash flow and revenue models.
Notwithstanding, the more a business can manage its risk levels, the lower the cost of raising capital.
That being said, different capital raising strategies depend on the nature of the business, business growth ambitions, the amount required, type of venture, market characteristics, size and timing of business cash flow, and the stage of business growth.
1. Using Crowdfunding
With crowdfunding, different individuals pool their money together to invest in, donate to, or support business initiatives of other people or organisations.
Essentially, these people may decide to pay for the manufacturing and promotion of a product and are willing to tolerate the risk in a communal way. Being a relatively new phenomenon and capital raising strategy, crowdfunding revolves around group financing, circumventing professional parties like banks or venture capitalists.
The beauty of crowdfunding is that there are numerous, easily accessible websites and platforms that allow ordinary individuals, friends, and family members to get in on the fundraising action.
2. Engaging Angel Investors
Also known as ‘business angels’, angel investors are usually high net worth individuals who invest their own funds into promising early-stage new businesses. These individuals are often experienced entrepreneurs who sometimes provide ‘smart money’ by providing advice and making introductions to suppliers, distributors and customers.
Business angels typically provide capital in exchange for equity in the company. They can also work alone or in groups.
However, when seeking angel investment, it’s better to find someone who is in the same line of business, has a point of view that your team lacks, or has had success in that line. Angel investors can be found through Angel LinkedIn groups, and ‘angel led’ crowdfunding platforms like Syndicate Room.
3. Applying for grants or loan schemes for startups
Another notable way to raise capital can be through grants obtained from government agencies and statutory authorities, as long as a founder’s business aligns with current government initiatives.
For example, Singapore has well-curated schemes and grant opportunities for startups like Startup SG Founder that matches mentors to start-ups and provides funding of up to $50,000 to first-time entrepreneurs with innovative business ideas. This scheme works by matching $5 to every $1 raised by the business owner for up to $50,000.
4. Seeking out venture capital investment.
Venture capital investment comes from the private sector and is pooled from corporations, foundations, pension funds, and organisations. Venture Capital investors typically provide liquidity and help the most promising ventures for growth.
Venture capitalists typically look at the composition of the team, the intellectual property (IP) portfolio, the state of the sector, traction and growth of the market, financial indicators and entry valuation.
Despite all these somewhat stringent requisites, venture capital can help a business scale up and stay ahead of their competition.
5. Investment companies & wealth management firms
Private wealth management firms are bodies that serve ultra-high-net-worth investors with a net worth typically exceeding $100 million. These firms may have more flexibility in deciding to invest in younger companies.
Certain investment firms that have extensive networks can also provide connections and assist with capital raising for promising projects and companies as well.
6. Initial public offering / public stock issuance
Initial Public Offering (IPO) is another capital-raising strategy that works by offering shares to members of the public in new stock issuances. Initial Public Offerings are normally carried out with the help of an investment bank.
Aside from providing access to risk capital, IPOs can help improve the public image of a company, facilitate future mergers and acquisitions, and deliver easier future access to other equity and debt markets.
Here are the Advantages and Disadvantages of 3 more common capital raising strategies::
- Angel Investment
- Venture Capital
- Wealth Management firms and Family Offices
Advantages and Disadvantages of Angel Investors
Advantages
- Shorter negotiation and closing time.
- Simpler due diligence.
- Do not typically interfere with day-to-day operations.
- Less aggressive in the terms of equity demands.
Disadvantages
- They invest smaller amounts than institutional investors.
- Highly dependent on personal networks.
Who Should Consider Angel Investors?
- Entrepreneurs attempting to raise small capital quickly with less hassle.
- Founders with large personal networks.
- Business owners that don’t want to bring in board members.
Advantages and Disadvantages of Venture Capitalists
Advantages
- Can provide a substantial amount of capital.
- Can be beneficial to firms’ innovation as VCs can extend social capital as well as access to specialised professional services and opportunities to establish alliances with third parties
- Can allow for quick expansion, depending on the company’s needs.
Disadvantages
- Aggressive terms are typically set by Venture Capitalists.
- In some instances, supposed value-add may not be transferable to the company.
Who Should Choose the Venture Capital Route?
- Founders who want to leverage industry knowledge and networks possessed by good VCs.
- Entrepreneurs who require much larger investments than angel investors.
- Business owners who desire near-term exit.
Advantages and Disadvantages of Wealth Management firms and Family Offices
Advantages
- These are a hybrid between venture capitalists and angel investors.
- They typically offer more cash than angel investors, though not as much as VCs.
- Focused on specific industries and mission-driven.
Disadvantages
- Most don’t prepare businesses for larger institutional investments.
- Most don’t offer technical value beyond cash.
- They are mostly unstructured in their process and approaches.
How to find, cultivate, and build relationships with investors?
To effectively raise capital, one requires high levels of engagement in most cases. Business owners need to constantly think of unique ways to pitch their products, or new feature releases to remind investors that they exist.
It is essential to keep business relationships going, even when an entrepreneur isn’t looking to raise money immediately. Here are a few tips for cultivating and building meaningful relationships with investors.
- Engage a lot of diverse investors.
- Build relationships and do not burn bridges.
- Develop and promote a sense of community where possible.
- Choose between metric focus or a big vision.
- Always pre-qualify and conduct due diligence on your potential investor.
- Always practice your elevator pitch and be ready for any potential investor interaction.
Conclusion
It’s important to remember that most investors are financially motivated and they will always want something in return for their investment, whether equity or part of the profits. On the other hand, some Angel investors might not ask for equity or profits but could want something in return, such as public recognition, or being part of creating jobs in a specific sector.
Furthermore, do note that attracting equity investment is not a straightforward process. Businesses and founders need to always be ‘investment ready’ to maximise the potential for success.
Overall, capital raising strategies vary in different countries and industries. Additionally, they can be affected by the characteristics of the business environment.
These include industry growth rate, labour market rigidity, technology policy schemes, constraints to IPOs, barriers to the creation of new companies, innovation intensity, capital intensity, tax rates, opportunities of exit for VC investors, level of corporate taxes, the regulatory framework, constraints to the investment activity of pension funds and insurance companies, and macroeconomic factors like interest rates, interest rates spreads, and GDP growth, etc.
For more information, reach out to us at Salzworth
