If you’re launching a start-up, you know how difficult it can be to gain traction for a new idea and make it a reality. In reality, 20.8% of private sector businesses will close within their first year. Additional ongoing funds for advertising, product development, and marketing models are also needed.
To give your business a fighting chance, you need to know as much about how to raise capital. That includes learning about raising capital.
Understanding how to raise capital for your start-up is one of the most challenging tasks for a new business owner. Among the most effective methods of raising money for early-stage companies are venture capitalists, crowdfunding, and angel investments.
Today, we’ll take a deep dive into what you need to know about capital sourcing. Start by reading our 12 facts you should know about raising capital.
1. Understand What Raising Capital Means?
Raising capital is a crucial part of any business. For a start-up, it can seem like a daunting task. In its simplest form, raising capital is the process of obtaining financial resources in the form of debt, equity, or other investments.
The hard part comes when you need to find those financial resources. The process of getting money from investors to finance a business means having a plan of action.
You’ll need a way to infuse cash into your business. You’ll start with creating a business plan. Consider a business plan as the blueprint for starting a company. Most business plans include a crucial step where you brainstorm ideas for a fundraising strategy.
Include alternative ways for borrowing money that doesn’t include a traditional lender in your business plan.
2. Understanding the Types of Capital
When starting a company, it’s crucial to understand the different types of capital you can obtain. Part of your fundraising strategy is to become familiar with the different types of capital available to you.
Most fundraising for new companies will include these types of capital.
Debt Capital
A company or organization can raise debt capital by borrowing money from a lender or investor that must be repaid with interest. This type of funding is a valuable tool for businesses. It can fund expansion, acquisition, and working capital projects.
Most debt financing is provided through loans, bonds, or other forms of debt. The investor determines the financing terms, including interest rates, repayment terms, and collateral.
However, companies that over-leverage and over-borrow can become weighed down in debt if they fail to manage their financial obligations. As a rule of thumb, a firm’s debt-to-equity ratio will combine short- and long-term.
Equity Capital
Equity capital is money that investors put into a business in exchange for shares of the business. It’s the primary source of funding for a business and can also be used to finance debt.
Once investors put money into a business, they’re at risk because if the business goes bankrupt, they won’t get their money back until all the other creditors have been paid out first. There are various reasons why people are willing to invest in a business for financial gain.
Non-dilutive Capital
Non-dilution capital is a type of financing that doesn’t require you to give up any equity in your business. It’s vital for start-ups that want to get their business up and running while also trying to keep dilution to a minimum to pay off the debt faster.
3. Advantages of Raising Capital
There are several advantages to raising capital when starting a new company. Most people either don’t have the finances on hand or don’t want to tap into their savings. The alternative is to raise financial capital.
Having access to additional financial resources is vital to your success. Additional resources will allow you to focus on the other aspects of your business plan, like finding the perfect location for your business. You’ll also need marketing and inventory.
Another advantage of raising capital is the ability to expand your business when the time is right. There is no magical time frame for when a new business will blossom. However, it’s a proven fact that many new businesses never make it to their one-year anniversary.
A third advantage is known as the potential increase in the business valuation. It is one of the things investors consider when critiquing your fundraising strategy.
Your company’s potential value refers to the amount of money held back by an asset or thing because of its unique place in the market or how it’s set up. It’s usually measured in terms of people, patents, intellectual property, ideas, and more tangible proof of your business proposal.
4. Ways to Secure Capital
There are different ways a raise financial capital. When you decide to start a business, it is vital that you look at all options. Once you clearly understand each method, you can determine which methods work best for your business plan.
Luckily, no rule says you can only choose one fundraising method for new companies. Below are your many options to explore.
Debt Financing
Debt financing consists of borrowing money from a traditional lender. To go this route, you need to have a decent credit score. Plus, it helps to have an established relationship with the lender already.
- Bank loans
- Credit cards
- Line of credit
Financing debt using these methods often means a more extended repayment period and interest terms based on your creditworthiness.
Equity Financing
- Initial public offering
- Private placement
- Secondary market sales
Crowdfunding
- Kickstarter
- Peer-to-peer lending
- Donation-based crowdfunding
Angel Investors
- High-net-worth individuals
- Institutional investors
- Venture capital funds
After exploring each of these options, you can better determine which is best for your fundraising strategy.
5. Have a Strong Business Model
We’ve discussed the business plan as an outline of your business. The business model will show how the business will function. Basically, the main idea behind the business is the business model, and the business plan shows how it could work.
It can also be seen as a way for a company to make money. The business plan also plays a role in how a company presents its fundraising strategy, and it’s used to show how well the company is doing in the short term.
