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The Essential Guide to Capital Raising

Show Notes Of Podcast

What is capital raising?

Capital raising (or a “capital raise”) is the process through which a company raises funds from external sources to achieve its strategic goals. These goals could include investment in the business (hiring, technology, marketing, and PPE) or externally (part or full investments in other assets, such as M&A, joint ventures, and strategic partnerships).

In broad terms, there are three ways in which companies can raise capital: Debt, equity or a combination of the two, otherwise known as hybrids.

In many respects, there has never been a better time for companies to raise capital.

Interest rates are hovering close to zero for a longer period than at any stage of history, the government has just made an historic cash injection into the economy, and there is an ever-growing number of funding sources to choose from.

DealRoom works with hundreds of companies both seeking and providing capital on an ongoing basis, providing them with a virtual deal room that smoothens the process for them, whichever side of the transaction they’re on.

In this article, we share some of the insights we’ve gleaned from helping companies through this process. 

In many respects, there has never been a better time for companies to raise capital.

Interest rates are hovering close to zero for a longer period than at any stage of history, the government has just made an historic cash injection into the economy, and there is an ever-growing number of funding sources to choose from.

DealRoom works with hundreds of companies both seeking and providing capital on an ongoing basis, providing them with a virtual deal room that smoothens the process for them, whichever side of the transaction they’re on.

In this article, we share some of the insights we’ve gleaned from helping companies through this process. 

What is capital raising?

Capital raising (or a “capital raise”) is the process through which a company raises funds from external sources to achieve its strategic goals. These goals could include investment in the business (hiring, technology, marketing, and PPE) or externally (part or full investments in other assets, such as M&A, joint ventures, and strategic partnerships).

In broad terms, there are three ways in which companies can raise capital: Debt, equity or a combination of the two, otherwise known as hybrids.

Debt raising

Debt raising is where a company raises funds through debt: A third party provides the company with cash and in return, they receive the money with interest over a period of time agreed upon between the company and the lender. 

Equity raising

Equity raising is where a company raises funds through selling its own equity to outside investor(s). This tends to be more common in early stage companies, where novice entrepreneurs can gain expert industry advice in addition to cash.

Hybrids of debt and equity

A convertible note is considered a hybrid of debt and equity. Initially structured as a loan, a convertible note includes a provision that allows the loan and its interest to be converted to company equity at an agreed point in the future.

Why do companies raise capital?

Growth is, for all intent and purposes, the major reason why companies raise capital. Whether it’s a younger firm looking to raise capital with a venture capital firm to hire more programmers, a mature industrial firm looking to acquire an industry rival, or a distressed company looking to restructure in some manner, the underlying motive in almost all cases for raising capital is growth.

Growth being the implicit motive, the explicit motives for raising capital are as follows:

  • Mergers and Acquisitions: Few companies have the financial capability of acquiring a firm outright without at least some debt to fund the transaction. Lenders usually request details of the M&A transaction to see how their capital will be returned.
  • Purchase of fixed assets: Growing companies need to regularly reinvest in PPE (property, plant, and equipment), with this being the second most common motive for seeking to raise capital.
  • Working capital: Usually early stage companies seek to raise working capital to fund their growth plans. The most common requirements are capital for marketing, technology, and hiring.
  • Restructuring: A general category that could include anything from rebranding the company to a management reshuffle to shifting company headquarters. All are going to cost the company money for which it may need to raise capital.

Which companies provide capital?

Traditionally, banks were the go-to destination for companies looking for debt but the universal need to raise capital has led to a plethora of options for companies of all sizes.

Most of the following outlets for raising capital will cater for both debt and equity raising, with specifics depending on the institution in question.

  • Banks: Banks remain one of the most common sources of capital for companies, particularly when a company has a good track record with the bank. Equity raises can also occur with banks but tend to be far less common.
  • Private debt: Private debt - that is, debt funded by non-public financial institutions - has seen huge growth over the past decade, with the caveat for businesses that interest rates on loans usually begin at the 6-7% mark.
  • Private equity: With private equity companies sitting on an estimated $2 trillion of ‘’dry powder’ (funds waiting to be used), private equity currently offers an excellent way for companies of all sizes to raise equity capital.
  • Angel Investors/Seed Investors/Venture Capital: These funds usually seek an equity share of a small, fast-growing business and can build in a debt component. A major advantage here is the ability to tap into their network and expertise.
  • Public markets: The main reason that companies go public is to raise equity capital: Selling off slices of the company on a publicly traded index to fund the company’s expansion.
  • Small Business Association (SBA): SBA loans are a hugely popular means for small companies to access significant amounts of capital at very attractive rates, the only drawback being the time it can take to access funds.

Which documents are required to raise capital?

At the very least, a company will require a business plan or pitch deck to raise capital.

The aim of these documents is to show investors that the cash flows generated by the company are sustainable enough to ensure that it will get its money back with interest (in the case of a debt raise) or achieve what they deem to be an attractive return on investment (in the case of an equity raise).

More formally, offering memorandums are used by companies seeking to raise equity capital. An offering memorandum has to comply with securities laws designated by the SEC.

