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Raising Capital: The Best Ways to Raise Money for a Business

• 11 min read

Jaclyn Robinson, Senior Manager of Content Marketing at Crunchbase

Capital is the lifeblood of business. Without capital, you cannot continue to fund your daily operations. Raising money for a business is just the first step to get it off the ground. Beyond that, you’ll need to raise funds to keep it moving.

According to the U.S. Bureau of Labor Statistics , lack of capital is one of the leading reasons businesses fail to survive, with just 25 percent of businesses lasting past 15 years.

Raising capital for your new venture is the initial order of business, so let’s dive into what it means and how to do it.

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What is capital?

Capital is technically anything that can be quantified with a dollar figure within a business setup. A factory’s machinery counts as capital. Intellectual property could also be classified as a type of capital.

However, most people use the capital for business in terms of the money they have in the bank. Financial capital is often the difference between success and failure, so let’s talk about how to go about raising funds.

Types of capital for business

Raising capital begins with understanding your options for injecting that vital liquidity into your business.

Capital raising can come from a variety of sources. The right option for your company largely depends on your current circumstances and weighing the pros and cons of each option. Here are a few different types of capital.

Debt capital

Debt capital is the most common way startups get the money together to launch their businesses. The concept of debt capital is that you borrow money to raise the necessary funds.

Traditional bank loans, credit cards, online lenders and Federal loan programs are just some of the ways you can start raising capital via debt.

The average small business needs $10,000 to get started, but it depends on your industry and how ambitious you happen to be. Existing businesses will need to ensure they have a positive credit history to secure loans. In contrast, new business owners may use their personal credit scores to secure a loan.

The way debt capital is used depends on the size of the business. Although a small business may use debt capital by taking out a loan, corporations often choose to issue bonds, especially if national interest rates are low.

If looking at capital for business by taking out debt, watch your debt-to-income ratio to ensure you aren’t drowning in debt.

• It doesn’t dilute your ownership
• No lender claims on future profits
• Interest is tax-deductible
• Potentially higher interest rates
• May make it difficult to secure third-party equity investment

Equity capital

Equity capital comes in two forms: private and public equity capital.

Private and public equity capital comes in the form of shares in the company. The distinction is that a publicly traded company can be bought on the open market by anyone, whereas private equity is strictly traded among a closed group of investors.

When someone purchases a share in your company, they’re providing capital in the form of ownership. How much each share is worth depends on how many total shares you’ve got.

For example, if you have 100 shares and sell one share, each share is worth 1 percent of your company. Stock splits also allow you to create more shares to sell while diluting everyone’s ownership in the company.

It’s how small and growing companies can make a big splash.

• No repayment requirements
• Bring in partners with expertise and talent
• You no longer own 100 percent of your company
• Time and effort required to secure equity investors

Net earnings capital

The final way to raise the funds is by increasing your net earnings. In other words, rather than giving away part of your company or taking on debt, you’re working to improve your output and profitability.

Net earnings capital is harder to come by because it’s typically powered by raising money in other ways to up your capacity and increase your reach.

However, if you’ve already got money from investors and are looking to expand even further, net earnings capital is a great way to drive your business forward.

• No lost ownership
• Powered by genuine company growth
• Difficult to come by
• Higher taxes

How to raise money for a business

How do you go about raising capital if you are going into business for yourself? A complete understanding of capital raising is crucial to getting the funding needed to launch your new venture.

Determine your capital need

Before you can determine capital need, you’ll need to develop a long-term business plan and your company’s strategic goals. If you’re already operating, you have a leg up in understanding what it costs to run your business. If you’re just starting out, some of the expenses you need to take into account include:

• Office space
• Hiring new employees
• Purchasing technology/other hardware and software tools
• Marketing budget

You must strike a balance between having enough capital and not taking out too much capital. A lack of capital could indicate a broader weakness in your plan and the wider market. On the other hand, too much capital and you may find yourself giving away more equity than you intended or facing high monthly debt repayments.

Choose a funding type

You’ll almost certainly be choosing between equity capital and debt capital. When approaching venture capitalists, you will most likely need to give away a portion of the company, as well as a degree of control over business decisions.

With non-institutional investors, you’ll be taking on debt. Match up the potential debt repayments with your projected monthly revenue.

What works for one business may not work for another, so make sure you carefully think through your funding type.

Business valuation

The fundraising process begins with determining a rough value for the company. The entrepreneur needs to estimate how much their company is worth based on its potential. Equally, your assumptions need to be rational.

When seeking private equity or venture capital fundraising, you’ll need a pre-money and post-money valuation of the business. These estimates will determine how much of your company you’ll be giving away to investors.

Your post-money business valuation is the pre-money valuation plus any new money. Investors will ask probing questions regarding how you came to your pre-money valuation, so make sure you can show your rationale.

Connect with investors

It’s time to begin pitching your idea to investors. Keep this as condensed as possible because the more time you spend meeting with investors, the less time you have to manage the day-to-day operations of your business.

The easiest way to seek out investors is to leverage your professional network. Getting introductions in this way can be a launchpad for connecting with other interested parties.

The investor will present you with a term sheet if you receive an offer. This short document covers the primary points of the deal, such as how much is being invested, the amount of equity given in return, and any other high-level conditions.

You’ll have the opportunity to negotiate, but negotiation becomes significantly harder the moment you sign the term sheet.

Following funding rounds

Most successful companies don’t have just a single round of funding. A single round of funding may just be the jumping-off point for approaching more prominent investors.

Before embarking on your subsequent funding rounds, your pre-money value should be higher than the post-money value of the last round of funding. Why does this matter? New investors want to see that you’ve put your capital to good use and that this is a growing business.

Throughout each round of funding, you should be looking to fund anywhere from 12 to 18 months of operations before moving on to the next round.

Later rounds are traditionally more challenging to secure funding because investors who buy-in at later stages want to see proven business growth and momentum.

What’s the key to securing investment?

What investors want is simple: a positive (ideally outsized) return on their investment. Some may expect this return quickly, while others may be willing to stick it out for long-term growth.

Focus on the hard numbers and demonstrate that you’ve carried out meticulous research into your target market and the competition. Give accurate projections without exaggerating for effect. Experienced investors are well aware of business valuations, and being too ambitious could curtail your chance to raise money.

Condense your pitch and focus on the hard numbers that demonstrate to investors that they’re highly likely to see a positive return on their money.

9 things to know about raising capital

Figuring out how to raise funds can be intimidating the first time. There’s an art and a science to successful fundraising and a little bit of luck.

Follow these tips to increase your chances of securing the funding your new venture requires.

1. Get your material ready for investors

Focus not on what appeals to you but on what appeals to investors. All venture capitalists have a way they like to see businesses presented. Generally, your documentation should be well-structured and in an easy-to-read format.

Never tell an investor to visit your website to check you out. Investors are busy people and don’t have time to look you up themselves.

Give them everything they need right in front of them during your initial round of fundraising.

2. Create a strong business plan

The most important part of your pitch is your business plan. It should be a complete roadmap to success and a blueprint for how your organization will make money.

Investors don’t just want to see the financial figures. They want to know how you intend on operating your business, your marketing studies, as well as risk management, investment offering, and even an exit strategy.

Think like a chess player. Show that you’ve thought four moves ahead and planned for every eventuality.

3. Be clear on your competitive edge

What makes your business special?

No equity investor is interested in investing in one of a thousand other businesses. They’re searching for the movers and shakers that are about to change the game. If you’re just starting an accountancy business, no venture capitalist will show any interest because it’s nothing special.

Equity capital is different because investors want a piece of the next big revolution within your industry.

4. Concentrate on investors with niche experience

Some investors will indeed have fingers in many industry pies, but investors often come with more than money. Experienced business owners provide expertise to younger entrepreneurs. Talent and expertise come with the package because you’re not just getting capital. You’re getting a new owner.

Look for investors with experience within your niche. If you’re also providing them with influence over business decisions, you need the confidence that they know what they’re doing.

You should be looking to bring on investors only in a nonexecutive role if they don’t.

5. Talk about your management team

Remember, investors don’t know who you are. They don’t know if you’re a great entrepreneur in the making or a kid with an inheritance from mommy and daddy. You need to show that you’ve got the chops to make it.

Venture capitalists pay massive attention to the management team running the company. They want to know about their experience and personalities. There’s a reason many investors admit they give money to the entrepreneur rather than the business idea itself.

Don’t underestimate the value of your human capital because even the best business idea in the world won’t get far if the management team doesn’t meet the appropriate standard.

6. Know what the investor brings to the table

Inexperienced entrepreneurs tend to make the mistake of assuming that an investor is just someone who’s going to give them money. Investors form a valuable part of where your business can go.

Some investors can help you scale by having connections in emerging markets. If you’re looking to expand your business into Europe, India or China in the future, it makes sense to look for an investor with these types of connections. Investors may also sit on your board, playing a huge part in critical business decisions and the direction of your company, so ensure you’re aligned with the investor’s long-term vision for your company.

As already mentioned, an investor with technical expertise in your industry can also be helpful. Not every investor is hands-off, so make sure you question what they can bring to your emerging company.

7. Get your valuation independently certified

Where does one start when it comes to certifying a business? Unless you’ve had specific training or experience, the chances are you don’t know how to value your business.

Some entrepreneurs will pluck a figure out of thin air and run with it using a convoluted explanation. That’s not good enough for raising capital. Any investor with a degree of experience will see right through it.

Show your professionalism and credibility by enlisting the help of a professional valuator who can comb through your business plan and provide a realistic valuation.

Do this as early as possible so you know how much capital to ask for and which investors to approach.

8. Pitch with two essential documents

There are two critical documents you need when securing funding for your company. They are:

• Investor Pitch Deck : These presentations are roughly 10 pages/slides in length. It’s your first impression, so make it count. Investors scan through your pitch deck and decide whether they want to look at your formal business plan.
• Business Plan : If an investor wants to see your business plan, they’ll ask for it. This document is where you get into the nuts and bolts of your company.

Maintain a copy of these documents at all times when looking for capital. If investors like what they see in these two documents, they will ask for a formal in-person meeting.

9. Be persistent

Remember that many investors won’t reply to you at all. It doesn’t mean there’s anything wrong with your pitch, venture capitalists are busy people and don’t have the time to reply to everybody.

As long as you’ve meticulously combed through your documentation, you’ll find the right investor match sooner or later. What’s important is patience and maintaining focus on the critical operations of your business.

Debt and equity capital are the two primary ways you’re going to get a significant injection of cash into your business. If you’re strategizing and researching how to find investors for a startup , be sure you can clearly articulate your business plan and support that plan with relevant market research before you reach out to investors.

Crunchbase enables you to conduct market research, find and connect with the right decision-makers all in one platform.

• Originally published February 26, 2022

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How to Raise Capital for Business Growth

• Growth capital can help businesses significantly increase their value, but be clear on how these funds will drive growth.
• Once a business has a clearly-defined growth strategy, there are several financing strategies to evaluate.
• We’ll finish with some best practices and key questions for teams as they move forward raising growth capital.

“Begin with the end in mind” is an axiom made famous by Stephen Covey, author of “The 7 Habits of Highly Effective People.” Nowhere is this advice more important than when you’re planning to raise capital for business growth. Taking the time to make sure you really understand what you’re hoping to achieve with the capital you plan to raise provides clarity and direction. 

At the highest level, there are only three main reasons to raise growth capital. They come down to funding one or more of the following growth strategies:

• Faster core growth than the business’s cash flow supports;
• Inorganic growth, such as M&A or adjacent-market entry, to complement the existing core business; or
• Innovative new projects.

That’s it. Too many entrepreneurs make the mistake of viewing raising capital as a marker of success. It’s not! You don’t need to raise capital to be successful — for instance, in many situations, raising venture capital isn’t wise . Yes, raising capital can be a smart strategic decision to enable or accelerate growth when the business has a clear opportunity to do so and a strong plan to make it happen. But an outside financing event, of itself, won’t make your business successful.

Importantly, the three main growth strategies lend themselves to different financing strategies. Before we get to that, let’s discuss the growth strategies and their different potential outcomes. Because the details of your business may be nuanced, I’ll unpack each growth strategy with a few quick examples to help you think through which are applicable to your business. 

Then, I’ll finish with a few key questions to help leadership teams think through the growth strategy they’re contemplating before starting to raise capital.

Growth Strategy 1: Enabling Faster Core Growth Than the Business’s Cash Flow Supports

Sometimes this strategy is about operational efficiency or scaling up production. More typically, it’s about increasing sales, marketing and/or core product development investments; these may have a meaningful impact on growth but slower payback period. All of this often requires investment in more comprehensive business management systems, much of which is addressed in our Project $50M series .

Here, we’ll focus on the capital implications of such investments.

A simple case in point: new customer acquisition. The lifetime value of a customer is significantly greater than the cost to acquire the customer, but that lifetime of revenue is paid out over months or years. Meanwhile, incremental new-customer acquisition costs negatively impact short-term cash flow. Long-term, of course, those customers may contribute significantly to the bottom line. So the business needs to raise capital to cover the short-term hit in expectation of long-term profitability.

Management should pay close attention as it makes these investments that neither of the following are happening:

• Acquisition costs per customer are increasing as the business scales, and/or
• New customers are different in some way that may cause them to have a lower lifetime value — for example, maybe they churn faster.

Monitoring both of these are important when using growth capital for customer acquisition costs, because if either or both don’t track to your projections you can end up with a growing customer base but lower profits or, in extreme cases, losses.

Regardless of whether the growth capital is being used for acquiring customers, increasing operational efficiency or scaling up production, it’s important to make sure that spending eventually translates to milestones that make the investment worthwhile. 

Unfortunately, there are many companies that don’t have a reasonable path but keep consuming growth capital. Companies in this situation achieve what some growth equity investors call “profitless prosperity.” Eventually they will run out of investors to fund this “prosperity” and be forced to make dramatic reductions in expenses or face bankruptcy. 

Sometimes a business has already funded prior growth with outside capital but needs more capital to continue growing. It isn’t profitable today, but it has a clear path to profitability and doesn’t want to make the necessary expense adjustments to get the business profitable right now because that would diminish growth. This is very common for tech and life science startups given their significant early fixed costs. 

Alternatively, a business may be profitable and growing but see a clear opportunity to accelerate growth with outside capital. It may have started with a small investment or even bootstrapped to profitability. For example, consider a small consumer packaged goods (CPG) food brand that started by selling organic snacks to a few local retailers. After a successful trial in the local Whole Foods store, it has the opportunity to sell in all locations nationwide. The business scaled to this point using the owners’ capital and cash flow, but getting to the next level will require outside capital.

Two warnings: Businesses sometimes grow to this stage without needing the financial rigor that helps them accurately see all their costs, or their customer lifetime value. Investors will demand better financial management. Second, once businesses start raising capital for growth it often becomes hard to stop; many future financing rounds become necessary. Venture investors often describe this phenomenon as the “VC treadmill.” Think about these issues carefully before starting down this path.

Growth Strategy 2: Inorganic Growth to Complement the Existing Core Business

Adjacent market expansion.

Sometimes the strategy is to grow a business by expanding to a new market with similar customers and offering the same or a very closely related solution to those new customers. If the business has captured a significant percentage of its current target customers, then expanding the market may be the easiest way to continue growing.

A simple example: Imagine you run a very successful Greek restaurant that’s busy through the week and has long waits on Friday and Saturday nights. As you contemplate growth options, you may decide that you have captured most of the target market in your town. Therefore, instead of finding a larger location in your existing town (Growth Strategy 1), you decide to open a second location in a neighboring town. You are choosing Growth Strategy 2, expanding to a new market with similar customers instead of trying to continue growing your current market.

Management should pay close attention as it explores this strategy to ensure that new customers in the adjacent market are behaving similar to existing customers. This often can be done by conducting small-scale tests ahead of making a significant investment.

Too many businesses push into opening new markets without validating that customers really are like those in their existing market, often because leaders don’t think creatively enough about how to validate a concept. In the context of a restaurant, lack of such validation could result in opening that second location in a community with significantly different demographics and, therefore, food preferences.

So imagine our restaurant’s new target town is a 30-minute drive away from the current location. Management might initially argue there is no way to “prove” customers will order from their Greek restaurant without signing a lease and opening a location. But if pushed not for “proof” but merely to increase their confidence, they might do one or more of the following experiments:

• Analyze their customer loyalty program to find the small percentage of existing customers from the planned new town who are traveling to their existing location. Conduct qualitative research — say, interviews over a free meal — to get these customers’ feedback on the new location.
• Set up a limited-menu offering at the local farmer’s market or similar “pop-up” location for a few weekends to test demand.
• Do targeted marketing to the new town with a coupon offering 10% off your meal with a unique code and then track the conversion of those campaigns.

