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The Essential Guide to Capital Raising

Kison Patel
CEO and Founder of DealRoom
Kison Patel

Kison Patel is the Founder and CEO of DealRoom, a Chicago-based diligence management software that uses Agile principles to innovate and modernize the finance industry. As a former M&A advisor with over a decade of experience, Kison developed DealRoom after seeing first hand a number of deep-seated, industry-wide structural issues and inefficiencies.

CEO and Founder of DealRoom

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 is designed to smoothen the process of raising funds, whichever side of the transaction they’re on.

In this article, we share some of the insights we’ve gathered from helping companies through their capital raise process.

What is Capital Raising?

Capital raising definition refers to a process through which a company raises funds from external sources to achieve its strategic goals, such as investment in its own business development, or investment in other assets, for example M&A, joint ventures, and strategic partnerships.

Types of Capital Raising

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

Types of Capital Raising

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.

How to Raise Capital for Your Business

There has never been a better time to raise capital.

Although interest rates are due to rise in the coming years, over a decade of interest rates hovering near zero mean that there is plenty of cash out there just waiting to be utilized on a good project.

Unused funds in private debt - that is, debt held by non-financial institutions - are currently estimated at around $2 trillion.

Here’s how to get part of the action:

Step 1: Clean up your financials

Most lenders will focus on two things: The executive summary of your business plan (see next bullet point) and your financial statements. Ensure both are as good as they can be. That means paying off credit card debt so that it’s not on the balance sheet, becoming more aggressive in the short term about credit terms so that your receivables are lower, and maybe even cutting back on some operating expenses.

Step 2: Write a business plan

Whether the funds are coming from a financial institution, a private equity-style fund, independent investors, or even the SBA, it pays to have a strong business plan that shows exactly why you need to raise capital, and why the lender can be sure that they’ll receive the principal with interest within an agreed timeframe.

Step 3: Emphasize the sources and uses

As part of the business plan, know exactly where the funds will be used. If you’re acquiring a new piece of equipment, make it explicit. If you’re hiring for sales and marketing, show how the funds will be used (what percentage on social media, what percentage on a sales team, etc.). Show as much detail as possible - this also serves to give you insight into your own business.

Step 4: Make a long-list

When looking to raise capital, it’s useful to keep in mind that you’re not the only one. Everybody wants more money. People who are providing it are typically overrun with requests for capital. Most businesses will be trying to convince them that theirs is better than all the others, so don’t be surprised when the first ten companies don’t jump. The capital raising process can take a significant amount of time. Buckle up.

"From data storage and sharing to investor communication and progress reports, DealRoom helped readily execute Pax8’s entire investor management process." -- Jefferson Keith SVP, Corporate Development at Pax8

The process of raising funds is easier said than done, however.

Interested in learning more about the Capital Raising Process?

Download our Capital Raise Playbook that outlines and walks you through the process of raising capital for your business.

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:

Why do Companies Raise Capital?

Read also: Venture Capital Deal Structures: Complete Guide

Who Does the Capital Come From?

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. Learn more about how does venture capital work here.

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.

Ways of Capital and Equity Raise for Different Business Sizes

Depending on the size of your business, there are different ways you can raise capital. The process of raising capital for a private company will for example be different than for a public company.

Following are typical routes of capital raising for different business sizes:

Startups

  • Friends and family
  • Public or private business incubators
  • Seed investors
  • VC funds

Small and medium-sized enterprises (SMEs)

  • Private equity investors (those aimed at SMEs)
  • Family offices

Large Companies

  • Initial Public Offering (IPO)
  • Private equity investors (those aimed at larger companies)
  • Family offices
  • Wealth funds and asset managers

How To Get Ready for the Capital Raising Process?

The capital raising process can be complex and overwhelming, especially if it's your first time.

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

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).

Offering Memorandum

Offering memorandums are used by companies seeking to raise equity capital. It 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 process is called venture capital due diligence.

This document also invariably features a subscription agreement that defines the terms of the investor’s participation in the company’s equity offering.

To streamline this otherwise complex process, we put together a Capital Raising Playbook that helps you tick all the boxes.

Get a free sample by scheduling a demo down below.

venture capital due diligence checklist

Capital Raise via Equity: Pros and Cons

Pros

  • No debt to repay: The best reason to finance using equity is the lack of debt on your company’s balance sheet. There are none of the monthly interest payments, and the risk of being overloaded with debt - a killer for many companies - is reduced.
  • Enhanced input from industry experts: Equity financing will often come from companies that have people with experience in your industry. That gives you increased access to investor intelligence, allowing you to tap into insights not readily available to your competitors.

Cons

  • Higher long-term costs: Although equity financing may seem cheaper in the short-run, in the long-run, it means handing over a perpetual share of profits, and - if you decided to sell the company - a share of the payoff from your divestment.
  • Potential conflicts: By providing outsiders with access to your company, you’re automatically opening yourself up to potential conflicts. Even with the best of intentions, differences around how the company is managed and its vision can lead to conflicts in the mid- to long-term.

