Raising Capital for Start-Ups and Small Businesses: An Introduction
Access to capital is essential for businesses to get off the ground and scale. While bootstrapping with personal funds is possible at first, eventually, most companies need outside financing to grow. There are several options entrepreneurs can consider when raising capital, each with their own pros and cons.
Kevin Bush, one of our co-founded and financial services lead, shares his expertise from his extensive experience raising capital for small and medium-sized businesses.
"Before the various capital raising options are considered, there are several high-level items those seeking capital for their company need to be aware of prior to talking to capital sources.
1. Competent leadership team in place
Investors look for signs that a business will be well-run, profitable, and as unproblematic as possible. The best way to soothe doubts is by having a leadership team that is responsible, mature, and competent. The tone of a business is set at the top, and when those in charge take their roles seriously, everyone else will too. As important as a CEO or company president is, sales, marketing, middle management and the cleaning staff are crucial as well. Potential investors will want to see that a business has given thought to every part of their team, from the bottom to the top.
2. Clearly defined path to a return on investment
Investors want to see a clear path to a return on their investment. The point of financing a business is to eventually make more money than they put in, after all, so a clear business plan and realistic expectations will go a long way to convincing them that a business will be able to make money.
3. Financial records in order
Nothing shakes investor confidence like sloppy bookkeeping. Having a company’s financial records in order displays sound management practice. If all strategy, financial and planning documents are organized in one place and can easily be reviewed by a lender, a business will be ahead of the game and can significantly speed up the process. Make sure historical financials are clean and tight, keep any projections promising but realistic and always provide proof of future revenue potential. This means keeping track of distribution contracts, partnership contracts, assets on hand and how you use funds.
If all three of the above criteria are in place, then several options are available to raise capital.
Option 1: One of the most common sources of startup funding is from angel investors. These are high-net-worth individuals who provide capital to early-stage companies in exchange for an equity stake. The pros of angel funding are that it doesn't require repayment and comes from those with business experience who can advise the company. The cons are that angels take equity and have expectations for exit events.
Option 2: Another option is venture capital funding. Venture capitalists (VCs) are professional investors who provide higher amounts of capital to more established startups poised for high growth. The benefit of VC money is it enables quick expansion. The downside is VCs expect very high returns and dilute founder equity substantially.
Option 3: Business loans from banks are a more traditional source of funding. Pros are that loans don't require giving up equity and funds don't have to be repaid if the business fails. Cons are that loans come with interest, collateral requirements and the need to qualify based on credit score.
Option 4: Crowdfunding platforms allow raising smaller amounts from a large group of investors online. This democratizes access to capital but requires significant marketing efforts to attract backers.
Ultimately, the best approach to raising capital depends on the specific size and stage of a small business. Early-stage ventures may benefit most from bootstrap funding, angel investors, and small business loans to get off the ground. More established companies with growth potential are better suited for venture capital injections to rapidly scale. And stable small businesses can utilize business loans, lines of credit and crowdfunding for flexible funding that doesn't require giving up equity. The key is matching the fundraising method to the needs and prospects of the company. With the right capital and smart strategy, small businesses can go from startup to success."
Kevin Bush, CFA
Co-Founder and Partner