An important point about this strategy is that in each of the three example tests above, you are doing an experiment for the purpose of validating or invalidating your assumptions about that new market. You aren’t investing in marketing to efficiently acquire customers; you’re investing to learn about a potential new market.

Expansion via M&A

Often, companies will explore inorganic growth via acquisition. For example, if you run a service business with 10 plumbers in your city, you may decide to acquire another similar service business in a neighboring city to enter that market. 

On the surface, this can be really appealing. It can feel like a way to accelerate the speed at which you can scale in this new market. But keep in mind the advice of Roger Martin, former Dean of the Rotman School of Management at the University of Toronto. Martin pointed out in the Harvard Business Review that most acquirers focus on the wrong thing and, therefore, M&A fails up to 90% of the time. His advice:

Companies that focus on what they are going to get from an acquisition are less likely to succeed than those that focus on what they have to give it.

This insight applies to businesses large and small and is particularly important when thinking about leveraging an acquisition to accelerate inorganic growth. Don’t think about the acquisition target’s ability to get you into a new market. Instead, think about how your company can bring unique resources, expertise and systems to make the acquiring company a stronger and better entity after the merger.

In the case of the plumbing business, instead of focusing only on the customers it’s buying, the acquiring company could consider how it can bring efficiencies through, perhaps, its route management software and simplified mobile sales system.

After all, if the acquisition target is already successful and growing, you have to ask: Why is the owner letting you acquire it for a good price? On the other hand, if you can step in and truly make it a much better business, that could be a great way to enter an adjacent market.

Growth Strategy 3: New Innovation Projects

Here, the focus is on innovation to develop new products or services. In some cases, a new product or service will be incremental innovation developed for existing customers. For example, consider a very successful moving business with a fleet of 20 trucks. Instead of trying to grow to 50 trucks (Growth Strategy 1), you may develop other logistics solutions to sell into your existing market.

Alternatively, an innovation project could be transformative, like launching a new solution for new customers. For entrepreneurs who have conceived, launched and scaled successful businesses, this is often a helpful way to scratch that entrepreneurial itch. Beyond the personal motivation of founders, it’s often strategically wise to build new lines of business that support future ambitions. However, the risks around a new line of business failing are very similar to the risks of any startup failing — in other words, quite high.

Therefore, the leadership team should make sure it has a good understanding of its unique competitive advantage to develop that new solution. There are scenarios where this may make sense, and you may have a great advantage. If you run a successful residential electrician business you may encounter a common electrical problem in all condos in your area and decide to create a new product to solve it, based on your expertise as electricians. 

Just make sure you validate as many assumptions as possible as quickly and efficiently as possible — especially assumptions around why your new customer cares about the problem you’re solving. Similar to the Greek restaurant example in Growth Strategy 2, you can often test assumptions in creative and cost-effective ways early on. This is critical because leaders often get focused on how to solve a given problem in a novel way without ensuring customers care about the problem. Said another way, most innovation fails not because “it” can’t be built but because there isn’t enough customer demand.

The key questions leaders should ask themselves as they explore each of the three alternative growth strategies:

Key Questions for Each Growth Strategy

If management can confidently address the key questions in the table related to its chosen growth strategy, and confidently sign up for the related business projections, it will likely lead to a very positive outcome. If not, the company is likely to be in a worse situation after raising incremental debt or equity financing.

2 Different Business Financing Strategies

If you need outside capital to execute against one or more of the three growth strategies, at the highest level there are only two ways: Get a loan or sell some of the business’s equity. Of course, both approaches come in a variety of flavors that are worth exploring.

1. Business loans

In general, if a business translates its capital into incredible growth, a loan is the less expensive route because you haven’t given up any equity — or a very small amount if warrants are issued as part of the loan deal. Therefore, once the loan is repaid, all of the increase in equity value goes to the owners. On the other hand, taking a loan requires confidence that you can repay it from future cash flow. 

Banks provide credit in a number of different forms, but most of these, such as a line of credit, are focused on smoothing out a business’s cash flow. When focusing on financing growth, the options are surprisingly limited — and term loans are the most typical approach. While specific repayment terms, interest rates and loan amounts vary by the lender and specific loan product being offered, since we’re focusing on growth capital that usually means multiyear term loans. So we won’t discuss short-term loans, which are more typically used as an alternative source of working capital, not growth capital.

When thinking about a term loan, you should review the offer in detail, but the key questions to focus on are:

• Is the interest rate fixed or variable?
• What is the repayment schedule? For example, is there a “balloon payment” at the end of the loan?
• Is there a prepayment penalty?
• What collateral is required to secure the loan?

Revenue-based financing is an alternative to term loans that has a distinct advantage. In this model, which shares characteristics with income-driven student loan repayment plans, rather than fixed monthly payments the business’s payments are instead tied to its revenue growth. The nice thing about this alternative funding model is that if sales slow, repayments slow in parallel until the business resumes growing. On the other hand, if a business’s revenue grows faster than projected it will repay the loan sooner than projected. This model is sometimes described as “royalty-based financing,” because the business is effectively paying a royalty on sales until its total debt is repaid.

While closely related to factoring receivables and merchant cash advances, revenue-based financing is for larger growth capital needs, whereas factoring receivables and merchant advances are more typically used to smooth out working capital fluctuations. For example, when a company factors receivables, it is effectively accelerating collection of already contracted sales. Operationally, it does this by selling the receivables to a third party at a discount in return for quicker access to cash. In revenue-based financing, your future revenue secures the loan.

If pursuing revenue-based financing, it’s important to truly understand the cost of the capital being provided. While the flexibility is often quite compelling, the business must be able to operate on its remaining gross margin after making the payments.

2a. Selling equity as a private company

The alternative to loans when raising outside growth capital is to sell some equity in your business. In general, this is a much longer term — and more significant — commitment between the company and its source of capital. Unlike a loan, when you sell equity to obtain growth capital, the source of the capital shares in the long-term appreciation of the business and, in some cases, may end up with ownership control.

You may have heard equity investors called private equity investors, growth equity investors or venture capitalists. These labels had more meaning a decade ago, but since then the distinctions between them have grown blurry. In this article, we’ll refer to them all as private equity (PE) investors. And there’s one thing all PE investments share in common: A company’s owners, including its board of directors (if any), agree to sell part of their business to a PE firm in return for a growth capital investment. So, the central question in a PE deal is, What percentage of the company are we selling?

The standard way PE firms think about this question is that the company had some value before the investment (the “pre-money” value) and adding capital raises that to a new value (the “post-money” value). The math is actually simple: If the company was worth its pre-money valuation before raising capital, then the pre-money value plus the new capital raised equals what the business should be worth after. While determining valuation is often more art than science, both sides will assess comparable companies to help them determine these valuations.

How PE investments work

As an example, imagine a business is valued at $30 million before investment. A PE firm invests $10 million into the business. The business would then be worth $40 million — $30 million + $10 million.

Ownership percentages are calculated based on the post-money valuation. The PE firm owns a percentage equal to the value of its investment divided by the post-money valuation, while the previous owners’ percentage is the pre-money valuation divided by the post-money valuation. Coming back to our imagined business, the new PE investor would own 25% of the company post-investment ($10 million/$40 million) and existing owners would own 75% ($30 million/$40 million) of whatever percentage they owned before the transaction.

To effect this ownership change, the company issues new shares for the PE firm based on an agreed-upon price per share derived by dividing the total shares outstanding by the pre-money valuation. In our example, if the business has a $30 million pre-money valuation and 3 million outstanding shares, then each share is worth $10. The company issues 1 million new shares at $10 each for the PE firm, which amounts to 25% of the new level of 4 million total shares outstanding. The company is committed to spending that investment in ways that significantly >increase its enterprise value , and all shareholders reap the rewards of that appreciation.

Of course, in real life these transactions end up being more complicated than this basic math. One common complication is a secondary offering, where founders and early employees or investors also sell part of their stake to the new investors, thus receiving a partial liquidity event. The most common reason for this is to give the early employees or founders an opportunity to diversify their personal net worth. In many cases, this aligns the investors’ and founders’ attitudes toward risk, because the founders no longer have all their net worth concentrated in one illiquid security.

A secondary transaction as part of a growth round is a similar, but different, process than completely preparing a company for sale . But because some PE firms prefer to acquire entire companies outright, sometimes a company that begins investigating equity options to raise growth capital ends up in a transaction where PE investors buy all of the company. Where that becomes a possibility, the transaction should be evaluated against other acquisition options, such as a strategic acquirer.

How to evaluate a PE term sheet

Typically, the first step in a PE deal is for the investors to provide a term sheet that specifies the key business conditions of their offer to invest. Besides spelling out proposed ownership percentages, term sheets may include provisions that can have a dramatic impact on potential outcomes. 

Key questions to ask yourself when reviewing a term sheet include:

• Is there a control provision? Control provisions give the new investors rights that allow them to block sale of the business at a certain valuation, or to specific companies, or both. If investors request this, it’s crucial for leaders to think through the implications upfront. A future acquisition offer the founding team is excited about may not be equally exciting to the PE firm. Control provisions can end up eliminating the option completely even if it would be the choice of the founders.
• Do the PE investors get a board seat? In many ways, adding investors to your board can be helpful. They bring connections and experience across a portfolio of investments that often add value to strategic discussions. But some investors aren’t so helpful, and can even become a huge distraction in certain situations. If you are going to add an investor to your board, it’s important to talk to other CEOs who have had this specific investor — not just the firm but the actual partner — on their boards.
• Do they get budget or expense approval over a specific amount? While it may not seem like a big deal, keep in mind that you and the management team may not be used to having to loop other people into these decisions. Again, the new investors may have helpful perspectives, but it may also take a lot of work to get them to understand why certain expenses are necessary.
• Do they have inspection/information rights to specific financial statements? On the surface, this is very straightforward: The investors get the right to understand what’s going on in the business they’ve invested in. However, it can create work you and your team aren’t anticipating. For example, if annual financial statements need to be audited, then you should make sure you are accounting for that in your plans, both in terms of the effort to do an audit and the expense of hiring an audit firm.
• Do they have the right to participate in any future financing events to maintain their ownership percentage? These are typically called “pro-rata rights” and are just that — rights, not obligations. In other words, investors with these rights aren’t required to maintain their ownership percentage but must be offered the chance to participate in future financings. If a large professional PE firm chooses not to exercise its pro-rata rights, it can be seen as a concerning signal: What does this existing investor know that I don’t? But when the PE investor is a high-net-worth individual, aka an “angel,” or a smaller fund, the signal is less clear.

Understanding liquidation preferences

Of all possible term sheet provisos, liquidation preferences can become the most impactful, depending on the eventual outcome. It’s almost always the case that the PE firm’s stock gets a preferred return in a sale (liquidity event), before proceeds are divided based strictly on the percentage of shares owned. Typically, such liquidation preferences are roughly equivalent to the amount of capital invested by the PE firm, but can be multiples of that as well. 

There are two ways a liquidation preference can work. More commonly, the investor has to choose either to use its liquidation preference or just divide the proceeds based on ownership percentages. This is called a “non-participating preference.” However, in some cases, the investor will get its preferred return and then participate based on ownership percentages, which is called a “participating preference.”   

To illustrate the impact of liquidation preferences, let’s come back to our example business now worth $40 million after a PE firm purchased 25% of the company for $10 million, and consider the impact of four possible liquidation preferences.

$10 million, and consider the impact of four different possible liquidation preferences.

PE Investor Liquidation Preference Options

Scenario 1: $30 million sale.

In this unfortunate scenario, the company later sells for what its pre-money valuation was when it received the $10 million investment. This obviously is not what anyone was hoping for when the PE firm invested, but it does happen. In this case, if the original owners looked at their 75%, they might expect to receive $22.5 million (75% of $30 million) but because of the liquidation preference, they won’t receive that in any of the situations.

Scenario 1: Liquidation Preference Impacts

Scenario 2: $75 million sale.

In this scenario, the company grows in value from the $40 million post-money valuation to sell later for $75 million. Again, if the original owners looked at their 75% they might expect to receive $56.25 million. But they only receive that in option one, where the PE firm chooses to take its proceeds from the ownership percentages instead of using its liquidation preference, because with a non-participating preference, the returns are greater from its ownership percentage. This is called “clearing the preference stack.” 

Scenario 2: Liquidation Preference Impacts

Scenario 3: $150 million sale.

In this scenario, the company will clear the preference stack in both options one and three, which is why those options have the same proceed distribution in the accompanying table. But for options two and four, the PE firm gets its preferred return ahead of dividing the remaining proceeds based on ownership percentages. This is important, because it shows no matter how good the outcome, a participating preference will always have a significant impact on the ultimate return calculation.

Scenario 3: Liquidation Preference Impacts

2b. selling equity as a public company.

Historically, most companies went public via a traditional Initial Public Offering (IPO) process. Today, companies have more options when contemplating going public. Specifically, an increasing number of companies are going public via direct listings or special purpose acquisition companies (SPACs). All three options can raise significant growth capital — and allow founders, early employees and investors to cash out some or all of their liquidity.

Traditional initial public offerings

Investment bankers drive the traditional initial public offering (IPO) process . The first step for business owners is to evaluate different underwriters and select one or more of them to work with. Once selected, the underwriters work with the company to develop the required documentation (most notably the S1) and then market the shares to institutional investors via presentations (called a roadshow).

Based on demand from investors, the underwriter sets the terms of the IPO. The company then issues additional shares at those terms and sells them (typically to institutional clients of the investment bank) to begin the public trading of the stock. While the bankers are well compensated to set these terms correctly, often the stock jumps in value quickly once it begins being publicly traded or, in less fortunate cases, falls.

While some argue that such an opening day “pop” in value is good, increasingly companies are pushing back. This includes Bill Gurley, one of the most successful venture capitalists of all time, who has publicly challenged this process and advocated for direct listings.

Direct listings

Unlike an IPO or SPAC, there are usually no new shares issued to raise capital in a direct listing. Therefore, it’s typically not been a source of new growth capital. However, recently this changed with the New York Stock Exchange (NYSE) getting SEC agreement to allow direct listings that also include raising capital. So direct listings are becoming a potential alternative to raise growth capital, though only on the NYSE for now.

The biggest advantages to a direct listing are that the process is much simpler than an IPO and it doesn’t require the time and expenses often involved in a traditional IPO. However, without the support of underwriters pitching their institutional clients, you’ll need to find another way to ensure there is demand for the company’s stock when it goes public. This is why you generally only see companies with strong brand awareness, like video game provider Roblox, pursue a direct listing.

Special purpose acquisition companies

Think of a SPAC as a “shell” company that goes public to raise money to acquire a successful private company. This may be the easiest way for a company to access growth capital from the public market, because the SPAC is already public when it makes the acquisition. While SPACs have been around for a long time, they have recently become more popular as an alternative path to becoming a public company.

SPACs are unusual, and so there are a few unusual factors to consider in pursuing one:

• Sponsors: SPACs have sponsors — the group of individuals who launched the SPAC via their own traditional IPO, with a goal of finding a company to acquire. Sponsors receive 20% of the new company as founders shares, for a nominal fee — often $25,000.
• Time limit: Typically sponsors have two years to find a company to acquire and bring that company public via a process called “de-SPACing.” The first step is to agree with the target company on key terms such as valuation. Once those terms are agreed, the sponsors also need to get the initial investors in the SPAC to approve the acquisition.
• Debt partners: Finally, the acquisition price almost always requires more capital than the SPAC raised in its IPO. Therefore, before the new target company goes public, the SPAC sponsors need to raise additional capital. Now that the target is known, this can typically be done via hedge funds and other institutional investors providing additional money via a public investment in public equity (PIPE) transaction.

If you’re talking to SPAC sponsors, be sure of their ability to raise additional capital, and know their timeline. If they don’t complete an acquisition in the agreed-on time, the SPAC dissolves and the investors who purchased shares get their money back.

Business loans vs. equity financing

Now that we’ve walked through loans and equity financings, let’s map these back to the three growth strategies. The main decision criterion usually is the amount needed to fuel the growth plan.

In general, if you need a lot of capital, it’s easier to secure via equity than debt — in fact, some growth strategies require so much capital that equity becomes the only option. This is both because PE investors tend to think longer-term than bankers, and because it avoids encumbering the company with massive loan payments. You can raise more capital with equity than with debt at any given point in time.

However, if your business can manage the necessary loan payments to get all the way through its growth curve, loans are the better option because the owners get to keep all the value of the business’s appreciation.

Table 6 summarizes key considerations to help think through the loan-versus-equity decision for each growth strategy.

Best practices for raising capital

Scenario plan..

When you think through each of the different growth capital raising strategies laid out above, there are a range of possible outcomes. If owners and the board align on executing against one or more of these, it’s important to think through different outcomes for each strategy in a scenario planning exercise. Then think about the implications to equity holders and, if a loan, debt holders, based on these outcomes.

Don’t perpetually fundraise, but continuously build relationships.

