Few businesses launch with all the money they need to become sustainable and to grow. Unless you’ve received a massive inheritance or have a million-dollar credit card limit, at some point you will have to raise money. But if you dive straight in without preparing, you’re unlikely to be successful. This is why developing and implementing a capital raising strategy is so important.
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.
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. 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
- 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 a startup requires a completely different approach than raising money for a more established business.
- Startup or pre-seed round (goal: $0-100k)
- Personal savings or personal credit
- Friends and family
- Seed round (goal: $100k-3 million)
- Angel investors
- Business accelerators & incubators
- Venture capital firms (VCs)
- High net worth individuals (HNI)
- Series A (goal: $3-6 million)
- Venture capital firms (VCs)
- High net worth individuals (HNI)
- Angel investors
- Series B (goal: $10-30 million)
- Any of the above, plus:
- Debt providers
- Private equity firms (PEs)
- Hedge funds
- Series C (goal: $30-50 million)
- Any of the above
- Series D (goal: $50 million or more)
- 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 tech startups. These are serious funding sources that didn’t exist ten years ago.
Developing the Right Materials for Fundraising
Capital raising materials are for a very specific purpose, to generate investor interest in your company and compel them to take the next step. This means they will be quite different from your traditional website or company brochures, which are for potential customers. They may touch on some of the same things, like the unique value proposition of your products and services, but investors will want more detail. They will expect well-prepared and thought out materials such as the following:
- 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
- A complete financial model detailing:
- 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 have access to 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
So, you have an actual meeting on the calendar with a potential investor – congrats! When the time comes, remember to just be yourself. Let your passion, enthusiasm, and drive show through, but not in a pushy way. Remember, you’re not meeting with the President of the United States. All you’re doing is seeing if there is a “fit” between you and the potential investor, to gauge whether there is any interest and compatibility there.
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.