It’s important to compare how business models work to see how they can help you. Business models can help you make sure you’re making money and help you figure out what services customers value.
They also show how money comes into the business from the customers. Every business has different ways of making money. Still, the goal of a business model should be to make the money process as simple as possible.
Focusing on the significant income generators is the objective.
6. Present a Compelling Pitch
If you’re looking to pitch your business idea to potential partners and investors, a business pitch is the perfect way to do it.
You’ll need to create a persuasive presentation that looks professional and can be easily edited. Presentations often require last-minute changes. Your business pitch will depend on your audience.
There are three types of pitches to consider.
Investor Pitch
An investor business pitch usually takes around 45 minutes and is between you and the investor. You’ve reached out to them, and they’ve accepted your request for a meeting.
Competitive Pitch
You’re looking at five to ten minutes with a business pitch competition. You’ll be pitching your idea to multiple investors who are hearing pitches for other new businesses the same day. Think about the TV show Shark Tank.
Elevator Pitch
An ‘elevator’ pitch is the most intense type of pitch, but it only takes around 30 seconds. You happen to be in the right place at the right time, and an investor agrees to hear a brief synopsis of our business idea. The elevator pitch determines if the investor will sit for your full investor pitch.
7. Provide an Exciting Term Sheet
If you’re a start-up looking for financing, create a term sheet. It’s a legal document for the venture capitalist that outlines the terms and conditions of an investment.
In about 500 words, you’ll express your ideal financial terms. You’ll note your start-up’s worth, who will have control over it, and who stands to gain the most if you sell or go public.
It’s like a letter of intent, and once it’s signed, it’s up to you and the founding team to negotiate. Don’t sign a term sheet if you’re not ready to negotiate the entire investment deal.
8. Don’t Include Intellectual Property
Intellectual property is the rights you have for something you’ve created. That creation can be in the form of a design, idea, copyright, trademark, or patent.
Rights to your intellectual property should never become part of negotiations when you’re trying to raise financial capital. The risk of losing what you’re worked hard for is too significant if you can’t repay the loan.
9. Don’t Over Sell
Overselling what your business will offer is never a good fundraising strategy. The reason is, at some point, you’ll need to prove to the investor what you promised.
When you’re trying to raise financial capital, always be realistic about your objectives. Don’t be afraid to share with the investor if you haven’t figured something out yet. They’ve probably already picked up on it in your presentation.
If the investor is truly interested, they may have a solution that brings your idea full circle.
10. Your Idea is Not New
Have you heard the phrase “There’s nothing new under the sun?” Keep this in mind when you’re fundraising for new companies. Almost every company, every invention, and every concept you can come up with is a new version of something that already exists.
Instead of pitching your idea as something new, show the investor why it’s unique and will outperform similar businesses already on the market.
11. Have a Strong Defense
Can you defend your new business when you’re in front of the investor, asking them to invest in your new business? If you’re unsure, you’re not ready to raise financial capital.
If you keep your fundraising strategy focused on the facts, being able to defend against the investor’s questions is more effortless. Here are some tips to remember when fundraising for new companies and preparing for the investor’s questions:
- Create a script
- Never fudge numbers
- Don’t fear being transparent
- Be realistic but optimistic
- Prepare for hard questions
Show the investor you’re ready to pitch your idea. Work with a designer who can create a dynamic presentation as part of your strategy. Presentations should use powerful images, charts, and graphs.
The text needs to be a mixture of standard and bold fonts. Stick to your talking points and stay away from information that’s not needed at this point.
Show the investor you respect their time and are ready to present your ideas. Send them an advanced simplified version of your presentation. By doing so, you’re setting the expectations for the meeting.
12. Close the Deal
Having an exit strategy is essential for a successful investor pitch. Most people don’t think it’s necessary, but your investors do. It would be best to let them know what happens after you launch your business, what you plan to do next, and who you think would be interested in buying it from you.
Having an exit strategy also shows you’re strategic and ensures your investors know what’s next.
Show enthusiasm, present facts, and share your expectations. Last, thank the potential investor for their time, attention, and feedback.
Let Us Help You Get Your Money!
Raising capital for your start-up is one of the most challenging tasks for a new business owner. It’s an integral part of starting a company. Knowing the types of capital available and the advantages and sources of capital can help guide your decisions.
Consulting with a professional may be beneficial when considering capital raising options for a fundraising strategy.
If you want to know more about how to make your plan to raise capital even better, we can help you build a winning strategy. Let’s schedule a time to work together.