Each of the sources of capital above have folks on their teams tasked with building relationships with entrepreneurs. Business owners could fill their calendars meeting with these folks. While it’s important to constantly be in relationship-building mode, most of the time you should be clear you aren’t fundraising but are just getting to know them. To that end, you want to spend more time listening versus talking.

Also, keep in mind that any figures or financial results/projections that you share with them will not be forgotten. Therefore, less is more. Keep them interested and make sure you have enough of a relationship that when you want to raise money, you know who to call.

Always be qualifying.

  You also want to constantly be qualifying potential investors. Keep in mind, as in sales, a “no” is the second-best answer. An investor perpetually telling you it “may” be interested can often lead to you wasting a lot of time. Make it easy for those who aren’t interested to opt out, so you can focus on qualified potential investors.

When ready, run a process.

It’s distracting to raise growth capital. What you want to do is minimize the distractions and keep the timeline short. This starts with preparation. Prepare the required documentation and have it ready to share in a secured data room, which is PE/M&A parlance for an encrypted, password-protected folder.

Key questions in raising capital

Are the owners and board aligned.

As you think about the different folks who are going to weigh in on the financing decision, it’s important to understand their different incentives. A founder who has spent seven years building a company looks at both upside and downside potentials differently than an investor who has a portfolio of early-stage companies on a strong growth trajectory. This is manageable, but it’s important to make sure you understand the priorities and get the groups aligned on the ultimate growth strategy and capital required.

What are you optimizing for?

Related, everyone needs to know what you’re optimizing for with the financing strategy you ultimately choose. For example, if you choose to finance growth via a traditional term loan, everyone needs to understand the risk if you are not able to make payments — including potential expense reductions, and even becoming insolvent in extreme cases.

Do you hire a banker?

Obviously if you choose to go public via a traditional IPO you’ll need to hire a banker. However, in many other situations, it can still make sense to involve a banker. They can help enforce the timeline, have additional relationships that can be included in the pool of potential investors and often have insights based on prior transactions that can help manage expectations and the process. There are real fees that come along with bankers, so you should be sure how the individual will have a positive impact.

Is the financier a good partner?

Especially when you talk about selling equity as a private company, the groups that you’re getting involved with are long-term partners. You need to make sure they are aligned with you on the vision for the company. However, this isn’t limited to equity partners; it’s also important to make sure the investors providing loans are folks you are aligned with.

One thing I always recommend is that as the investor moves into diligence on your business and starts checking your references, you should also ask to talk to their references. And specifically ask to speak with companies they worked with where the deal didn’t ultimately work out. When everyone makes money and an investment works, it’s relatively easy for entrepreneurs to speak highly about their investors. However, you can really gauge the value an investor can bring from experiences where things became difficult.

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The Essential Guide to Capital Raising

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.

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 a 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 3 ways how companies can raise capital: debt, equity, or a combination of the two, otherwise known as hybrids.

Debt Raising

Debt raising involves raising funds through loans provided by third parties. The lenders of the debt have traditionally been banks and public debt markets (i.e. the bond markets) but now include a host of financial institutions and increasingly private equity funds. In its simplest form, debt raising involves paying the lender back its principal and an agreed amount of interest over the duration of the loan.

The size of the debt market (in 2021, the global debt market was valued at $303 trillion) means that anyone debt raising can avail of multiple forms of debt. Lenders can include a range of terms and conditions on their loan that protect them on the downside in the event that your company cannot (or will not) repay the money.

In broad terms, there are four forms of debt that companies can avail of:

• Secured debt: Where collateral is used to secure the loan, thus enabling the company to avail of lower interest rates (as the risk is lower for the lender);
• Unsecured debt: This form of debt includes no borrower collateral, so the interest rate depends on the company’s credit history;
• Tax-exempt corporate debt: Some debt may be eligible for tax exemption. For example, projects related to sustainability;
• Convertible debt: Usually considered a hybrid (i.e. a mixture of debt and equity), whereby the debt can be converted into equity if the borrower prefers.

Which type of debt a company raises depends on a number of different factors - primarily the condition of their financial statements (and in particular, the amount of debt outstanding on the balance sheet), their credit (rating) history, quality of the collateral, and borrowers’ and lenders’ own appetite for risk. At most points of an economic cycle, debt is possible for a company to raise, but the cost of interest is not always attractive.

Pros and Cons of Debt Raising

• Relatively fast access to cash for companies that require it;
• In low interest rate environments, debt offers a cheap way to access liquidity;
• Debt repayments (in interest) can be forecasted accurately for budgeting purposes;
• The interest paid is tax deductible
• Generally, raising debt reduces a company’s credit rating;
• There mere availability of debt may induce managers to raise it when it is not required;
• The money has to be repaid, even if the business isn’t performing well;
• Debt on a balance sheet reduces management’s strategic options.

Equity raising

Equity raising occurs when a company seeks to raise funds through the sale of its equity - i.e. a share in the ownership of the company. The equity investors can generally be anyone that possesses the cash required and is willing to meet the company’s owners on its valuation. A company that overvalues its equity risks alienating most investors, who will fear not seeing an adequate  return on their investment.

Most companies with positive outlooks (i.e.their equity is attractive to investors) can avail of equity funding. Like debt raising, certain equity raising agreements can have different conditions attached, and when this happens, it is usually referred to as ‘preferred equity.’ The stock market is the largest and most well-known method of equity raising, where publicly listed companies sell their equity to raise funds and maintain liquidity.

Pros and Cons of Equity Raising

• Access to the management advice of seasoned equity investors;
• No requirement for regular interest repayments(as with debt raising);
• Possibility for company management to set the company valuation;
• Technically, a lower risk solution than debt raising.
• Company management is giving up (some) controlling the business;
• The equity may come with some provisions on consulting the investors on big decisions;
• The presence of external investors may lead to friction within the company;
• The upside potential of the company now has to be shared with outsiders.

Equity Raising Examples

There are several kinds of raising equity, with the big differentiator between them being the stage of a company’s evolution to which it applies to. In broad terms, the different types of equity raising - in chronological order, from early companies to mature companies, are:

• Crowdfunding
• Seed financing
• Angel financing
• Venture Capital
• Private Equity
• Public Capital Markets

Hybrids of debt and equity

A hybrid of debt and equity gives the advantages(and disadvantages) of debt and equity raising and tends to be seen as a compromise between the two. Depending on how the hybrid capital raising agreement is written up, it could benefit either the company or the owner moreover the course of the debt. In essence, if the company thrives and the debt is convertible to equity, investors win. Otherwise, the benefits tend to be derived by the company.

Pros and Cons of Hybrids of Debt and Equity

• More flexible arrangements are possible for the company and investors;
• Can provide both sides of the transaction with a lower risk proposition;
• May give companies access to a broader range of investors;
• May enable investors to diversify across a broader number of companies by combining fixed income (debt) with equity investments.
• Hybrid capital raising tends to be more complex than either debt or equity raising;
• Tends to favor investors at the expense of companies.

How to Raise Capital for Your Business

Whether a company is raising debt or equity capital, it essentially faces a sell-side investor equation similar to that faced by owners looking to divest their companies (ultimately, what is equity raising aside from selling a part of a business).

On this basis, company managers face many of the same challenges as they would in M&A: providing investors with the right documentation, valuing the company correctly, and getting their house in order.

For this same reason, managers at these companies would be well advised to use data room due diligence software like DealRoom or an alternative.

Not only does DealRoom enable companies to efficiently organize their capital raising process, but it can also show where weaknesses in the company’s value proposition might exist before making the initial approach to investors for their debt or equity raise.

Here is a step-by-step approach to raising capital for your business:

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? Utilize the Capital Raise Playbook tailored to outline and walk you through the process of raising capital for your specific 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:

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 to both debt and equity raising, with specifics depending on the institution in question.

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 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 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:

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

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)
• 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. Grab your copy now!

There have never been as many options for companies seeking to raise debt or equity capital.

At the time of writing, private equity funds hold close to $2 trillion in ‘dry power’ (capital ready to be distributed to companies either through debt or direct equity investments). But the fact that they’re not distributing it says something about companies - primarily, that they’re not adequately prepared in these investors’ eyes.

Talk to DealRoom today about the essential role that our lifecycle management tool plays in enabling companies to take this leap.

Get your M&A process in order. Use DealRoom as a single source of truth and align your team.

What is a Business Plan? Definition, Tips, and Templates

Published: June 07, 2023

In an era where more than 20% of small enterprises fail in their first year, having a clear, defined, and well-thought-out business plan is a crucial first step for setting up a business for long-term success.

Business plans are a required tool for all entrepreneurs, business owners, business acquirers, and even business school students. But … what exactly is a business plan?

In this post, we'll explain what a business plan is, the reasons why you'd need one, identify different types of business plans, and what you should include in yours.

What is a business plan?

A business plan is a documented strategy for a business that highlights its goals and its plans for achieving them. It outlines a company's go-to-market plan, financial projections, market research, business purpose, and mission statement. Key staff who are responsible for achieving the goals may also be included in the business plan along with a timeline.

The business plan is an undeniably critical component to getting any company off the ground. It's key to securing financing, documenting your business model, outlining your financial projections, and turning that nugget of a business idea into a reality.

What is a business plan used for?

The purpose of a business plan is three-fold: It summarizes the organization’s strategy in order to execute it long term, secures financing from investors, and helps forecast future business demands.

Business Plan Template [ Download Now ]

Working on your business plan? Try using our Business Plan Template . Pre-filled with the sections a great business plan needs, the template will give aspiring entrepreneurs a feel for what a business plan is, what should be in it, and how it can be used to establish and grow a business from the ground up.

Purposes of a Business Plan

Chances are, someone drafting a business plan will be doing so for one or more of the following reasons:

1. Securing financing from investors.

Since its contents revolve around how businesses succeed, break even, and turn a profit, a business plan is used as a tool for sourcing capital. This document is an entrepreneur's way of showing potential investors or lenders how their capital will be put to work and how it will help the business thrive.

All banks, investors, and venture capital firms will want to see a business plan before handing over their money, and investors typically expect a 10% ROI or more from the capital they invest in a business.

Therefore, these investors need to know if — and when — they'll be making their money back (and then some). Additionally, they'll want to read about the process and strategy for how the business will reach those financial goals, which is where the context provided by sales, marketing, and operations plans come into play.

2. Documenting a company's strategy and goals.

A business plan should leave no stone unturned.

Business plans can span dozens or even hundreds of pages, affording their drafters the opportunity to explain what a business' goals are and how the business will achieve them.

To show potential investors that they've addressed every question and thought through every possible scenario, entrepreneurs should thoroughly explain their marketing, sales, and operations strategies — from acquiring a physical location for the business to explaining a tactical approach for marketing penetration.

These explanations should ultimately lead to a business' break-even point supported by a sales forecast and financial projections, with the business plan writer being able to speak to the why behind anything outlined in the plan.

Free Business Plan Template

The essential document for starting a business -- custom built for your needs.

• Outline your idea.
• Pitch to investors.
• Secure funding.
• Get to work!

You're all set!

Click this link to access this resource at any time.

Free Business Plan [Template]

Fill out the form to access your free business plan., 3. legitimizing a business idea..

Everyone's got a great idea for a company — until they put pen to paper and realize that it's not exactly feasible.

A business plan is an aspiring entrepreneur's way to prove that a business idea is actually worth pursuing.

As entrepreneurs document their go-to-market process, capital needs, and expected return on investment, entrepreneurs likely come across a few hiccups that will make them second guess their strategies and metrics — and that's exactly what the business plan is for.

It ensures an entrepreneur's ducks are in a row before bringing their business idea to the world and reassures the readers that whoever wrote the plan is serious about the idea, having put hours into thinking of the business idea, fleshing out growth tactics, and calculating financial projections.

4. Getting an A in your business class.

Speaking from personal experience, there's a chance you're here to get business plan ideas for your Business 101 class project.

If that's the case, might we suggest checking out this post on How to Write a Business Plan — providing a section-by-section guide on creating your plan?

What does a business plan need to include?

• Business Plan Subtitle
• Executive Summary
• Company Description
• The Business Opportunity
• Competitive Analysis
• Target Market
• Marketing Plan
• Financial Summary
• Funding Requirements

1. Business Plan Subtitle

Every great business plan starts with a captivating title and subtitle. You’ll want to make it clear that the document is, in fact, a business plan, but the subtitle can help tell the story of your business in just a short sentence.

2. Executive Summary

Although this is the last part of the business plan that you’ll write, it’s the first section (and maybe the only section) that stakeholders will read. The executive summary of a business plan sets the stage for the rest of the document. It includes your company’s mission or vision statement, value proposition, and long-term goals.

3. Company Description

This brief part of your business plan will detail your business name, years in operation, key offerings, and positioning statement. You might even add core values or a short history of the company. The company description’s role in a business plan is to introduce your business to the reader in a compelling and concise way.

4. The Business Opportunity

The business opportunity should convince investors that your organization meets the needs of the market in a way that no other company can. This section explains the specific problem your business solves within the marketplace and how it solves them. It will include your value proposition as well as some high-level information about your target market.

5. Competitive Analysis

Just about every industry has more than one player in the market. Even if your business owns the majority of the market share in your industry or your business concept is the first of its kind, you still have competition. In the competitive analysis section, you’ll take an objective look at the industry landscape to determine where your business fits. A SWOT analysis is an organized way to format this section.

6. Target Market

Who are the core customers of your business and why? The target market portion of your business plan outlines this in detail. The target market should explain the demographics, psychographics, behavioristics, and geographics of the ideal customer.

7. Marketing Plan

Marketing is expansive, and it’ll be tempting to cover every type of marketing possible, but a brief overview of how you’ll market your unique value proposition to your target audience, followed by a tactical plan will suffice.

Think broadly and narrow down from there: Will you focus on a slow-and-steady play where you make an upfront investment in organic customer acquisition? Or will you generate lots of quick customers using a pay-to-play advertising strategy? This kind of information should guide the marketing plan section of your business plan.

8. Financial Summary

Money doesn’t grow on trees and even the most digital, sustainable businesses have expenses. Outlining a financial summary of where your business is currently and where you’d like it to be in the future will substantiate this section. Consider including any monetary information that will give potential investors a glimpse into the financial health of your business. Assets, liabilities, expenses, debt, investments, revenue, and more are all useful adds here.

So, you’ve outlined some great goals, the business opportunity is valid, and the industry is ready for what you have to offer. Who’s responsible for turning all this high-level talk into results? The "team" section of your business plan answers that question by providing an overview of the roles responsible for each goal. Don’t worry if you don’t have every team member on board yet, knowing what roles to hire for is helpful as you seek funding from investors.

10. Funding Requirements

Remember that one of the goals of a business plan is to secure funding from investors, so you’ll need to include funding requirements you’d like them to fulfill. The amount your business needs, for what reasons, and for how long will meet the requirement for this section.

Types of Business Plans

• Startup Business Plan
• Feasibility Business Plan
• Internal Business Plan
• Strategic Business Plan
• Business Acquisition Plan
• Business Repositioning Plan
• Expansion or Growth Business Plan

There’s no one size fits all business plan as there are several types of businesses in the market today. From startups with just one founder to historic household names that need to stay competitive, every type of business needs a business plan that’s tailored to its needs. Below are a few of the most common types of business plans.

For even more examples, check out these sample business plans to help you write your own .

1. Startup Business Plan

As one of the most common types of business plans, a startup business plan is for new business ideas. This plan lays the foundation for the eventual success of a business.

The biggest challenge with the startup business plan is that it’s written completely from scratch. Startup business plans often reference existing industry data. They also explain unique business strategies and go-to-market plans.

Because startup business plans expand on an original idea, the contents will vary by the top priority goals.

For example, say a startup is looking for funding. If capital is a priority, this business plan might focus more on financial projections than marketing or company culture.

2. Feasibility Business Plan

This type of business plan focuses on a single essential aspect of the business — the product or service. It may be part of a startup business plan or a standalone plan for an existing organization. This comprehensive plan may include:

• A detailed product description
• Market analysis
• Technology needs
• Production needs
• Financial sources
• Production operations

According to CBInsights research, 35% of startups fail because of a lack of market need. Another 10% fail because of mistimed products.

Some businesses will complete a feasibility study to explore ideas and narrow product plans to the best choice. They conduct these studies before completing the feasibility business plan. Then the feasibility plan centers on that one product or service.

3. Internal Business Plan

Internal business plans help leaders communicate company goals, strategy, and performance. This helps the business align and work toward objectives more effectively.

Besides the typical elements in a startup business plan, an internal business plan may also include:

• Department-specific budgets
• Target demographic analysis
• Market size and share of voice analysis
• Action plans
• Sustainability plans

Most external-facing business plans focus on raising capital and support for a business. But an internal business plan helps keep the business mission consistent in the face of change.

