What Raising Capital Means for Your Business

Running a business takes a lot of work. Everything from the initial idea to how to fund it rests on your shoulders, including how to increase visibility and figure out your financials.

Most entrepreneurs pour their own money and resources into their endeavors to get started, but few of them have the cash reserves to fund their businesses on their own for the long term.?

This is when entrepreneurs usually begin raising capital.

In its purest form, raising capital is the process a business goes through to bring money in so it can get started, grow, or transform in some way.?

Having capital on hand enables you to scale your business or at least begin to lay the groundwork to scale. For example, you can hire more employees to serve your customers better or free up more time for you to work on the business instead of in it. Or you can invest in software and tools to streamline operations or create a more luxurious user experience.?

There are generally two categories you can explore as a business owner looking to raise capital: equity and debt. Equity raising means exchanging a portion of business ownership for capital (or funding). Debt raising means exchanging debt for funding, like loans or a line of credit.

This article will focus largely on equity raising. However, most companies use a hybrid strategy when financing their work. Debt raising is helpful to solve short-term cash flow problems and to fund improvements to your brick-and-mortar location.?

Why is capital raising necessary for business?

Few companies can sustain growth using only net profits. In fact, the most significant risk for a small business is running out of working capital or the cushion between its assets and liabilities. As the saying goes, it takes money to make money. At least, that is the case for almost all of today’s startups.

When you raise capital for your business, you’re keeping the lights on, paying your employees, and building momentum in your entrepreneurial journey. You’re also indicating that your business is a viable one, as most investors won’t risk spending money on an idea that doesn’t have potential.??

Raising capital also demonstrates that your business plan and financial documents are in order. Banks and investment firms require extensive paperwork before approving a loan or investing in a business to protect themselves from risk and someone taking off with their money. Openly raising capital shows that your startup or small business is organized, mature, and aware of the responsibility you owe to consumers.

What are the pros and cons of raising capital?

When pursuing equity capital, you can do so either privately or publicly. Private equity keeps any exchange of stock in your business to a closed group of people and out of the general public’s reach. Public equity means your business is publicly traded on a stock exchange, allowing anyone to purchase stocks or shares of the business.

As with most things, raising capital, either publicly or privately, has pros and cons.

The benefits of raising capital include not having to pay back the investment, sharing the risk of being in business, and the chance to bring in someone with knowledge and experience in running profitable businesses.

The only real disadvantage of raising capital is that you no longer hold sole ownership of your company. When you accept an equity investor, you give them a piece of your business for better or worse.

How do you raise capital to grow a business?

Raising capital takes time, networking, and confidence. You have to believe in the success of your business and be able to sell it. But you can rarely go from a self-funded startup to an initial public offering (IPO). Instead, there are funding stages you must complete to demonstrate the viability of your business model and product or service, steadily growing and expanding while attracting larger investors.?

Stages of Raising Capital

Pre-seed

The pre-seed stage, also known as the friends and family round, is the initial phase of raising capital. This marks the first time you ask someone to back their belief in your business with financial resources (or you invest additional money of your own into the company). You usually don’t have to complete a valuation before pre-seed funding. And most pre-seed investments are accomplished via convertible note, requiring an exchange of equity or a stake in the company when you raise the next funding round.

Seed funding

The seed funding stage marks the official start of your equity funding endeavors. Seed funding usually finances a company’s first steps into product development or market research. Since companies in a seed funding stage don’t have a proven track record of success, they usually accept funding from angel investors. Angel investors almost always require an equity stake in the company for the riskier investment they make.?

Seed funding varies from industry to industry but can produce investments of $10,000 to $2 million for startups. For some companies, this is all the money they need to run a thriving business and reach their goals as business owners.

Series A

The next phase of raising capital is Series A. This round of funding requires strategy in addition to a great idea. Investors in Series A funding want to know that the companies they support have a strong long-term plan for building a successful and profitable business.?

Typically, companies in Series A have up to a $24 million valuation and raise anywhere from $2 million to $15 million in this stage. The investor landscape changes dramatically, too. Because Series A companies have more to prove, the investors take on lower risk. That’s why most investors in Series A are usually traditional venture capital firms.

Companies that participate in Series A funding are not limited to accepting just one investor either. They can shop their idea around, but with every investor they commit to, they’re giving up part of their ownership in the business. Many Series A companies aim to secure one larger anchor investor; then, they may entertain smaller investment offers.

Series B

Companies that move on to Series B funding are larger companies that want to expand and increase the demand for products. These companies are typically valued at $30 million to $60 million by the time they reach Series B.?

This means they are probably extremely popular with their target audiences and have built a loyal and large user base.?

Companies in Series B are shopping their idea to most of the same firms as their Series A round, but they also have access to venture capital firms that focus only on late-stage investing.?

Series C

Just because a company is successful (and raking in millions of dollars), it doesn’t have to slow down on its pursuit of funding. Series C funding is meant for companies that already excel in one niche but have their sights on expansion.?

Companies in Series C need a valuation of at least $118 million, though many of them are valued at much more than that.??

Series C funding helps companies reach new markets and establish themselves as leaders in their industries. It is also seen as a mark of confidence before a company considers an IPO.?

Hedge funds and investment banks are usually the largest players in Series C funding.

With each phase of funding, companies raise capital per their business goals and market trends. Some companies complete many rounds of funding to reach their goals. Others are set after just one round. There’s no one “right” way to fund your business idea, but bringing in outside expertise is almost as valuable as the boost in cash flow.

Join us for Capital Connects in March 2023

Are you in pre-seed or Series A funding and looking for new opportunities for capital raising? Join us at Capital Connects in March 2023!?

At Launch Greensboro, we host an annual pitch competition for pre-seed and Series A stage companies. Entrepreneurs can take part in one of two competitions, a two-minute lightning round and a six-minute pitch session, to get in front of new investors and opportunities to raise capital. Plus, all participants receive at least two hours of professional preparation from our staff here at Launch.?

You can apply to Capital Connects through November 20, and you will receive notification of your next steps by December 15.?

Learn more and apply here.

Glossary

Entrepreneurship doesn’t always come with a dictionary. We’ve listed some of the words and phrases we’re asked about a lot below.?

Angel investor - A high-net-worth individual who invests his or her own money directly into a business with the expectation of an equity stake in the company.

Benchmark - A goal or milestone by which a company measures its success.

Bootstrapped - When a company finances itself from personal resources or revenue.

Buyout - The full purchase of stock that an individual or investor holds in a company.

Capital - The money, wealth, goods, and services accumulated by a business for growth

Debt - An amount owed to an individual or entity for borrowed money to be repaid on an agreed-upon date, typically with interest. This includes a loan.

Debt raising - The exchange of debt for capital.

Equity - An ownership interest in a company.

Equity raising - The exchange of a percentage of business ownership for capital.

Ground floor - The beginning of a company or business venture.

Incubator - An organization that primarily focuses on early-stage companies and their development.

Initial public offering (IPO) - When a privately-held company lists shares of itself for public consumption.

Liquidation - The process of selling off a company’s assets.

Pivot - When a startup changes direction with its business strategy.

Return on investment (ROI) - The money an investor gets back on his or her initial investment into the company.