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.

fundraising case study

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 is designed to smoothen the process of raising funds, whichever side of the transaction they’re on.

In this article, we share some of the insights we’ve gathered from helping companies through their capital raise process.

What is Capital Raising?

Capital raising definition refers to a process through which a company raises funds from external sources to achieve its strategic goals, such as investment in its own business development, or investment in other assets, for example M&A, joint ventures, and strategic partnerships.

Types of Capital Raising

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

Types of Capital Raising

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.

How to Raise Capital for Your Business

There has never been a better time to raise capital.

Although interest rates are due to rise in the coming years, over a decade of interest rates hovering near zero mean that there is plenty of cash out there just waiting to be utilized on a good project.

Unused funds in private debt - that is, debt held by non-financial institutions - are currently estimated at around $2 trillion.

Here’s how to get part of the action:

Step 1: Clean up your financials

Most lenders will focus on two things: The executive summary of your business plan (see next bullet point) and your financial statements. Ensure both are as good as they can be. That means paying off credit card debt so that it’s not on the balance sheet, becoming more aggressive in the short term about credit terms so that your receivables are lower, and maybe even cutting back on some operating expenses.

Step 2: Write a business plan

Whether the funds are coming from a financial institution, a private equity-style fund, independent investors, or even the SBA, it pays to have a strong business plan that shows exactly why you need to raise capital, and why the lender can be sure that they’ll receive the principal with interest within an agreed timeframe.

Step 3: Emphasize the sources and uses

As part of the business plan, know exactly where the funds will be used. If you’re acquiring a new piece of equipment, make it explicit. If you’re hiring for sales and marketing, show how the funds will be used (what percentage on social media, what percentage on a sales team, etc.). Show as much detail as possible - this also serves to give you insight into your own business.

Step 4: Make a long-list

When looking to raise capital, it’s useful to keep in mind that you’re not the only one. Everybody wants more money. People who are providing it are typically overrun with requests for capital. Most businesses will be trying to convince them that theirs is better than all the others, so don’t be surprised when the first ten companies don’t jump. The capital raising process can take a significant amount of time. Buckle up.

"From data storage and sharing to investor communication and progress reports, DealRoom helped readily execute Pax8’s entire investor management process." -- Jefferson Keith SVP, Corporate Development at Pax8

The process of raising funds is easier said than done, however.

Interested in learning more about the Capital Raising Process?

Download our Capital Raise Playbook that outlines and walks you through the process of raising capital for your business.

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:

Why do Companies Raise Capital?

Read also: Venture Capital Deal Structures: Complete Guide

Who Does the Capital Come From?

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. Learn more about how does venture capital work here.

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.

Ways of Capital and Equity Raise for Different Business Sizes

Depending on the size of your business, there are different ways you can raise capital. The process of raising capital for a private company will for example be different than for a public company.

Following are typical routes of capital raising for different business sizes:

Startups

  • Friends and family
  • Public or private business incubators
  • Seed investors
  • VC funds

Small and medium-sized enterprises (SMEs)

  • Private equity investors (those aimed at SMEs)
  • Family offices

Large Companies

  • Initial Public Offering (IPO)
  • Private equity investors (those aimed at larger companies)
  • Family offices
  • Wealth funds and asset managers

How To Get Ready for the Capital Raising Process?

The capital raising process can be complex and overwhelming, especially if it's your first time.

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

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).

Offering Memorandum

Offering memorandums are used by companies seeking to raise equity capital. It 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 process is called venture capital due diligence.

This document also invariably features a subscription agreement that defines the terms of the investor’s participation in the company’s equity offering.

To streamline this otherwise complex process, we put together a Capital Raising Playbook that helps you tick all the boxes.

Get a free sample by scheduling a demo down below.

venture capital due diligence checklist

Capital Raise via Equity: Pros and Cons

Pros

  • No debt to repay: The best reason to finance using equity is the lack of debt on your company’s balance sheet. There are none of the monthly interest payments, and the risk of being overloaded with debt - a killer for many companies - is reduced.
  • Enhanced input from industry experts: Equity financing will often come from companies that have people with experience in your industry. That gives you increased access to investor intelligence, allowing you to tap into insights not readily available to your competitors.

Cons

  • Higher long-term costs: Although equity financing may seem cheaper in the short-run, in the long-run, it means handing over a perpetual share of profits, and - if you decided to sell the company - a share of the payoff from your divestment.
  • Potential conflicts: By providing outsiders with access to your company, you’re automatically opening yourself up to potential conflicts. Even with the best of intentions, differences around how the company is managed and its vision can lead to conflicts in the mid- to long-term.

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.

fundraising case study

What is DealRoom?

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