4. Strategic Business Plan

Strategic business plans focus on long-term objectives for your business. They usually cover the first three to five years of operations. This is different from the typical startup business plan which focuses on the first one to three years. The audience for this plan is also primarily internal stakeholders.

These types of business plans may include:

• Relevant data and analysis
• Assessments of company resources
• Vision and mission statements

It's important to remember that, while many businesses create a strategic plan before launching, some business owners just jump in. So, this business plan can add value by outlining how your business plans to reach specific goals. This type of planning can also help a business anticipate future challenges.

5. Business Acquisition Plan

Investors use business plans to acquire existing businesses, too — not just new businesses.

A business acquisition plan may include costs, schedules, or management requirements. This data will come from an acquisition strategy.

A business plan for an existing company will explain:

• How an acquisition will change its operating model
• What will stay the same under new ownership
• Why things will change or stay the same
• Acquisition planning documentation
• Timelines for acquisition

Additionally, the business plan should speak to the current state of the business and why it's up for sale.

For example, if someone is purchasing a failing business, the business plan should explain why the business is being purchased. It should also include:

• What the new owner will do to turn the business around
• Historic business metrics
• Sales projections after the acquisition
• Justification for those projections

6. Business Repositioning Plan

When a business wants to avoid acquisition, reposition its brand, or try something new, CEOs or owners will develop a business repositioning plan.

This plan will:

• Acknowledge the current state of the company.
• State a vision for the future of the company.
• Explain why the business needs to reposition itself.
• Outline a process for how the company will adjust.

Companies planning for a business reposition often do so — proactively or retroactively — due to a shift in market trends and customer needs.

For example, shoe brand AllBirds plans to refocus its brand on core customers and shift its go-to-market strategy. These decisions are a reaction to lackluster sales following product changes and other missteps.

7. Expansion or Growth Business Plan

When your business is ready to expand, a growth business plan creates a useful structure for reaching specific targets.

For example, a successful business expanding into another location can use a growth business plan. This is because it may also mean the business needs to focus on a new target market or generate more capital.

This type of plan usually covers the next year or two of growth. It often references current sales, revenue, and successes. It may also include:

• SWOT analysis
• Growth opportunity studies
• Financial goals and plans
• Marketing plans
• Capability planning

These types of business plans will vary by business, but they can help businesses quickly rally around new priorities to drive growth.

Getting Started With Your Business Plan

At the end of the day, a business plan is simply an explanation of a business idea and why it will be successful. The more detail and thought you put into it, the more successful your plan — and the business it outlines — will be.

When writing your business plan, you’ll benefit from extensive research, feedback from your team or board of directors, and a solid template to organize your thoughts. If you need one of these, download HubSpot's Free Business Plan Template below to get started.

Editor's note: This post was originally published in August 2020 and has been updated for comprehensiveness.

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by James Hickson | February 09, 2022 | 11 min read

Everything you need to know about raising capital

Last updated: April 18, 2022

Let's examine two ends of a company spectrum. On one end, there is the seed company raising money to pitch a business idea to venture capital firms. And at the other, there is the decades or even centuries-old incorporated company with a healthy amount of cash flow. What do they have in common? Both entities must know how to raise capital.

This can be an overwhelming process for many businesses. But it also can mean the difference between success and failure regardless of your growth stage. To remove some of the pressure around capital raising, this article summarises everything you need to know.

We cover its importance, define key terms based on the stage of your company, provide guidelines for raising capital, examine key documentation, and give some key tips on how to raise capital quickly. If raising money for your business is a weak point, read on.

Table of contents

What does it mean to raise capital, why is it important to raise capital, how can a company raise capital.

A simple business definition for raising capital is when a business owner receives money from an investor or several investors to facilitate the start, growth, or daily operations of a business. Again, this can be a burden for some business owners. But most entrepreneurs consider it essential, and the cornerstone for their success.

A business owner might look at different fundraising methods to service different capital needs. These methods fall under two forms of fundraising: equity financing and debt financing – also known as dilutive or non-dilutive.

What is equity capital raising?

Equity capital raising is the process of raising money by selling shares of stock. This offsets the need to borrow money and creates debt. But it also dilutes the current pool of shares by increasing the total number of available shares. For capital raising, there are two types of shares sold: common and preferred.

Common stock shares give investors the right to vote, but that's all. And if the company liquidates or goes bankrupt, other shareholders will have first rights on any payments.

Preferred shares offer no voting rights and limited rights on ownership. Instead, preferred shareholders receive specific dividends before common shareholders receive payments.

Equity finance

When examining equity capital raising, you'll hear common terms like equity finance and equity funding. These all fall under the same umbrella. Equity finance also involves selling shares to investors to raise capital for business operations. But it's more of a blanket term that can include investment from friends and family, an angel investor (business angels) or other private investors, venture capital firms, private equity firms or institutional investors, or an initial public offering (IPO) on public markets.

You'll generally hear equity finance regarding public companies, but it also applies to private equity investment.

What is startup capital raising?

While equity finance can refer to capital raising for both established companies and startups, startup capital raising narrows the focus. When entrepreneurs have a solid business plan or prototype, they can raise capital in a variety of ways.

Startup capital can come from equity financing channels like venture capital, seed investors, angel investors, and institutional investors. But it can also come from debt financing channels like bank loans and bonds. Small businesses may also use credit cards to get things off the ground.

Debt financing can have a higher risk than equity financing, as startups will pay interest as part of their business loan agreement. But the bank will have no control over the company, and on fulfilment of the loan agreement is fulfilled, the contract dissolves.

Startup finance

Startup finance is another interchangeable term for startup capital raising. It includes all the means for a new business to either launch a product or grow the business – including dilutive and non-dilutive financing .

Unless you're sitting on tons of cash or your established business has a healthy cash flow, you'll need more money for growth and expansion plans. Many successful business owners boast that they never had to raise capital from venture capitalists, but it's not necessarily the best course. Here are some key reasons to raise finance for your business:

It's easier to scale your business – If you're beholden to interest payments on bank loans, it can make it difficult to launch a small business or project. Venture capital and equity investment make it easier to scale and often provide more money up front.

Capital gives your company credibility – When venture capitalists or private equity firms invest in your company, it shows others that your idea and business plan are credible. And venture capital firms often release news of the investment to the media to increase visibility.

You could gain access to additional resources – Raising finance often comes with access to additional resources. Think tax and legal resources along with access to extensive industry research.

The funding terms could be helpful – If you opt to work with an equity investor over a business loan, your business could receive better payment terms. You won't have to make monthly payments or pay interest at all.

When should you raise funds for a startup?

Business fundraising rarely happens just once. It happens in stages – known as 'rounds' – and each round has a different purpose and set of parameters. These are the common stages:

Pre-seed – This is the first investment and idea stage where a company has no customers or employees yet.

Seed – There should be a prototype or demo available of your product or idea at this stage.

Series A – Stage that raises funds to put a product on the market.

Series B-D and possibly more – Stages reserved for scaling, growth, and expansion.

Every company has a different path and different needs, so there's no actual premiere time for capital raising. Mostly, you can raise funds when you have a valid problem to solve and the demand for the solution is both viable and verifiable.

However, there are many valid reasons to wait before raising funds. You could need more time to generate interest in a solution before investors will bite. Or you have the funds to finance it yourself for a while. Another good reason to wait is that you may not have the time or resources to invest in pitching your idea to investors.

It's up to you as a business owner to consider the stages and reasoning for fundraising and discern what's best for your company.

Earlier, we defined what it means to raise capital, so now let's dive into the nuts and bolts of how you can do it for your company.

What are the methods of raising capital?

Each method for raising capital falls under the two forms detailed earlier: equity or debit. No matter which method you pursue, it's important to understand the reasoning for your choice.

Is it more helpful for your company to give up some equity in order to meet your goals? Or would your company profit more by taking on debt because you know you can pay back the loan quickly?

Regardless of which category you choose, you'll use the common methods detailed below.

3 common sources of equity capital

Note that the listed equity funding sources are outside of friends and family or money from your own pocket.

Angel investor or private investors – Angel investors are private individuals with a high net worth. They invest in small business startups or directly with entrepreneurs – with excellent business plans – in exchange for equity in the business.

Venture capitalists – These individuals generally work for venture capital firms and invest in businesses after angel investors. They tend to invest for longer terms and focus more on the growth potential of the company, as opposed to a solid business idea.

Initial Public Offering (IPO) – An initial public offering takes your company onto a stock exchange to raise capital from the public market. This option is complex, expensive, and usually only viable for established companies.

3 common debt capital sources

Debt capital comes from financial institutions through three common methods:

Loans – A company borrows money from a bank or government agency and pays it back over time with interest payments according to the loan agreement.

Credit lines – Companies use lines of credit to support growth. Obviously, you'll also pay interest using this method.

Bonds – Bonds are a corporate finance option where established companies allow large pools of investors to lend money directly to the company.

How does a capital raise work?

Capital raising happens when large or small businesses approach investors (equity capital raising), lenders (debt financing), or investment bankers – for both categories, and to process documents – with the purpose of raising capital.

Raising finance for businesses – new or old, big or small – requires tons of preparation and planning. Think about it – you're asking investors or lenders to commit their money to your company based on its potential for growth. You'll need to provide evidence that your business or idea has a high chance of succeeding and you'll be able to pay back these individuals or institutions.

What happens in a capital raise?

Capital raising can be a long process, so don't expect things to happen overnight. Below is a breakdown of both an equity and debt capital raise.

Unless you have a company to take on the public stock exchange, you can sum up the equity capital raise process in seven steps:

Determine your strategy for funding – This is the pre-offer stage where you'll define exactly what it is you're looking for in the capital raise. If you're giving an equity stake, how much are you willing to give up? If you're engaging in debt financing, how much debt are you willing to take on? And how high of an interest rate can your company pay and still accomplish its goals?

Organise your business details – You can't just pitch what's in your head. You must compile research, documentation, and accurate projections of the numbers your business can attain – revenue, profits, customers or users, etc.

Seek out investors – It's important at this stage to do your research and look at your network. Do you have a connection who can give you a solid contact? Or do you plan on reaching out to an investment firm? Working with investment bankers could be another viable option.

Create your pitch – Your pitch is where your capital raising campaign will live or die. It's important to create a presentation that's both immaculate and impossible to refuse. Then, present it to anyone and everyone who will listen and provide useful feedback to perfect your presentation.

Set up meetings – It's a numbers game, so don't expect every pitch to go well. But the more investors you pitch your idea to, the higher your chances are of getting funding.

Post-pitch due diligence – After your pitch, you'll need to follow through and provide even more evidence for the viability of your business or idea. This means possibly reaching out with more data and confirming your commitment.

Negotiation – This is also known as the closing process. You'll have to draw up paperwork and work out the finer details and work out what is in the best interest of both parties.

Sign the agreement – This is where the work begins. It's time to take the capital and put your plan into motion.

The process for raising debt capital can be similar equity financing if you're seeking a bank loan. You'll go through all seven of the steps listed above, but instead of pitching to investors, you'll pitch to lenders.

Otherwise, you'll take on debt through the form of a credit line. In this situation, you probably won't have to give a pitch. Instead, you'll need to show your business numbers to prove to credit lenders that you can pay back your credit loan and interest.

Documents to raise capital for your business

You'll integrate these key documents into a detailed business plan to raise capital for your business.

One-page company profile – Also known as an executive summary, this document provides potential investors and/or lenders with all the essential information they need at a glance.

A Confidential Information Memorandum – An exhaustive document ranging from 40 to 60 pages that details every aspect of your business. It includes your executive summary and lays out the elements of your company that prove it will be a success – product overviews, SWOT analysis, market opportunities, financial statements and outlook, etc.

A pitch deck – A pitch deck is like a CIM, except that it's much shorter – 10 slides – and has a lot of personality. This is what you should use to pitch your presentation to investors and lenders verbally and with enthusiasm.

A financial model – This is a spreadsheet that contains core financial statements and projections of how your company will perform in the coming years. You must include your balance sheet, cash flow statement, and business income statement and be able to show how those numbers came to be.

James Hickson is the CEO and Founder of Bloom Financial Group, the winner of numerous industry awards – most recently recognized as FinTech CEO of the year as well as Payment Service of the year by AI Global Media.

Bloom is a European Fintech company focused on small to medium business lending. With their proprietary technology, Bloom offers e-commerce and retail brands access to revenue based funding (between 25,000 EUR and 3M EUR).

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• Building Your Business

A Guide To Raising Capital for Startups

How To Fund Your Startup

What Are Your Options for Raising Capital?

How to get funded, consider the future, frequently asked questions (faqs).

Tom Werner / Getty Images

Once you decide to start your own business, one of the most important factors is funding your idea. As a founder, fundraising—whether one-time or ongoing—is a key part of the job description. While many entrepreneurs believe they must save up and invest their own capital to make their dream a reality, or what is called bootstrapping their startups, there actually are many ways to raise money for your startup, even though it can sometimes be a lengthy and challenging process.

Most startups rely on a combination of fundraising options and by stages, starting with grants, microloans, angel investors, and ending with venture capital (VC) funding, as a way to seed the startup and allow it to grow at an exponential rate if the business model allows for it.

Before starting your fundraising journey, however, you must lay the groundwork by doing your research, leveraging your network, and thinking realistically about how much cash you will need. In this guide, we will go over assessing your startup costs, different types of cash sources to consider, and how to go about closing the deal.

Key Takeaways

• Before seeking outside capital, you must know your financial projections and capital needs inside and out, even if your product is not yet on the market.
• Don’t just consider what you need to get started—make sure you include what you’ll need to stay afloat when fundraising.
• There are many different avenues that founders use when seeking capital, so make sure to consider the pluses and minuses of each type of funding to assess which is right for your business.
• Craft a solid pitch deck, hone (and re-hone) your pitch, and take advantage of your network to connect with and win over the right investors for your company.

Startup Costs

Regardless of the size of your future company, the first step is to understand how much you’ll need to get off the ground. This exercise is necessary for founders, both as a way to understand the financial realities of their new business and because in order to raise funds, you will need to know how much your business needs on the first day as well as day 100. The quickest way to scare off an investor or a bank loan officer is by not being familiar with your own numbers.

Every business has different startup capital requirements . A brick-and-mortar operation might have licensing, inventory, and insurance burdens that an online startup may not. Most new business owners do not know all the detailed transactions that go into a business, so to calculate approximate startup costs for your company, you need to do research.

Speak to an accountant or bookkeeper in your chosen field, or employ an industry consultant and begin to think critically about everything that goes into running your proposed business.

If you’re at a loss as to how to figure the costs associated with your new business, connect with friendly founders who have done similar things. Finding a mentor or advisor for your business can be just as valuable as finding a source of capital.

Depending on your type of business, necessary costs might include:

• Web and app development
• Product design and prototype development
• Digital marketing
• Subscriptions to software as a service
• Cloud storage such as Amazon Web Services or Dropbox
• Outsourcing manpower and skills
• Licenses and permits
• Office space

Once you understand these costs, you can begin to formulate your initial capital needs and your revenue projections. Build a worksheet and itemize your startup financial burden. Don’t forget to leverage your own skills and experience to keep these costs down. Consider doing the marketing yourself, or lean on a handy friend to help with the build-out of a space.

There are many different ways to fundraise for your new business, but there is no one-size-fits-all approach, even within the same industry. Before beginning your fundraising journey, consider how much equity you’re willing to part with (if any), and how much input you’re willing to hear from outside voices. Regardless of the size of your future business, having a plan can help you understand how you might piece together funding from different sources to meet your goals.

Bank Loans and Lines of Credit

Although it may seem like an obvious choice, traditional bank loans and business lines of credit are very hard to secure for businesses with less than two years of tax records. If they are an option, they often set steep collateral requirements.

The best avenue for debt financing is likely through U.S. Small Business Administration (SBA) microloans, which are loans less than $50,000 given to help businesses get started and expand. They are available through certified intermediaries and likely require some personal collateral or guarantees from the owner.

Alternative lending, which takes place outside of a banking institution, may be better suited to a new small business. Consider the SBA’s Lender Match program, or check your state’s division of small business for lists of lending alternatives.

Angel Investors or Friends and Family

Without an established business history, one way many founders start their fundraising is with friends and family or angel investors. This type of capital is usually unique to each individual deal, meaning there is more flexibility with deal terms. You may be able to raise debt capital , meaning borrowed money, from one family member and take an investment from another.

Angel investors are non-institutional investors who may be entrepreneurs themselves and often have a passion for helping small businesses and startups. They may agree to offer capital in exchange for debt or equity. Extending your network can help you connect with individuals who are willing to invest, often without interfering too much with your business. Look for local angel groups, where like-minded individuals pool resources to make a more sizable investment as a group.

Crowdfunding

Some startups find success through crowdfunding platforms. With this route, money is raised via the internet through different platforms, often in exchange for a “gift,” depending on the level of investment. The traditional method of crowdfunding allows founders to raise small amounts from a large number of people, with no obligation of repayment or equity disbursement. This type of funding usually requires some basic marketing, as well as a robust network of friends and family in order to succeed.