This formal document provides registered investors with a detailed overview of the company’s financials and operations. This document also invariably features a subscription agreement that defines the terms of the investor’s participation in the company’s equity offering.

Conclusion

Whatever your company’s funding needs, you’re going to need to assemble a range of documents to get you through the process.

DealRoom has developed a software that has been proven across hundreds of capital raises by companies of all sizes. Talk to us today about how our VDR solutions can help you achieve your goals for capital raising.

dealroom demo

In many respects, there has never been a better time for companies to raise capital.

Interest rates are hovering close to zero for a longer period than at any stage of history, the government has just made an historic cash injection into the economy, and there is an ever-growing number of funding sources to choose from.

DealRoom works with hundreds of companies both seeking and providing capital on an ongoing basis, providing them with a virtual deal room that smoothens the process for them, whichever side of the transaction they’re on.

In this article, we share some of the insights we’ve gleaned from helping companies through this process. 

What is capital raising?

Capital raising (or a “capital raise”) is the process through which a company raises funds from external sources to achieve its strategic goals. These goals could include investment in the business (hiring, technology, marketing, and PPE) or externally (part or full investments in other assets, such as M&A, joint ventures, and strategic partnerships).

In broad terms, there are three ways in which companies can raise capital: Debt, equity or a combination of the two, otherwise known as hybrids.

Debt raising

Debt raising is where a company raises funds through debt: A third party provides the company with cash and in return, they receive the money with interest over a period of time agreed upon between the company and the lender. 

Equity raising

Equity raising is where a company raises funds through selling its own equity to outside investor(s). This tends to be more common in early stage companies, where novice entrepreneurs can gain expert industry advice in addition to cash.

Hybrids of debt and equity

A convertible note is considered a hybrid of debt and equity. Initially structured as a loan, a convertible note includes a provision that allows the loan and its interest to be converted to company equity at an agreed point in the future.

Why do companies raise capital?

Growth is, for all intent and purposes, the major reason why companies raise capital. Whether it’s a younger firm looking to raise capital with a venture capital firm to hire more programmers, a mature industrial firm looking to acquire an industry rival, or a distressed company looking to restructure in some manner, the underlying motive in almost all cases for raising capital is growth.

Growth being the implicit motive, the explicit motives for raising capital are as follows:

  • Mergers and Acquisitions: Few companies have the financial capability of acquiring a firm outright without at least some debt to fund the transaction. Lenders usually request details of the M&A transaction to see how their capital will be returned.
  • Purchase of fixed assets: Growing companies need to regularly reinvest in PPE (property, plant, and equipment), with this being the second most common motive for seeking to raise capital.
  • Working capital: Usually early stage companies seek to raise working capital to fund their growth plans. The most common requirements are capital for marketing, technology, and hiring.
  • Restructuring: A general category that could include anything from rebranding the company to a management reshuffle to shifting company headquarters. All are going to cost the company money for which it may need to raise capital.

Which companies provide capital?

Traditionally, banks were the go-to destination for companies looking for debt but the universal need to raise capital has led to a plethora of options for companies of all sizes.

Most of the following outlets for raising capital will cater for both debt and equity raising, with specifics depending on the institution in question.

  • Banks: Banks remain one of the most common sources of capital for companies, particularly when a company has a good track record with the bank. Equity raises can also occur with banks but tend to be far less common.
  • Private debt: Private debt - that is, debt funded by non-public financial institutions - has seen huge growth over the past decade, with the caveat for businesses that interest rates on loans usually begin at the 6-7% mark.
  • Private equity: With private equity companies sitting on an estimated $2 trillion of ‘’dry powder’ (funds waiting to be used), private equity currently offers an excellent way for companies of all sizes to raise equity capital.
  • Angel Investors/Seed Investors/Venture Capital: These funds usually seek an equity share of a small, fast-growing business and can build in a debt component. A major advantage here is the ability to tap into their network and expertise.
  • Public markets: The main reason that companies go public is to raise equity capital: Selling off slices of the company on a publicly traded index to fund the company’s expansion.
  • Small Business Association (SBA): SBA loans are a hugely popular means for small companies to access significant amounts of capital at very attractive rates, the only drawback being the time it can take to access funds.

Which documents are required to raise capital?

At the very least, a company will require a business plan or pitch deck to raise capital.

The aim of these documents is to show investors that the cash flows generated by the company are sustainable enough to ensure that it will get its money back with interest (in the case of a debt raise) or achieve what they deem to be an attractive return on investment (in the case of an equity raise).

More formally, offering memorandums are used by companies seeking to raise equity capital. An offering memorandum has to comply with securities laws designated by the SEC.

This formal document provides registered investors with a detailed overview of the company’s financials and operations. This document also invariably features a subscription agreement that defines the terms of the investor’s participation in the company’s equity offering.

Conclusion

Whatever your company’s funding needs, you’re going to need to assemble a range of documents to get you through the process.

DealRoom has developed a software that has been proven across hundreds of capital raises by companies of all sizes. Talk to us today about how our VDR solutions can help you achieve your goals for capital raising.

dealroom demo

What is DealRoom?

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