Venture Capital
Financing a company through venture capital is a popular approach for small startup companies with a high growth potential, or companies who have demonstrated high growth in terms of employee number or annual revenue. A venture capital investment in a company is usually higher risk, but with the potential for a bigger payout for the investor if the company is successful. Importantly, venture capitalists usually receive an ownership stake in the company and may want a voice in company decisions going forward. It is a particularly popular model in the technology industry, including information technology, clean or green technology, and biotechnology.
Raising Capital
Companies seeking venture capital investors must demonstrate the potential for the market in their area, have an excellent management team, and clearly communicate their high growth potential. As a rule of thumb, most venture capital investors want a return on their investment within three to seven years. All of these factors can make raising startup funding a challenging task for companies seeking start up capital. But what about established companies that want to branch into a new area? How do corporations raise capital? We'll touch on this briefly, but business funding has the added benefit of historical success and more money to work with, so a few more options are open to established corporations
How to Raise Capital for a Startup
Raising capital for a startup begins by seeking out potential investors to provide the first seed money for the company, followed by a startup investment, and finally followed by several rounds of growth investments. You can get investment for startup seed money by seeking out an angel investor, an affluent individual who can support business startups. AngelList hosts profile information for over 4,000 angel investors in the United States and includes information on their markets and past investments.
Additionally, you can raise money for startup online by using a crowdfunding website like Kickstarter, Indiegogo, or GoFundMe. These are both great choices for approaches on how to raise capital without borrowing money. If your startup doesn't require large initial overhead, other options to consider are to provide the seed funding yourself (called bootstrapping), ask family and friends to help out, or take out a small business loan. Another low risk option is to enter a competition to get yourself and your ideas or products out in front of investors. Importantly, the seed money stage can provide the funds needed to create prototypes of your product or conduct further research to strengthen your company’s position, brand image, and mastery of the field. All in all, raising capital for a startup usually takes about six months to a year. Taking these steps can be essential for success with venture capitalists in the startup and growth stages of capital raising, meaning success or failure for the future of your company.
How to Raise Investment Capital
Maybe you're not interested in launching a whole new startup right now, but want to know how to raise capital for a business expansion. Additional capital raising strategy options exist for established companies and corporations looking to raise investment capital. Because these companies already have a history of success, it can be easier to obtain seed money to start a business or expand a current one from venture capitalists and angel investors. Bridge loans and mezzanine financing are also options for how to raise money for business expansions that are more established. Additional investment capital private sector funding sources include retained earnings from the company, debt capital, and equity capital from bondholders and shareholders.
Equity Capital
Equity capital is a business investment in exchange for stock in the company. Offering stock buy-ins at a reasonable price point is a great option for how to raise equity capital. There is some risk for equity capital investors, though it is a lower-risk approach than venture capital. Equity capital can be a more challenging approach to acquiring funding though because a lot of capital is needed. An investor with a large share of company stocks often receives some control of the direction and ongoing decisions in the company. Types of equity financing can also include dividends, retained earnings from the stock, repurchased shares called treasury stocks, and initial public offerings (IPOs) when a company goes public. Methods of raising equity capital include seeking out high worth individuals or firms with deep pockets to purchase stock. You can also entice potential stockholders to invest by communicating a quantification of stock appreciation potential.
Methods of Raising Capital
We've touched on these methods above, but let's recap the ways to raise capital for a company. Crowdfunding, friends and family, angel investors, and venture capital investors are all great methods for how to raise money for a business without a loan. Crowdfunding or requests to your friends and family may be your best bets for ways on how to raise money without a product if you're just at the idea stage. Remember, if you ask your friends and family for money, it's still important to prepare a well-thought out pitch. You also may want to consider a small business association (SBA) loan if you have good credit, if you’ve been in business for a couple years, and if you have strong annual revenues. SBA loans can have favorable rates and terms for the loan. Bootstrapping can also be an avenue for how to start a business without a loan. Offering stock in the company is a useful approach for raising capital as well, but you'll probably need many shareholders to reach your fundraising goals. Once a company goes public, they'll have additional options for raising capital including offering stock to the public on the stock market. Mature companies can also issue bonds as a long-term investment option.
How Can a Private Company Raise Capital?
Private companies can have a difficult time raising capital because they have the fewest options and limited name recognition. So —how can a private limited company raise finance? The answer is to go through multiple rounds of fundraising. Often, the first round will start with formal requests to friends and family, followed by a round seeking angel investors, crowdfunding, and venture capitalists. The first of these rounds is the seed funding round, followed by rounds termed Series A, B, C, and on. This process is a proven method that allows private companies access to capital — although it's not required for business success. Just 0.05% of small businesses raise venture capital.
Why Do Companies Go Public?
The ability of a company to go public is often viewed as a milestone. A public company spreads the risk of ownership across a large group of shareholders and takes the burden off of the initial investors. How do public companies raise capital? The biggest and most financially lucrative capital increase is the ability to list a company's stock on a stock exchange. This leads to numerous additional benefits including stock options for potential employees, market exposure to attract hedge funds, and credibility of the company brand. Public companies can also negotiate lower interest rates when borrowing money from banks, and can have additional leverage when obtaining loans. Both venture and equity capitalists look for an option to exit their investment through the initial public offering (IPO) of the company, marking this stage as an important point for your startup investors.
Source of Capital For a Company
The best source of capital for a company will be influenced by its private limited or public limited standing. Sources of finance for a public limited company will often rely more heavily on debt financing, or debt capital, and come in the form of loans and bonds. Because of the added burden of interest, debt financing isn't usually the best choice for private startups. The best sources of funds for private limited companies are often equity capital. A debt free option, adding shares in the company’s stock is a relatively quick source of capital without immediate drawbacks. Equity capital can also dilute ownership, which for a private company can be an issue for current shareholders.
For a new startup, seeking venture capital and equity capital are two popular approaches for raising capital. Once a company has matured, additional capital sources like debt financing can be obtained with a reasonable amount of risk.