Recently, the U.S. Securities and Exchange Commission (SEC) approved equity crowdfunding, which allows for companies to sell securities to the public via a registered broker, although there are limits to how much a business can raise and to how much one can invest.

Accelerators and Incubators

Depending on your industry, applying to accelerators or incubators may be a good path to consider. These programs can support early-stage companies with mentorship, operations, marketing, and access to capital. Startups enter one of these programs for a fixed period of time and often work alongside other emerging brands in their industry.

Acceptance is often very competitive and may require founders to travel to partake in educational programming. Many are focused on growth-driven startups, so it’s worth considering whether your business is the right fit.

Venture Capital

Venture capital funding often is used to take a startup to the next stage once the idea has been commercialized. Venture funds are intended to be a short-term cash infusion to enhance a startup's growth. These funds are useful when a business has a viable idea but may not have many hard assets that a bank can use as collateral for a loan.

Because venture capitalists are investing in a balance sheet with the expectation of a profitable exit in the not-too-distant future, they often take a large equity stake and can be very involved in the operations of the business. VCs are usually industry-specific, and they usually invest in industries where they see massive potential for growth.

Family Offices

Family offices are entities established by wealthy families to manage their assets and provide tax and estate planning services to family members. They often participate in mission-driven investment and fall somewhere between a VC and an angel investor. Investments from family offices have variable deal structures, but their involvement in a business is often more similar to an angel investor than to a VC.

Many founders believe that grant money will be an easy source of capital, but the reality is that they are very hard to access. Most grant money has stringent requirements for distribution. The best chance at winning grant money is by seeking out highly localized opportunities rather than through the national SBA, but do thorough research on this option before building it into your plan.

Once you’ve identified the capital sources you’ll be targeting for your startup, the next step is to set yourself up for success. Whether you’re seeking a microloan, $10,000 from a friend, or a large investment from a VC, preparation is key to securing funding.

Know Your Financials

A founder must know their financials inside and out. In addition to startup costs, you should have a pro forma with at least three years of projections, a balance sheet, and a cash-flow statement .

You should also know how to discuss your projected earnings before interest, tax, and amortization, known as EBITA; cost of goods sold (CoGs), gross profit, and gross margin. Friends and family may not need as much financial detail, but banks, VCs, and some angel investors will want to fully understand the financials of their potential investment.

Hone Your Pitch

Having a strong and persuasive pitch is important regardless of which funding route you pursue. A good place to start is with a solid pitch deck, which should clearly explain your idea, your background, your potential market share, and in some cases, your exit strategy. Look for open-source templates , and remember to keep things straightforward and data-driven.

From your deck, craft and practice your two- to 10-minute pitch about why your idea has value in the market. Although loan officers and family may not want to see your pitch deck, they will certainly want to be “sold” on why they should trust you with their funds.

Activate Your Network

The best way to get funded is by using your network of friends and family. Not only will they be your first stop for early investment, loans, or crowdfunding, they also may have someone in their extended circle who could be useful. Most early-stage money is gathered via a “warm introduction,” especially when it comes to venture capital, so always look for ways to make a connection. Instead of outright asking for money or connections, asking for advice and feedback on your pitch is often a good way to start.

Following Up

Regardless of the outcome of your pitch, you’ll want to follow up. Don’t be afraid to reach out, ask for feedback, and stay in contact with everyone on your list. Plan to follow up with contacts three times; even if you don’t receive funding, it’s always good to keep potential investors in the loop on how your business is growing.

Beyond the basics of starting up, however, you need to keep your new business going. In addition to raising what you need on the first day, don’t forget to factor in what you’ll spend on a monthly basis.

Use your financial projections to assess how long it will take before your revenue can sustain your business and build any gaps into your capital search. A good rule of thumb is to seek six months of operating expenses.

Beyond that, consider how you see your business growing 12 to 18 months in the future. If you’re able to gain traction with investors or lenders, try to build those goals into your initial raise so that you have a longer time before needing to seek capital again.

Depending on your track record, some fundraising avenues, such as venture capital, might be better suited for later, when your business has established success and gained market share. You’ll have more leverage and may be able to negotiate more favorable deals at that point.

What kind of business is best suited for raising capital?

Businesses of all sizes raise capital at different stages. Startup capital is perfect for early- or idea-stage businesses. You may not need capital if your business can be sustained on revenue alone.

What is the difference between equity and convertible debt?

An investor may require a percentage of your company or equity, in exchange for funding. Another format often employed by angel investors is for the funds to act as a “loan” for a set time period, after which they convert that amount to equity shares in the company.

Within a business, who is primarily responsible for raising capital?

Generally, the founder or CEO is responsible for raising capital for the new business. As a business grows, other C-suite employees will likely join the fundraising team.

U.S. Small Business Administration. " Calculate Your Startup Costs ."

Michigan.gov. " Guide to Starting a Small Business ." Page 10.

U.S. Small Business Administration. " Loans ."

U.S. Securities and Exchange Commission. " Updated Investor Bulletin: Crowdfunding for Investors ."

State University of New York. " Grants & Small Business Financing ."

What Is a Capital Raising Strategy and Why Do You Need One?

by William Lieberman | Oct 7, 2020 | Capital Raising

In this post, we’re going to explain how to raise capital. We’ll discuss each of the steps involved and provide insight to guide your decisions, so you can prepare for and pursue funding for your business.

What Is a Capital Raising Strategy, Exactly?

A capital raising strategy is essentially a roadmap for how your organization will pursue and obtain the funds it needs to fuel its growth. The capital raising process can take a long time and it’s a serious undertaking. However, while you may stay up late at night searching for new investors, writing pitch decks , and pouring over financial spreadsheets, building your strategy is the simplest part of the entire process.

Creating a capital raising strategy allows you to break the process down into achievable chunks which include:

• Setting clear goals
• Financial preparation and readiness assessments
• Developing the right materials
• Practicing your pitch
• Meeting with investors

Each of these steps could have many more sub-points to it, so just like anything else in business, planning matters a lot since it creates focus. Thorough planning improves your chances of success and makes overwhelming projects, like raising capital, more manageable.

Setting Clear Goals for Fundraising

The first question you need to ask yourself is what exactly do you expect to accomplish by fundraising? Is there a specific area of growth or opportunity you’ve identified? Why go through this process now and not another time? Have you taken a good, hard look at your company and where things sit? How much money do you need, by when, and how will you use it?

If you have a CFO on your leadership team, you will want them engaged from the very beginning. If not, consider hiring a fractional CFO to provide insight and guidance for this specific initiative. Preferably one who has significant experience raising capital for growing businesses.

Having someone on board who has relationships with the investment community and who can guide you through this process is essential. Raising capital can be a full-time job and, as the CEO, you still need to run your business. You will need sound financial advice, preparation for tough investor questions, and attorney and tax professional referrals. Getting the right people in place now will ensure that you get the job done.

RETURN TO NAVIGATION

Financial Preparation and Readiness

Gaining a 360-degree view of your company’s financial performance and projections is the next big step. Arguably, the most important step.

As the CEO you need to be able to show potential investors that your company is ready for this. You’ll need to demonstrate that you’re doing the right things to be successful, have done your due diligence, and have gained some market traction. You’ll want to ensure your books are “clean” and have been independently audited. And, you’ll need to ensure that you have the right management team in place to make your vision a reality.

Without this groundwork, serious investors won’t even want to talk to you as these items are essential to mitigating risk. Furthermore, scrutinizing the structure and performance of your company will allow you to gather the information you need to clarify the type of funding appropriate to your business and to build and present a winning pitch. This part of developing a capital raising strategy will involve the following:

Pulling Together Your Story

You probably already have a business plan, a description of your management team, and plenty of materials that describe your products and services. These items are core to every business. If something is missing or unclear, however, now is the time to get on track. You will need these items for your pitch deck as they demonstrate the value of your organization.

For more information, I’d encourage you to read my post titled “ How to Increase Company Valuation .” It provides insight into how potential investors and/or buyers evaluate a company.

The Development of Comprehensive Financial Models

Set aside some time to take an honest look at your important financial documents and to clean up anything an investor might question. For instance, review existing performance forecasts. If the market or economic outlook has changed you may need to make some adjustments. Audit your current capitalization table . And, examine legal or corporate structure documents for any changes you need to make. Then, collect the data and prepare the necessary financial models and forecasts (also known as pro forma financials).

Any serious investor will want to see these documents before agreeing to part with their cash.

Clarifying the Ask: Equity, Debt, or Hybrid Structure?

Once you’ve reviewed the particulars of your business, it’s time to take a look at the benefits your investors will gain from the deal. Will they receive a partial equity stake in your company or the promise of you repaying their money with interest? There are many ways to structure a capital deal. You will need to present something appealing to investors, yet acceptable to you.

Consider doing a cost/benefit comparison between equity and debt , or evaluating what a hybrid model might look like. If you decide to focus on debt financing and leave equity financing for another time, some of the steps below won’t be necessary. Here are some important considerations for the structure of a deal:

• Priced round versus convertible debt
• Valuation or valuation cap
• Discount (convertible)
• Minority versus majority stake
• Control provisions
• Exclusivity 
• Liquidation preference
• Redemption rights

Understanding Appropriate Sources and Methods of Raising Capital

As your company begins to engage in capital raising, it’s important to realize that there are different sources of funds available at each stage. The list below breaks down appropriate sources by round. To improve your chance of success, it’s critical to determine the most fitting target for your business. As you might imagine, raising money for an early-stage startup requires a completely different approach than raising money for a more established business.

• Personal savings or personal credit
• Friends and family
• Angel investors
• Business accelerators & incubators
• Venture capital firms (VCs)
• High net worth individuals (HNI)
• Any of the above, plus:
• Debt providers
• Private equity firms (PEs)
• Hedge funds
• Any of the above
• Any of the above, plus the option of an initial public offering (IPO)

You might notice the absence of investment banks from this list. This is intentional because investment banks don’t provide funds themselves. They are “middlemen” that get the funds for you from – you guessed it – investors.

Also, note that crowdfunding is missing. Crowdfunding is a niche in the capital raising ecosystem. It gets a lot of press, but it’s just not a good way to launch anything other than maybe a side or hobby business.

There are, however, business incubators. Business incubators (or accelerators) fund startups. These are serious funding sources that didn’t exist ten years ago.

Developing the Right Materials for Fundraising

• Executive summary : the high points of what you are proposing
• Professional pitch deck : a summary of your business plan, management team, products and services, competition, growth history, and growth plans using new capital
• Press package : especially for an IPO
• Due diligence items such as patents, contracts, competitive intelligence, or any other documents that provide an accurate, legally sound justification of your company’s net worth
• Key assumptions about your business
• Revenue model
• Pro Forma income statement
• Balance sheet
• Statement of cash flows
• Cost of goods sold analysis (“bill of materials”)
• Personnel (hiring plan)
• Summary results with variance analysis
• Operating expense details
• Summary of key investment factors : points that help alleviate risk anxiety
• Pro Forma capitalization table
• Term sheet or letter of intent
• Legal documentation

The preparation and readiness work you did in the last step should have you well prepared for this one. But now is when it all comes together. This package must be rock-solid and extremely professional. It must tell a compelling, well-crafted (yet, truthful) story about where your business is today, where you’re going, and why your company would be a good choice for investment.

Identifying and Tracking Prospects

Once you have the necessary marketing materials, don’t forget to put a system in place for keeping track of your capital source prospects. This could be as simple as an Excel workbook to record names, contact information, dates, etc. Or, you may be able to integrate it with your existing customer relationship management (CRM) system — just be sure to create a new database specifically for capital raising so these new prospects don’t get mixed up with your regular customers and sales prospects. Also, be sure to restrict access to this fundraising prospect database so only the people with a real business need can access it.

Practicing Your Pitch

One of the most common pitfalls I’ve seen capital-hungry companies fall into is insufficient preparation for the pitch, so build time into your capital raising strategy for pitch practice. Even if you’re a confident public speaker, presenting to investors can be a nerve-wracking experience. A few practice rounds will ensure that you can share your passion (despite your nervousness), avoid errors, and get ready for the inevitable hard questions.

Consider your pitch from an investor’s perspective and anticipate their concerns. If you are able to practice your pitch on some “friendlies” who can ask some of the harder questions and critique your answers, all the better. This will help you iterate based on the feedback so you can be more successful when the time comes.

At the CEO’s Right Hand, we help our clients practice their pitches . We provide insight into things to say and what not to say. Then we do a thorough walk-through of important topics investors will expect you to address, such as:

• Traction to date
• Go to market strategy
• Intellectual property
• Management team experience/depth
• Monetization strategy
• Key performance indicators

Finally, we work with you to address any challenges until you’re 100% ready.

Meeting with Investors

The investor who ultimately decides to give you their money becomes a part of your company. Be respectful of their time (just as you would expect one of your employees to be) and avoid boring them with unnecessary details. And, don’t worry, the trusted team you assembled in step one will be at your side, to guide you through any rough spots.

Final Thoughts on Developing a Capital Raising Strategy

As an entrepreneur and the CEO of a growing company, you know capital raising is crucial. Yet the process can seem overwhelming – a minefield where one misstep can completely derail your dreams. That’s why developing a comprehensive capital raising strategy is so important. It forces you to take a critical look at your business and get everything in place before creating a pitch deck and engaging with investors. This will ensure that the time you spend raising money is productive.

Investors will expect you to have the keen financial and business insight necessary to answer the single most important question on their minds: “Do you have what it takes to ensure we both make money out of this deal, without undue risk?” But you don’t have to do this alone. At The CEO’s Right Hand, we provide capital raising services and can help you navigate the entire process successfully. Contact us today to discuss how we can help you get the funding you need to grow.

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Mr. Lieberman is the founder and CEO of The CEO’s Right Hand, Inc., a New York-based consulting services firm that provides the full breadth of strategic, financial and operational advice to founders, CEOs and Executive Teams. As an experienced entrepreneur himself, he has served in various C-suite leadership and advisory roles across a wide spectrum of industries.

His first venture was CMR Technologies, a FinTech company based in San Francisco serving the investment management consulting space. From CMR, Mr. Lieberman formed Xtiva Financial Systems, a software company specializing in sales compensation solutions for the financial services industry. Mr. Lieberman served as Xtiva’s CEO, building the company to over $10 million in revenues and 100+ clients. He also served as the President and CFO for Interactive Donor, a New York-based Benefit Corporation which incentivizes charity through rewards.

Mr. Lieberman holds double Masters degrees, one in Business Administration and the other in Computer Science from the University of California at Los Angeles. He completed his Bachelors in Computer Engineering from the University of California at San Diego.

Contact William Lieberman [email protected] 646-277-8728

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How to Write a Business Plan for Raising Venture Capital

Written by Dave Lavinsky

Are you looking for VC funding or funding from other potential investors?

You need a good business idea – and an excellent business plan.

Business planning and raising capital go hand-in-hand. A venture capital business plan is required for attracting a venture capital firm. And the desire to raise capital (whether from an individual “angel” investor or a venture capitalist) is often the key motivator in the business planning process.

Download the Ultimate VC Business Plan Template here

Writing an Investor-Ready Business Plan

Executive summary.

Goal of the executive summary: Stimulate and motivate the investor to learn more.

• Hook them on the first page. Most investors are inundated with business plans. Your first page must make them want to keep reading.
• Keep it simple. After reading the first page, investors often do not understand the business. If your business is truly complex, you can dive into the details later on.
• Be brief. The executive summary should be 2 to 4 pages in length.

Company Analysis

Goal of the company analysis section: Educate the investor about your company’s history and explain why your team is perfect to execute on the business opportunity.

• Give some history. Provide the background on the company, including date of formation, office location, legal structure, and stage of development.  
• Show off your track record. Detail prior accomplishments, including funding rounds, product launches, milestones reached, and partnerships secured, among others.
• Why you? Demonstrate your team’s unique unfair competitive advantage, whether it is technology, stellar management team, or key partnerships.

Industry Analysis

Goal of the industry analysis section: Prove that there is a real market for your product or service.

• Demonstrate the need – rather than the desire – for your product. Ideally, people are willing to pay money to satisfy this need.
• Cite credible sources when describing the size and growth of your market.
• Use independent research. If possible, source research through an independent research firm to enhance your credibility. For general market sizes and trends, we suggest citing at least two independent research firms.
• Focus on the “relevant” market size. For example, if you sell a portable biofeedback stress relief device, your relevant market is not the entire health care market. In determining the relevant market size, focus on the products or services that you will directly compete against.
• It’s not just a research report – each fact, figure, and projection should support your company’s prospects for success.
• Don’t ignore negative trends. Be sure to explain how your company would overcome potential negative trends. Such analysis will relieve investor concerns and enhance the venture capital business plan’s credibility.
• Be prepared for due diligence. It’s critical that the data you present is verifiable since any serious investor will conduct extensive due diligence.

Customer Analysis

Goal of customer analysis section: Convey the needs of your potential customers and show how your company’s products and services satisfy those needs.

• Define your customers precisely. For example, it’s not adequate to say your company is targeting small businesses since there are several million of these.
• Detail their demographics. How many customers fit the definition? Where are these customers located? What is their average income?
• Identify the needs of these customers. Use data to demonstrate past actions (X% have purchased a similar product), future projections (X% said they would purchase the product), and/or implications (X% use a product/service which your product enhances).
• Explain what drives their decisions. For example, is price more important than quality?
• Detail the decision-making process. For example, will the customer seek multiple bids? Will the customer consult others in their organization before making a decision?

Finish Your Investor Business Plan in 1 Day!

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And know it’s in the exact format that venture capitalists want?

With Growthink’s Ultimate Business Plan Template , you can finish your plan in just 8 hours or less!

Competitive Analysis

Goal of the competitive analysis section: Define the competition and demonstrate your competitive advantage.

• List competitors. Many companies make the mistake of conveying that they have few or no real competitors. From an investor’s standpoint, a competitor is something that fulfills the same need as your product. If you claim you have no competitors, you are seriously undermining the credibility of your business plans.
• Include direct and indirect competitors. Direct competitors serve the same target market with similar products. Indirect competitors serve the same target market with different products or different target markets with similar products.
• List public companies (when relevant, of course). A public company implies that the market size is big. This gives the assurance that if management executes well, the company has substantial profit and liquidity potential.
• Don’t just list competitors. Carefully describe their strengths and weaknesses, as well as the key drivers of competitive differentiation in the marketplace. And when describing competitors’ weaknesses, be sure to use objective information (e.g. market research).
• Demonstrate barriers to entry. In describing the competitive landscape, show how your business model creates competitive advantages, and – more importantly – defensible barriers to entry.

Marketing Plan

Goal of the marketing plan: Describe how your company will penetrate the market, deliver products/services, and retain customers.

• Products. Detail all current and future products and services – but focus primarily on the short-to-intermediate time horizon.
• Promotions. Explain exactly which marketing/advertising strategies will be used and why.
• Price. Be sure to provide a clear rationale for your pricing strategy.
• Place. Explain exactly how your products and services will be delivered to your customers.
• Detail your customer retention plan. Explain how you will retain your customers, whether through customer relationship management (CRM) applications, building network externalities, introducing ongoing value-added services, or other means.
• Define your partnerships. From an investor’s perspective, what partnership you have with whom is not nearly as important as the specific terms of the partnership. Be sure to document the specifics of the partnerships (e.g. how it will work, the financial terms, the types of customer leads expected from each partner, etc.).

Operations Plan

Goal of the operations plan: Present the action plan for executing your company’s vision.

• Concept vs. reality. The operations plan transforms business plans from concept into reality. Investors do not invest in concepts; they invest in reality. And the operations plan proves that the management team can execute your concept better than anybody else.
• Everyday processes. Detail the short-term processes and systems that provide your customers with your products and services.
• Business milestones. Lay out the significant long-term business milestones for the company, and prove that the team will execute on the long-term vision. A great way to present the milestones is to organize them into a chart with key milestones on the left side and target dates on the right side.
• Be consistent. Make sure that the milestone projections are consistent with the rest of the venture capital business plan – particularly the financial plan.
• Be aggressive but credible. Presenting a plan in which the company grows too quickly will show the naiveté of the team while presenting too conservative a growth plan will often fail to excite an early stage investor (who typically looks for a 10X return on her investment).

Financial Plan

Goal of the financial plan: Explain how your business will generate returns for your investors.

• Detail all revenue streams. Be sure to include all revenue streams. Depending on the type of business, these may include sales of products/services, referral revenues, advertising sales, licensing/royalty fees, and/or data sales.
• Be consistent with your Pro-forma statements. Pro-forma statements are projected financial statements. It is critical that these projections reflect the other sections of your newly formed business plan.
• Validate your assumptions and projections. The financial plan must detail your key assumptions, and it is critical that these assumptions are feasible. Be sure to use competitive research to validate your projections and assumptions versus the reality in your marketplace. Assessing and basing financial projections on those of similar firms will greatly validate the realism and maturity of the financial projections.
• Detail the uses of funds. Understandably, investors want to know what, specifically, you plan to do with their money. Uses of funds could include expenses involved with marketing, staffing, technology development, office space, among other uses.
• Provide a clear exit strategy. All investors are motivated by a clear picture of your exit strategy, or the timing and method through which they can “cash in” on their investment. Be sure to provide comparable examples of firms that have successfully exited. The most common exits are IPOs or acquisitions. And while the exact method is not always crucial, the investor wants to see this planning in order to better understand the management team’s motivation and commitment to building long-term value.

Above all, the business plan is a marketing document that helps to sell the investor on the business opportunity, the team, the strategy, and the potential for significant return on investment.

How to raise venture capital is a difficult and time-intensive challenge. There is no easy shortcut or silver bullet. However, you can greatly improve your chances of raising venture capital by writing a business plan that speaks directly to the investor’s perspective. A VC business plan template will significantly help in cutting down the time it takes to complete your plan.

Finish Your VC Business Plan in 1 Day!

Raising venture capital faqs, what is the purpose of a business plan for raising venture capital.

The purpose of writing a business plan for raising venture capital is to convince investors that the proposed new or existing company has a good chance of being successful and can earn them a favorable return on investment (ROI).

A VC Business Plan Template will help you in creating an investor ready plan quickly and easily.

What Does VC Funding Entail?

VC funding is a type of financial transaction in which the venture capital firm invests in startup companies or early-stage companies. The firm invests its own capital (which it receives from other entities that invest in the VC firm) in these nascent companies with the goal of rapidly expanding them. Generally, early-stage companies use bootstrapping, self-funding, bank loans, and/or angel investment before raising their first round of venture capital. Companies might receive several rounds of VC funding.

What is a Typical Amount of Capital to Raise?

Typically, the first round (Series A) of venture capital amounts to $2-10 million. To raise that amount from VCs at the very start of your company is often very difficult. Rather, you should consider approaching angel investors and banks to provide initial financing to get you to the point at which venture capitalists are interested in providing funding. Gaining customer traction is generally the point in which VCs are ready to provide Series A financing. VCs will provide Series B funding, Series C funding, etc. to help continue to fund a company’s growth if the company seems poised for success. These funding rounds are usually much larger than Series A rounds.

How Long Does It Take For Investors To Decide If My Business Is Worth Investing In?

It varies from investor to investor, but prepare yourself to wait up to three months before receiving a check from a VC. The process typically includes sending the VC a teaser email to get their interest, following up with a business plan, giving a pitch presentation, and negotiating the terms of the funding round.

How Do I Find Venture Capitalists?

There are many venture capital firms and virtually all of them have websites and are thus fairly easy to find. There are also directories of them available on the internet. You may also be able to find VCs through personal introductions or by attending industry events. 

Look for VCs that have funded companies in your industry/sector, at your stage of development and in your geographical area.

What Capital Raising Options are Available For a Business?

There are four broad options for raising money or venture capital when you run a business. These include venture capital firms, angel investors, loans and venture debt, or bootstrapping.

Venture Capitalists

A Venture Capitalist is an investor that provides equity financing for companies that have already achieved some traction but lack the financial resources to scale up their operations. Their investment objective is typically to grow the company so it can be sold or go public at a later date so the VC can exit or cash in on their success.

Angel Investors

Angel investors are wealthy individuals who invest their own money into startup companies because they believe they will get an above-average return on their investment. They also invest if/when they like the entrepreneurs and/or management team, they are passionate about the concept, or if they’d like to get involved in an exciting new venture.

Loans and Venture Debt

Business loans or venture debt is money given to a company in return for interest and principal payments over time, but without the investor taking an ownership stake in the company. Such funding is typically issued by local banks. Debt funding is typically less expensive than equity financing, but it is much harder for early-stage companies to raise significant amounts of debt capital.

Bootstrapping

Bootstrapping is the process of a startup company funding its own growth from internal sources such as the founder's savings, loans from friends and family, or credit card debt.

Firms that are bootstrapped can grow at a more controlled rate while they achieve product-market fit before an angel investor or venture capital firm injects their money to scale up the company.

Bootstrapping is best for companies with low capital needs because there’s only so much you can raise in this manner. If you need millions of dollars, bootstrapping just won’t work and you’ll need to tap venture capital.

How exactly will your small business persuade these potential investors to sign a check? Once you know what type of capital you are trying to raise, you can develop business plans to suit their exact requirements.

Need help with your business plan?

Speak with one of our professional business plan consultants or contact our private placement memorandum experts.

Or, if you’re developing your own PPM, consider using Growthink’s new private placement memorandum template .

Other Helpful Funding & Business Plan Articles

Capital raising for growth and innovation

In 2022, the digital capital raising market showed remarkable growth, reaching $65 billion . By the end of 2023, it’s forecasted to reach $66.26 billion. However, the traditional market still dominated, accounting for almost 90% of the total capital raised in 2022, reaching a staggering $541.8 billion . Still, by the end of 2023, the traditional capital raising market is expected to decrease to $498.9 billion .  

However, the landscape is evolving, influenced by trends like technology and biotech shifts, digital platforms, and changing investor preferences. With potential challenges on the horizon, such as the Silicon Valley Bank collapse and a projected drop in capital availability , it’s crucial to approach the process of raising capital with careful preparation. 

This guide serves as a roadmap for entrepreneurs, startups, small businesses, and established companies alike, shedding light on the importance of raising capital for fostering growth and driving innovation.

What does it mean to raise capital?

Capital raising refers to the process by which a company secures funds from external sources to finance its operations, innovation, or expansion initiatives.

Capital raising strategy is critical for both startups and established businesses looking to scale their operations.

Here are the six key advantages of raising capital for business:

• Business expansion opportunities . Raising capital provides the financial means to expand operations, enter new markets, and access previously untapped customer segments.
• Innovation and research . It enables businesses to invest in research and development, driving innovation and the creation of new projects, products, and services.
• Talent acquisition . With increased resources, companies attract and retain top-tier talent, fostering a skilled workforce that contributes to business growth.
• Competitive advantage . Adequate capital allows businesses to stay competitive by upgrading infrastructure, technology, and operational efficiency.
• Risk management . Capital serves as a cushion during economic downturns or unexpected challenges, helping businesses maintain stability.
• Strategic acquisitions . Raised capital funds acquisitions of complementary companies, technologies, or assets, accelerating growth and market presence.

Methods of capital raising

There are three main methods of raising capital.

1. Equity financing

Equity capital raising refers to the process of acquiring funds by selling ownership shares to external investors. This method of financing allows the company to raise funds without incurring debt and provides private equity investors with an ownership stake in the company, potentially granting them a share of profits and influence in certain matters, such as voting on company decisions.

Examples of equity raising include:

• Venture capital

Venture capitalists provide capital to startups and early-stage companies with high growth potential. In return, venture capital firms often acquire a portion of the company and may offer expertise and mentorship.

• Angel investors

These are individuals who invest their personal funds in startups. They may also offer mentorship and industry connections in addition to their financial support.

• Equity crowdfunding

This involves a large number of people collectively investing in a startup or an early-stage company through crowdfunding platforms like Kickstarter , AngelList , or IndieGoGo , allowing smaller investors to participate and potentially gain equity ownership.

• Seed funding

This is the initial capital raise that supports the development of a business concept, which often comes from angel investors, friends, or family.

• Initial public offering

In an initial public offering (IPO), a private business becomes a public company by issuing shares to the general public on the stock market. This provides access to a large investor pool and can raise substantial capital.

• Institutional investors

These include mutual funds, pension funds, hedge funds, banks, and insurance companies. They invest large sums of money, favoring established businesses for a greater assurance of return.

For those interested in how to start a hedge fund , you can find a dedicated article in our Insights section that provides valuable guidance.

2. Debt financing

Debt raising is when a company raises funds by borrowing money that needs to be repaid over time with an interest rate. Here are its main types: 

Businesses borrow from banks or financial institutions, agreeing to repay the principal amount with interest over a set period. Loan terms and interest rates vary based on the company’s creditworthiness and the lender’s terms.

• Corporate bonds

Companies issue bonds to investors, promising to pay interest and return the principal upon maturity. Bonds provide investors with a fixed income stream and allow businesses to tap into debt markets.

• Merchant cash advance

Merchant cash advance (MCA) provides businesses with immediate funds. Repayment involves deducting a fixed percentage from daily sales, along with a fee, until the advance is fully paid. This quick-access financing option suits businesses with steady sales.

3. Hybrid financing

Hybrid financing refers to a financial approach that combines elements of both equity and debt financing. Potential sources of hybrid financing include:

• Preferred shares

They offer advantages over common shares, such as dividends and liquidation priority. Some preferred shares are convertible to common shares under specific conditions, allowing investors to benefit from potential growth while enjoying fixed-income payments.

• Convertible debt

Companies often use a convertible debt raise, which starts as a loan but can be converted into equity shares. This financing option typically suits companies with a low credit rating but high growth potential.

How to select the best method of raising capital for a business

There are several critical factors to consider when selecting the best method of raising funds. Here’s a 3-step guide.

1. Assess your business needs and goals

Start by evaluating the business’s current financial needs and identifying why the company requires capital. Is it to fund product development, facilitate corporate growth, expand operations, or address cash flow issues? Clearly define the business goals and determine how much money is needed to achieve them.

2. Analyze the pros and cons of different methods

Consider the advantages and disadvantages of each method in relation to the business’s needs, goals, and risk tolerance. For example:

• Equity financing can bring experienced investors and strategic partners but may lead to loss of control
• Debt financing provides immediate capital without diluting ownership but requires repayment
• Hybrid financing offers flexibility in balancing potential returns and security but introduces complexity and risk of eventual equity dilution.

3. Tailor the method to the industry and growth stage

The best method of raising finance varies depending on the industry and business growth stage. For example, tech startups might opt for venture capital, while mature companies might prefer traditional bank loans. Consider what’s common and successful within the industry.

Capital raising process in 11 steps

Here’s a general overview of the capital raise process:

• Assess how much capital is required and for what purpose. This involves creating a detailed budget and financial plan to understand the funding requirements.
• Identify the most suitable method of raising investor capital for the business.
• Prepare a business plan and pitch. This should outline the company’s goals, financial projections, analysis of market conditions, and the potential return on investment for funders.
• Consider legal and regulatory compliance. For example, if going public through an IPO, the company must comply with securities laws and regulations, such as The U.S. Securities and Exchange Commission (SEC) or the Sarbanes–Oxley Act of 2002 (SOX) .
• Seek out potential investors or lenders who align with the business’s goals and values. This may involve networking, attending investor conferences, or engaging with venture capitalists or banks.
• Facilitate the due diligence process by preparing all necessary documents in advance. Consider using a virtual data room as a secure tool for sharing confidential information.
• Negotiate terms and agreements once investors or lenders are interested. Negotiations include discussing the valuation of the company, interest rates, equity stakes, and other terms and conditions.
• Secure the necessary funds and sign legal contracts. Equity financing may involve issuing shares, while debt financing involves disbursing loans or bonds.
• Utilize the raised capital for its intended purpose: operational expenses, expansion, research and development, or other specific projects. Otherwise, you might simply fail to reach the set objectives.
• Manage the funds post-raising, fulfill any repayment obligations for debt financing, and work toward achieving the goals outlined in the business plan.
• Regularly provide updates to investors and lenders on the company’s financial performance and progress toward set milestones in an agreed way, if that was required by investors and lenders. 

Challenges and solutions in raising business capital

To ensure successful capital raising, entrepreneurs need to be ready to address various challenges. 

Challenge 1: Investor alignment 

Finding investors whose goals, values, and expectations align with the business’s mission and growth capital plans.

Thoroughly research potential investors, communicate the business plan clearly, and seek investors who understand and share the same long-term objectives.

Challenge 2: Valuation

Overvaluing or undervaluing the business deters potential investors or leads to unfavorable equity raise terms.

Conduct thorough market research and financial analysis to determine a realistic valuation. Seek professional advice or use valuation methods like discounted cash flows or comparable transactions .

Challenge 3: Dilution of ownership

Equity financing leads to loss of control and ownership as more investors come on board.

Negotiate favorable terms, consider hybrid financing or convertible securities to delay dilution, and retain a sufficient equity stake to maintain decision-making authority.

Challenge 4: Investor due diligence

Investors must perform due diligence to assess the business’s financial health, management team, and growth potential, which is time-consuming.

Prepare comprehensive documentation, including financial statements (the balance sheet, income statement, and cash flow statement), business plans, and legal agreements. Streamline the process by addressing potential concerns proactively.

Capital raising for technological innovation

To foster innovation, tech companies often turn to innovation funding as a means to fuel their growth and stay competitive. Let’s explore some critical aspects of capital raising for technological innovation, with a focus on the considerations that tech companies must keep in mind:

• Intellectual property protection

Tech companies often rely on proprietary technologies and intellectual property (IP) assets. Before seeking innovation funding, it’s crucial to have a strong IP strategy to safeguard innovations and make them more attractive to investors.

• Scalability

Tech innovations must have the potential for scalability. Investors are drawn to growing ideas,  so demonstrating a clear path to scale your products or services is essential.

• Team expertise

The team behind a tech company is often a critical factor for investors. Highlighting the expertise and experience of the team members instills confidence in potential investors.

• Regulatory compliance

Tech innovations are subject to various regulations and compliance requirements, especially in fields like fintech, healthcare, and biotechnology. Understanding and addressing these regulations is crucial in attracting investment bankers.

Looking to prepare for an investment banking interview? Explore our article on investment banking interview questions for valuable insights and tips.

Role of innovation in attracting investment

Innovation and capital raising are closely connected in the tech industry. Here’s why:

• Competitive edge

Innovative tech solutions give companies a competitive edge as investors seek opportunities that stand out in crowded markets.

• Market potential

Innovation opens up new markets or expands existing ones. Investors are more inclined to support companies that have the potential to access untapped markets.

• Long-term viability

Innovative tech solutions are future-proof. Investors are more likely to commit capital to companies that demonstrate long-term viability by addressing evolving market needs.

• Return on investment

Tech innovations have the potential for high return on investment (ROI), making them attractive to investors seeking substantial returns.

Key takeaways

• Capital raising is the process of securing external funds to finance a company’s operations, innovation, or expansion efforts in the form of either debt or equity.
• The key reasons why companies raise capital include business expansion opportunities, innovation and research, talent acquisition, competitive advantage, risk management, and strategic acquisitions.
• The three main methods of raising money are equity financing, debt financing, and hybrid financing, each with its own advantages and considerations.
• The process of raising capital involves assessing capital needs, identifying suitable methods, preparing a business plan, considering legal compliance, seeking investors, facilitating due diligence, negotiating terms, securing funds, and managing post-funding.
• Challenges in raising capital include investor alignment, valuation, dilution of ownership, and investor due diligence, each requiring careful consideration and proactive solutions.

Other insights

Middle market mergers and acquisitions: Opportunities, challenges, and best practices

Everything You (Don’t) Want to Know About Raising Capital

• Jeffry A. Timmons
• Dale A. Sander

Most entrepreneurs understand that if the fundamentals of a business idea—the management team, the market opportunities, the operating systems and controls—are sound, chances are there’s money out there. The challenge of landing that capital to grow a company can be exhilarating. But as exciting as the money search may be, it is equally threatening. Built […]

Most entrepreneurs understand that if the fundamentals of a business idea—the management team, the market opportunities, the operating systems and controls—are sound, chances are there’s money out there. The challenge of landing that capital to grow a company can be exhilarating. But as exciting as the money search may be, it is equally threatening. Built into the process are certain harsh realities that can seriously damage a business. Entrepreneurs cannot escape them but, by knowing what they are, can at least prepare for them.

• JT Jeffry A. Timmons is the Frederic C. Hamilton Professor of Free Enterprise Studies at Babson College and the Class of 1954 Visiting Professor at Harvard Business School.
• DS Dale A. Sander is senior manager of Ernst & Young’s San Diego office, where he consults with entrepreneurs in emerging businesses.

Partner Center

What is Start up Capital in Business: Insights and Strategies for Entrepreneurs

Pradeep bhanot.

• February 29, 2024

Introduction

Embarking on a new business journey? You’re brimming with innovative ideas and the drive to make waves. Yet, one common hurdle stands in your way: securing business startup capital.

Table of Contents

Welcome to the quest for startup capital, the vital spark for your new business engine. As startup founders of this is a critical requirement to fuel growth, so a critical element in the business plan.

My first startup was in the Silicon Valley as the CEO of DevPort. The founder, Shiraz, and I pitched many VCs and Angels to secure funding for our business venture. Our coach from Sequoia Capital which is one of the leading venture capital firms, educated us on different types of startup capital. This article covers much of what we learned.

What in the World is Startup Capital in Business?

In plain English, startup capital in business is the cash you need to cover startup costs. It’s the lifeline that pays for the company’s major initial costs – think office space, market research, and those first few rounds of caffeine that keep the dream alive.

For a software startup business, it is particularly useful to have a running prototype service. Funding will provide the ability to scale development, capture some early adopters, and marketing to get your revenue stream kick started.

Types of Startup Capital

Venturing into entrepreneurship without grasping startup capital types for external investment is like sailing without a compass: progress is possible, but directionless.

Let’s examine the options to ensure the best fit for your business’s growth.

1. Equity Financing

What it is : Equity financing involves selling a piece of your company (equity) in exchange for capital. This means investors get a share of your business and, typically, a say in how things are run.

Pros : The biggest perk? You’re not required to pay back the funds if your business goes under. Plus, it often comes with valuable mentorship and industry connections.

Cons : The downside is the dilution of your ownership and control over your company. Every investor gets a slice of the pie, potentially reducing your piece.

2. Debt Financing

What it is : Debt financing means taking out a business loan from financial institutions that you’ll need to repay over time, with interest. Business loans can come from banks, credit unions, or online lenders in the form of a business loan or credit line.

Pros : You retain full control and ownership of your business. Interest payments are also tax-deductible.

Cons : Repayment obligations for a business loan can be heavy, especially if your business doesn’t generate the expected cash flow. Plus, it usually requires collateral.

3. Angel Investors

What it is : Angel investors are wealthy individuals who provide capital for a business start-up, usually in exchange for convertible debt or ownership equity. They’re often retired entrepreneurs or executives, who may be interested in angel investing for reasons beyond pure monetary return.

Pros : In addition to funds, angel investors can offer invaluable advice, mentorship, and industry contacts. They may also be more willing to take risks on early-stage start ups.

Cons : Like venture capital, accepting angel investment often means giving up a share of your business. Angel investors may also seek involvement in business decisions.

4. Venture Capital

What it is : Venture capital funding is given to start ups and new businesses with perceived long-term growth potential by the venture capital firm. Venture capitalists provide startup capital with the intension of providing advice, so it is more like a partnership.

Pros : Significant capital injection, mentorship, and networking opportunities. Venture capitalists also bring expertise and resources to scale your business rapidly.

Cons : Highly competitive and not easily accessible for all start ups. It involves giving up a significant equity stake and, often, some degree of control over your company.

5. Personal Savings and Bootstrapping

What it is : Providing your own startup capital using your savings or generating business revenue that’s reinvested back into the business. Bootstrapping means raising capital without external help.

Pros : Full control over your business without any dilution of equity. You make all the decisions without needing approval from outside investors.

Cons : Limited by the amount of personal funds available, which can restrict growth. The financial risk is all on you, which can be a heavy burden.

6. Crowdfunding

What it is : Crowdfunding platforms allow you to raise small amounts of startup funding from a large number of people, typically via the Internet. This can be in exchange for rewards, equity, or even new products.

Pros : Great way to validate your product or new businesses idea while simultaneously funding it. It also engages a community of supporters.

Cons : Requires a significant marketing effort when raising capital. Not reaching your startup capital funding goal can mean you get nothing (depending on the platform’s policies).

What it is : Grants are non-repayable funds or products disbursed by grant makers, often a government department, corporation, foundation, or trust, to a recipient. These are typically awarded to businesses that meet specific criteria, such as innovation in certain fields.

Pros : It’s free money that doesn’t need to be repaid and doesn’t dilute your ownership.

Cons : The application process can be complex, competitive, and time-consuming. Grants are also usually very specific about what the funds can be used for.

Seed Capital vs. Startup Capital: What Is the Difference?

Delineating the early financial phases of a venture is essential. This section contrasts seed capital with startup capital, the pivotal funds that nurture a business’s inception and generate revenue.

Seed Capital: Planting the First Financial Seed

Definition and Purpose : Funds from seed investors is often the very first investment a new business secures, aimed at validating the business idea, conducting market research, and covering initial operational costs. It’s about proving the concept can work.

Amounts and Expectations : The seed round for young companies is usually smaller than later rounds of financing. This is early-stage investment used to fund feasibility and conceptual work.

Startup Capital: Fueling the Business Launch

Definition and Purpose : Startup capital refers to the funds needed to launch the business operations fully. This capital is used for initial product development, marketing, and hiring key staff to bring the business idea to market.

Amounts and Expectations : When you raise startup capital rounds, the amounts are generally larger than the seed capital round, reflecting the increased valuation of the business and the move toward market entry and future growth.

How To Choose the Ideal Startup Capital for Your Business?

Deciding on the best type of startup capital for your business isn’t just about weighing the pros and cons.

It’s about introspection, understanding your business’s unique needs, and aligning your startup capital funding strategy with your long-term vision. Here’s how you can navigate this decision-making process:

1. Assess Your Business Stage and Needs

Early Stage vs. Growth Stage : Early-stage companies might find more value in angel investors or crowdfunding to get off the ground, while growth-stage businesses could be more attractive to venture capital firms looking to scale.

Financial Requirements : Quantify how much startup capital you need to reach your next business milestone. This helps in choosing funding sources that can meet these requirements without over-diluting equity or accruing unmanageable debt.

2. Consider Your Tolerance for Risk Personal

Financial Risk : Using personal savings or assets for bootstrapping involves significant personal financial risk. Ensure you’re comfortable with the potential outcomes.

Debt Risk : Debt financing requires confidence in your business’s revenue generation capabilities. Defaulting on loans can have serious consequences, so consider the stability and predictability of your cash flow.

3. Evaluate Your Willingness to Share Control and Profits

Equity Financing : Taking on investors means sharing decision-making power and future profits. If you’re open to collaboration and mentorship, and willing to share the pie for the sake of growth, equity financing could be beneficial.

Private Equity companies typically have a 5-year horizon when they provide startup capital which should be enough to be cashflow positive.

Independence : If retaining control and independence is paramount, look towards bootstrapping, loans, or crowdfunding models that allow you to retain full ownership.

4. Reflect on the Level of Support and Networks You Need

Beyond Capital : Some forms of raising startup capital come with mentorship, industry contacts, and operational support. Venture capital and angel investors often provide strategic guidance that can be invaluable for navigating early challenges.

Solo Journey : If you prefer to lean on your own expertise or have a strong support network, want to maintain your ownership stake, less intrusive forms of capital might be more suitable.

5. Long-Term Business Goals and Vision

Growth Trajectory : A high-growth startup aiming for rapid expansion may benefit from venture capital or angel investment to fuel their ambitions.

Sustainable Growth : Businesses aiming for steady, sustainable growth might find debt financing or bootstrapping more aligned with their goals, avoiding the pressure to scale at an aggressive pace.

6. Compliance with Funding Requirements and Obligations

Grants and Crowdfunding : Understand the specific requirements and obligations of less traditional funding sources. Some grants may restrict how funds can be used, and crowdfunding campaigns often require rewards or returns to backers.

7. Conduct a Reality Check

Market Validation : Ensure there’s a market demand for your product or service. This not only affects your ability to raise capital but also determines the most receptive source of funding.

The technology market is particularly subject to trends. My startup get to market as technology exchanges where cooling, so we missed the market trend that would have made us cool. Monitoring industry analyst hype-cycles can be useful for timing market entry. Your product or service could be before its time. Investors want to see pull from a market or customer segment to feel good about their bet on you.

Investor Appeal : Be honest about your business’s appeal to investors. High-risk, high-reward ventures might attract venture capitalists, while niche or lifestyle businesses might not.

Angels want to see that you have a path to profitability. This can be as little as a year. Make sure you have a clear idea of your planned milestones so they can see you have executed against your plan when you review your progress.

Final Thoughts on Choosing Your Path

Choosing the right startup capital is crucial, blending financial strategy with your business’s vision and goals.

Seek advice from mentors and advisors to navigate financing options to raise capital. Ensure your choice aligns with your growth ambitions outlined in a solid business plan.

Raising Startup Capital: Preparing Your Pitch

Crafting a pitch that sticks: the elevator pitch.

In a world where attention spans are shorter than ever, your elevator pitch needs to be sharp, engaging, and memorable. Tell your story in a way that leaves them wanting more – because first impressions are everything.

The Devil’s in the Details: What Investors Are Really Looking For

Also, beyond the flash and flair, investors are digging for substance. They want to see a strong business idea backed by market research, a clear path to generating revenue, and a team that can execute the vision. Don’t just sell them on the dream – show them the blueprint.

Common Pitfalls and How to Dodge Them

Entrepreneurial paths often include missteps like underestimating needed startup capital, leading to early financial strain. Equally damaging is overpromising to investors—transparency is key to long-term partnerships. I have worked with executives who over promise to the board, creating stress for everyone.

Be wary in negotiations; excitement can overshadow critical terms in agreements. Scrutinize equity stakes and repayment terms to ensure they align with your startup’s goals and capabilities. Securing the right capital on favorable terms is crucial for success.

Wrapping It Up: Key Takeaways and Your Next Steps

Finding the right startup capital is vital, yet varies for each business. It’s about adaptability, resilience, and focus on your goal.

With a robust business plan and understanding of your financial needs, you’re set to turn dreams into realities. Keep in mind that 10 out of 11 startups fail.

Start laying your empire’s foundation brick by brick, refine your pitch, and embark on your entrepreneurial path with confidence.

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13.6 Additional Considerations: Capital Acquisition, Business Domicile, and Technology

Learning objectives.

By the end of this section, you will be able to:

• Describe the capital acquisition opportunities available to different types of business structures
• Explain how the advantages and disadvantages of where a business is registered should inform the decision of where to create a business domicile
• Understand the role technology considerations may play in selecting a business structure

In addition to the main entity selection topics already discussed, such as ownership structure and taxation, there are other considerations that entrepreneurs might want to consider. For example, when choosing a business format, a founder would be interested in how to raise capital to use in the business.

Another issue to consider includes where to form a new business, since formation is largely a state issue, and there are fifty different states from which to choose. This has the potential to affect multiple aspects of one’s business, including income and sales tax issues, government regulation, and litigation situs (location). For example, some states, such as Wyoming and South Dakota, have no corporate income or gross receipts tax at all; other states, such as California and New York, do have a state corporate income tax. For more information on the variation between all 50 states, see the following website operated by Cornell Law School: https://www.law.cornell.edu/wex/corporations.

Capital Acquisition

Once an entrepreneur has created a business plan, the next requirement is to capitalize the business venture. If the entrepreneur wants to start out small, a sole proprietorship is all that is needed, although even for small businesses, this structure carries a high degree of risk. Basically, the entrepreneur can simply start working on the business venture. If the entrepreneur’s business venture is larger, raising capital becomes a major issue. This can be done though bank loans or investors.

Entrepreneurs eventually need capital to grow their business. Capital typically comes in the form of cash. Entrepreneurs need to consider the business structure they select for raising cash in the future if they plan to grow their business. Banks, family members, friends, or others can lend cash to an entrepreneur. These types of loans may not give the lenders ownership rights in the company. The lenders may take a lien on the assets of the business venture but do not necessarily have the right to run the business. Management is typically left to the owners when borrowing funds, but when a company receives investment funds, the investor also receives an equity share in the business and may be involved in management.

Owners and investors may want to have the right to operate the business or may want the investment structured in such a fashion so that the investors only participate in the profits or losses of the business, but do not operate the business. Depending upon the type of the business and the expectations of the entrepreneur and possible owners, this needs to be considered before creating a company. An entrepreneur raising capital needs to consider what participation is desired from investors and the timing of the needed capital. Remember, investors become owners, whereas lenders are not owners.

Capital is required at every step of a business. There can be lines of credit to finance operations as receivables are collected, and there can also be long-term borrowing for purchases of big-ticket assets required to operate the business. The difference between a loan and an investment is that the loan principal and interest must be paid back. However, an investment allows the investor to participate in the profits and losses of the business, but does not need to be repaid because investors can get a return on their investment by selling their interest in the business. Finding a good balance between how much ownership the entrepreneur wants to relinquish versus how much of the profits need to be paid to finance the business is key. The entrepreneur needs to determine this balance as the company grows. For example, Amazon started as a Washington state corporation named Cadabra, Inc. , operating out of Jeff Bezos ’ garage, and then through several transactions became the world’s largest online retailer incorporated as a Delaware corporation with its ownership shares AMZN traded on the NASDAQ.

Growing companies will have different rounds of outside investment. Never consider that the first outside investment received will be the last investment. There will be more than one round of financing in most companies. As the investment and financing changes, there will be changes in the corporate structure of the business venture. Just like Amazon, a company can start in one’s garage and then go on to be a company listed on a major stock exchange with a worldwide reach. Each step of the way takes careful planning (see Entrepreneurial Finance and Accounting ).

Legal and tax issues are directly related to the agreements between entrepreneurs and their investors. The written agreements should spell out the corporate structure with specific details of the arrangement between the two. The business structure will drive the tax circumstances of the investment, business, and owners. This may change with new investors, so agreements should be flexible. Many times, a new investment in the same business may be created in which the new business structure purchases the assets of the old business structure. This event will change all of the agreements evidencing the structure of the venture.

Agreements describing how the owners share in profits and losses, and how the owners share in making decisions about the business venture can and do change. Many owners and entrepreneurs desire that their company become a publicly held corporation. This is a company with its ownership shares traded on a public exchange. The ease of buying and selling shares on a public exchange typically increases the value of the company. Therefore, many investors desire that shares ultimately become publicly traded. A company may start as a sole proprietorship, become an LLC, and then be converted into a corporation with its ownership shares traded on a public stock exchange. In the circumstance where the company is growing, the business structure will change over time.

Many publicly traded companies start as a privately held corporation before going public through an initial public offering (IPO) . A recent example is Spotify , which in a 2018 IPO raised $9.2 billion. 21 A closely held corporation, which is essentially the same as a privately held company, has no public market for its stock. The owners, as members or shareholders, have more control over the directions of the company, until the company is taken public.

The assets of a closely held company can be sold to a company that is publicly traded, such as a reverse merger, or can be used to create a company that will pursue an IPO. Both of these are complicated endeavors that require audited financial statements, the assistance of lawyers and outside accountants, and the use of an investment bank. Each step of the way, the entrepreneur gives up some equity and control in the company in exchange for investment money to help the company grow. Most small companies becoming public will (but are not required to) list on a stock market like the Nasdaq SmallCap market or the Nasdaq National Market System . This development provides the company direct access to international capital markets and many new investors.

The issues that investors tend to look at include transferability or sale of their ownership interest, ability to raise additional capital, and protection of the investors’ assets outside of the investment. If the entrepreneur is unconcerned about investment from outsiders, these considerations are not as important. Another issue is the ability to raise capital through banks or by using the SBA to guarantee a loan through a participating bank. The first step in getting an SBA loan is determining that the “business is officially registered and operates legally.” 22 This means that the borrowing business is a company that is registered in a state to do business. An entrepreneur can borrow up to $4.5 million (the SBA limit 23 ), to fund operations. However, the first step is to create a proper business entity to which the bank can loan the money or in which an investor can invest. The typical entities to which banks lend money and investors invest money are partnerships, LLCs, or corporations. To create these entities, an entrepreneur needs to file the appropriate paperwork within a given state.

In addition to traditional sources of funding, including borrowing, taking on partners, and selling stock through an underwriter, there is a relatively new source of capital for small business entrepreneurs that is an important addition to the capital acquisition options for startups. Equity crowdfunding involves a startup raising capital through the online sale of securities to the general public.

In 2012, Congress enacted new legislation called the Jumpstart Our Business Startups (JOBS) Act , which amended US securities laws to enable small businesses to use a variation on a technique known as crowdfunding (see Entrepreneurial Finance and Accounting ). Crowdfunding is already in use as a way to donate money to consumers and businesses through web portals such as GoFundMe , but those sites do not offer SEC-compliant sales of securities in a business, as the JOBS Act now permits. Emerging growth companies (EGCs) seeking capital are now able to raise equity capital more easily and at a lower cost. This new type of funding should help level the playing field for EGCs and is viewed by many as a way of democratizing access to capital.

Recall that crowdfunding allows the entrepreneur to raise money from a large number of people and can be in the form of either non-equity or equity crowdfunding. To illustrate the difference between non-equity crowdfunding and equity crowdfunding, consider these two examples. An example of non-equity crowdfunding is Betabrand . Betabrand is an online women’s clothing company that allows users to vote on styles. If enough people “pre-order,” the design goes into production. No ownership/equity is exchanged between entrepreneurs and the backers. On the other hand, AngelList, SeedInvest, or WeFunder are examples of equity crowdfunding. They help business owners raise money from individual investors. Remember that this means the investor will end up owning an agreed-upon portion of the business they invest in. For example, LIVSN is a startup apparel company that is using WeFunder to raise capital via individual investors. By the end of 2022, LIVSN had raised $419,000 from 474 investors.

Link to Learning

The Crowdfunder website connects to one of several different business-oriented equity crowdfunding websites. It offers EGCs or small business several avenues of funding, including equity, convertible notes, and debt. The primary advantage is the ability to raise equity capital without big fees, lots of federal regulations, and red tape.

Business Domicile: State and Local Considerations

There are multiple reasons why an entrepreneur may want to consider geographic location when forming and operating a business. Of course, one practical consideration is where the entrepreneur lives, at least in terms of operating a small local or regional business. However, there are other important considerations, such as differing formation/incorporation laws, widely varying levels of regulation, different types of permitting, and other relevant factors. As a rule, a corporation is considered a citizen of both its state of incorporation and the state of its principal place of business.

The state where a person lives is not necessarily the state in which they must form and/or operate the business. For example, if a person lives in the New York City metro area, they might well have a choice of New York or New Jersey, or even Connecticut, Delaware, or Pennsylvania. The same may be true for the metro areas of other large cities. Additionally, even if a person lives in the middle of North or South Dakota, they might choose to start a business in another jurisdiction, such as Delaware, Alabama, or Wyoming, due to favorable formation regulations. The following section discusses the issue of choice of jurisdiction when forming a limited liability entity such as a corporation or an LLC.

Choice of State When Incorporating/Registering Your Business

Business entities seeking the protection of limited liability must be registered with a state. This typically includes corporations, LLCs, and LPs. Additionally, if a corporation seeks to sell stock to investors in a specific state (called an intrastate offering), it must be registered in that state. The first step is to select the type of entity to be created and then file the appropriate paperwork with the state. Each entity is typically created through the office of the secretary of state (or, in the case of Kentucky, Massachusetts, Pennsylvania, and Virginia, the secretary of the commonwealth), with each state having a different process for creating the entity. The Balance , a small business resource website, lists all state government offices in which to file the appropriate paperwork (https://www.thebalancesmb.com/secretary-of-state-websites-1201005).

Forming a business in the state where the entrepreneur is physically located is generally the easiest way to create the entity through which the entrepreneur will conduct business. Some entrepreneurs choose to create their business entity in other states for privacy reasons or for tax savings. The entrepreneur will still have to file and pay taxes in every state in which the business operates and will have to register its presence in the state in which it is physically located. Some investors might prefer out-of-state incorporation, and the entrepreneur needs to remember that the corporation will be subject to taxes, filing requirements, and other fees imposed by each state of operation and the state of incorporation.

Delaware is a particularly popular state in which to incorporate due to the ease of regulations regarding ownership structure and business-friendly laws; Nevada and Wyoming are popular as well for the same reasons. The reason these states are popular is that initial fees are cheap, there are little or no renewal fees, and the states emphasize asset protection. While Delaware, Nevada, and Wyoming offer good reasons to incorporate, they are not best choice for every business. If a business incorporates in one state but does business primarily in another, in all likelihood, it may very well have to pay the second state’s fees and/or taxes in addition to those of the first state. Entrepreneurs need to consider cost and ease of operations when determining the state in which to create their business entity.

Multistate Taxation

Most businesses have a website and are glad to sell products to any buyer, regardless of where the buyer is located. Amazon is an example of a company that capitalized on the concept of Internet sales. Amazon collects sales tax from all forty-five states that have a statewide sales tax because it owes tax in every state and city in which it operates.

Multistate taxation is not something that most small businesses consider, but it is an issue that can arise in many different circumstances. For example, professional basketball players may be taxed by the state, or even the city, in which they play. This means that an NBA player could owe taxes in over 20 states if he went to every game. Just sitting on the bench in 20 different states could trigger multistate taxation, and, if the team plays in other countries, foreign taxes could also be owed. This is true for every sport and every business that operates in multiple states or other countries. It is not only multibillion-dollar corporations that are affected, but small businesses and individuals as well.

Most online multistate businesses now collect and pay sales taxes in those states with a sales tax. This was not always the case, however. For years, Amazon and other online retailers sold products without collecting any state or local sales taxes at all. The legal requirement that companies did not have to collect sales taxes in a state unless they have a “physical presence,” such as warehouses, offices, and/or employees, gave online companies carte blanche to ignore state and local taxes for many years.” 24 Until the 2018 US Supreme Court decision in South Dakota v. Wayfair , states generally did not require online sellers to collect and remit sales tax to the state. However, this case changed the rules by creating the concept of an economic nexus , a virtual connection with a state based on sales volume or number of transactions. This now means, in most states, that if your business meets a threshold of $100,000 in sales in that state, it may now require you to collect sales tax on online transactions. Therefore, your online business may have to collect and remit sales tax to as many as forty-five states (five states do not have a sales tax). All entrepreneurs need to develop an understanding of how the Internet and the related tax laws and regulations will affect their planned business operations. Creating a company in another state will no longer automatically avoid multistate taxes and regulations.

Technology Considerations

Most new entrepreneurs have some familiarity with technology, whether something as basic as social media or more advanced as extensive website development skills. However, most small businesses face challenges in the areas of information technology security and compliance with legal and regulatory requirements.

Not all small businesses face these challenges. They are most common in companies that handle private information, such as health records or credit card data. The storage and protection of this type of information must comply with government regulations. For example, a small government IT contractor that deals with any type of classified governmental information would need to ensure classified information was protected per regulations and not at risk of exposure. In the healthcare field, recent hacks of patient health data, some of which are handled by small businesses such as a solo practice physician’s office, demonstrate the challenges of data protection. It is a significant challenge for companies with relatively small budgets to protect data. Technology security adds large costs and requires skilled personnel, for any business, large or small. Figure 13.10 summarizes the choices of business structure discussed throughout this chapter.

• 21 Samuel Stebbins. “The Top 26 Largest Company IPOs of the Year.” USA Today . December 7, 2018. https://www.usatoday.com/story/money/business/2018/12/07/top-ipos-2018-26-biggest-companies-went-public-year/38611947/
• 22 U.S. Small Business Administration. “Funding Programs.” n.d. https://www.sba.gov/funding-programs/loans
• 23 U.S. Small Business Administration. “Loan Fact Sheet: The SBA Loan Guarantee Program: How It Works.” October 2011. https://www.sba.gov/sites/default/files/SDOLoanFactSheet_Oct_2011.pdf
• 24 “Amazon’s Local, State and Federal Tax Issues Explained.” n.d. https://itep.org/amazons-local-state-and-federal-tax-issues-explained/

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• Authors: Michael Laverty, Chris Littel
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• Book title: Entrepreneurship
• Publication date: Jan 16, 2020
• Location: Houston, Texas
• Book URL: https://openstax.org/books/entrepreneurship/pages/1-introduction
• Section URL: https://openstax.org/books/entrepreneurship/pages/13-6-additional-considerations-capital-acquisition-business-domicile-and-technology

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Top five private equity trends for 2024

Read about the five key trends private equity firms will emphasize in 2024 as they create value

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Banking & Capital Markets

The bank of the future will integrate disruptive technologies with an ecosystem of partners to transform their business and achieve growth.

Disruption is creating opportunities and challenges for global banks. While the risk and regulatory protection agenda remains a major focus, banks must also address financial performance and heightened customer and investor expectations, as they reshape and optimize operational and business models to deliver sustainable returns. Innovation and business-led transformation will be critical for future growth. To remain competitive and relevant, every bank must embrace disruption and strategically build a better ecosystem — not a bigger bank.

Our worldwide team of industry-focused assurance, tax, transaction and consulting professionals integrates sector knowledge and technical experience. We work with clients to navigate digital innovation, new business models and ecosystem partnerships, helping banks become the nimble, responsive organizations that customers demand.

Five priorities for harnessing the power of GenAI in banking</p> "> Five priorities for harnessing the power of GenAI in banking

What to expect from global financial services in 2024 — Americas and EMEIA

In this webcast for Americas and EMEIA audiences, the EY Global Regulatory Network will discuss the direction of travel for regulators across key areas and how to prepare for what's coming.

Our latest thinking on Banking & Capital Markets

Impacts of Central Clearing of US Treasuries and Repo

In this webcast, panelists will discuss key themes and high-level requirements of the US Treasury and repo central clearing rules.

Can core platform modernization position a bank for future success?  

Case study: how one regional bank used core platform modernization to build a strong foundation for future profitability.

The case for a modern transaction banking platform

The evolution of corporate treasury management needs presents an opportunity for corporate banks. Learn from an industry approach.

How to transition from a tactical to strategic adoption of ISO 20022

With ISO 20022 adoption lagging amid competing global deadlines, a successful migration may hinge on changing from a tactical to a strategic mindset.

How Gen Z’s preference for digital is changing the payments landscape

EY survey shows Gen Z embraces simple, seamless payment methods. Learn more.

How can financial institutions modernize their fair-lending practices?

FIs that disregard fair banking are lagging behind FIs that enhance compliance procedures, lending models and data analytics to become more compliant. Read more.

Digital identity opportunities in financial services

Exploring the policy and regulatory trends shaping digital identity and opportunities for financial services companies in a changing payment landscape.

Explore our Banking & Capital Markets case studies

Using AI to augment pricing intelligence for banks

How an AI-powered digital tool, Smart Advisor (SA), helped one bank deliver better client service while maximizing value creation.

How a global FinTech captured growth in the SME segment

A global Fintech captured growth in an opportunistic SME segment with a differentiated, holistic strategy. Learn more in this case study.

Using AI to improve a bank’s agent effectiveness

Leveraging the power of AI and machine learning, one bank mined sales agents’ calls for performance-boosting insights. Learn more in this case study.

After cloud migration, investment bank sees potential for big dividends

A leading investment bank sought to move vital assets to the clouds by building an experienced, cross-functional team. Find out how.

How digital transformation is redesigning trade finance

Banks that adopt an agile, design-based approach to digital transformation can boost the success of their trade finance functions.

How to transform product development to outperform the competition

EY Nexus is a cloud-based platform offering access to the most advanced technologies to launch new products, businesses and services.

How EY can help

Capital Markets Services

Know how our Capital Markets consulting team can help your business grow, manage costs and meet regulatory requirements.

Consumer banking and wealth services

EY consumer banking and wealth technology solutions are designed to drive operational excellence and profitable growth. Learn more.

Corporate, Commercial and SME Banking services

Our Corporate, Commercial and SME (CCSB) Banking services team can help your business navigate through rising market expectation. Learn more.

Cost transformation

EY cost transformation teams help banks to optimize profits and fund transformation. Find out more.

Consumer lending services

Our consumer lending team can help navigate the complexities of unique lending propositions. Find out how.

EY Nexus for Banking

A transformative solution that accelerates innovation, unlocks value in your ecosystem, and powers frictionless business. Learn more.

Finance transformation

We help clients transform finance functions to be a strategic business partner for the business via value creation and controllership activities.

EY Financial Crime solutions

Our skilled teams, operational efficiencies enabled by innovative technology and flexible global delivery service centers can help you manage financial crime risk in a cost-effective, sustainable way.

Financial services risk management

Discover how EY can help the banking & capital markets, insurance, wealth & asset management and private equity sectors tackle the challenges of risk management.

IBOR transition services

EY helps global institutions prepare for the imminent transition away from Interbank Offered Rates (IBORs) to Alternate Reference Rates (ARRs). We also play a leading role in supporting regulators, trade associations and others to increase awareness and education.

Open banking services

Our open banking professionals can help your business maintain a trusted and secure open banking ecosystem while managing its risks. Learn more.

Payment services

Our payments professionals can help your business enhance innovation, drive growth and improve performance. Find out more.

Third-party risk management services

Discover how EY's Third Party Risk Management team can enable your business to make better decisions about the third parties they choose to work with.

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The Banking & Capital Markets team

Enjoys traveling with family, and coaching his daughters’ basketball and soccer teams. Enjoys running and playing basketball and golf.

Lee Ann Lednik

People-focused leader committed to building trust and transparency amid increasing complexity. Passionate working mom of three. Aspiring photographer. Avid sports fan.

David Kadio-Morokro

Passionate about technology, innovation, and leading EY people to solve clients’ most challenging problems.

Heidi Boyle

Passionate about helping people thrive in the workplace and creating a sense of belonging for all. Writer. Musician. Cooking enthusiast.

Seasoned financial services professional. Resides in Massachusetts with her husband and three children.

Kellen Maia de Sá

Collaborator and problem-solver with the desire to do the right thing. Leads efforts to help financial services clients with the disruption and impact of COVID-19.

Terry Cardew

Builds trust by helping banks solve business issues and stay competitive. Devoted husband. Father of six. Avid skier. NY Giants and Yankees fan. Supporter of The Fresh Air Fund and Lynne’s Kids.

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