Strategies to Capital Raise
Capital has several meanings in the business world alone. In a broad economic sense, capital refers to any of a company’s assets that hold monetary value, including funds, property, plant and equipment, and inventory. In this sense, capital is generally used as a measure of wealth or a tool to generate wealth (i.e., via direct investment).
In the narrower context of business finance, capital refers to funds or liquid assets held in reserve or for expenditure in day-to-day operations and investment in future growth.
The importance and use of capital
If you have ever attended a finance or accounting class at university, you may recall the phrase: “cash is king”. As it turns out, this is true, and cash, or capital in general, is indeed one of the most important factors in deciding whether a business succeeds or fails.
First, consider the concept of credit sales. For many businesses, revenue will be larger than funds received from customers at the end of a given financial period. This is because companies often accept credit sales. The collection period for these receipts can vary between a few days to a few months. However, over the collection period, a business will still need to pay operating expenses like wages, utilities, and the cost of sales. Therefore, a business needs to manage its capital to have enough money to continue operations throughout its’ usual working capital cycle and ultimately avoid insolvency.
Capital is equally critical for expanding a business’s operations. For some businesses, expanding operations requires additional capital, inventory, machinery, employees, property, and office equipment. For other companies, expanding operations requires an effective marketing campaign.
Capital is critical for obtaining the necessary tools to grow a business. Sometimes, the window of opportunity to expand a business is small. Therefore, it is imperative that a business is well-capitalised and can take advantage of a great business idea or opportunity.
Understanding Capital Raising
Raising capital is obtaining funds from investors, venture capitalists, or other sources to finance a business. It could be a crucial step for companies to achieve their strategic goals, such as growth, partnerships, and acquisitions. There are various ways to raise capital, including debt, equity, and a combination of both. Debt financing involves borrowing money from a financial institution, which must be repaid with interest. On the other hand, equity financing involves selling company stocks or shares to investors, giving them an ownership stake in the business. Understanding the different types of capital raising is essential for companies to make informed decisions about their funding options and to choose the method that best aligns with their financial strategy and growth objectives.
Sources of capital
Capital can be generated from several sources, depending on the size of the company, financial markets, and the stage of the business life cycle a company is in.
Start-ups and small businesses typically rely on personal savings, a personal loan from friends or family, an angel investment, or an investment from a venture capital firm. Large unlisted private companies can generate capital from an initial public offering. Other sources include capital from local, state, or federal government grants, private business loans from a bank, equity raising and public market debt (including debt securities from the bond or money market).
Convertible debt is another financing option, which is common for startups. It is a loan that can be converted into equity, commonly used to fund early-stage companies. This allows startups to secure capital without needing a precise valuation while offering investors a way to mitigate risk by possibly converting their loans into equity shares if certain milestones are met.
Another obvious source of funding is through the business itself. Many existing businesses generate capital from business operations (i.e., from generating a profit). Businesses often retain earnings (instead of paying out dividends to existing shareholders) to fund future operations and growth.
Preparing to Raise Funds
Before raising funds, companies must prepare themselves by developing a solid business plan, pitch deck, and financial projections. A business plan outlines the company’s vision, mission, market research, competitive advantage, and financial projections. It serves as a roadmap for the business and a persuasive document for potential investors. A pitch deck is a concise presentation that highlights the company’s unique value proposition, market opportunity, and growth potential. It is designed to capture the interest of investors and provide a compelling investment case. Financial projections provide a detailed breakdown of the company’s revenue, expenses, and cash flow, demonstrating the business’s potential for profitability and growth. A well-prepared business plan, pitch deck, and financial projections are essential for attracting investors and securing funding, as they show that the company is well-organised and has a clear strategy for success.
What is a capital raise?
Capital raising is the formal process of when a business seeks additional funding from shareholders or investors. These shareholders can be current or former angel investors, prospective institutional investors, or retail investors.
Types of capital raise
Capital raising can take the form of debt or equity or an instrument combining debt and equity.
Debt raising or debt financing occurs when a company borrows money from financial organisations, private investors, or public markets. The debt must be repaid at a later date.
Equity financing involves raising money by issuing common stock to retail and professional investors. While equity does not need to be repaid, an investor receives an ownership stake in a firm by purchasing stock. Investors raising equity capital can potentially receive a return on investment when the firm issues dividends or sells its share at a higher price to other investors.
Methods of raising capital
In public markets, businesses can raise equity through an initial public offering, share placements and purchase plans.
An initial public offering (IPO) is where a business offers investors the opportunity to purchase a share in the firm. The shares can then be traded on a public stock exchange like the ASX. This is typically a long process involving a roadshow (where the business is marketed to prospective investors) and publishing a prospectus (a document that outlines the company’s performance and what the raise money will be used for, etc.). An investment bank typically aids the IPO process. Upon floating, the firm must then frequently publish reports and abide by the regulations set by the public market’s governing body.
Share placements are where shares are offered to sophisticated (experienced high-net-worth investors) or institutional investors. This capital-raising process is beneficial as it can be conducted quickly. However, a firm is restricted by the amount that can be raised through this method.
Conversely, a share purchase plan allows existing retail investors to purchase more shares at a (typically) discounted price.
In private markets, businesses frequently approach venture capitalists, private equity firms and other capital partners to raise funds. These firms pool funds from institutional investors.
Raising Capital from Personal Networks
Raising capital from personal networks is a common strategy for startups and small businesses. This involves asking friends, family, and close connections for funding. Personal networks can provide a flexible and convenient funding source, often with more favorable terms than traditional financial organisations. However, it’s essential to maintain a professional relationship and ensure that the terms of the investment are clear to avoid potential conflicts. Business owners can also leverage their networks to access venture capital firms, private equity investors, and other funding sources. By tapping into these connections, businesses can expand their reach and increase their chances of securing the necessary capital to grow and succeed.
Effective Capital-Raising Strategies
There are several effective capital-raising strategies that companies can use to secure funding. These include:
- Developing a strong business plan and pitch deck: A well-crafted business plan and an engaging pitch deck are crucial for attracting investors.
- Building relationships with investors and funding sources: Networking and establishing connections with potential investors can open doors to funding opportunities.
- Leveraging personal networks and connections: Utilising personal relationships can provide initial funding and lead to introductions to larger investors.
- Considering alternative funding options, such as debt and equity financing: Exploring different funding methods can provide flexibility and meet specific business needs.
Companies must also be prepared to negotiate the terms of the investment and ensure that they understand the implications of the funding agreement. Businesses can effectively raise the capital needed to achieve their goals by employing these strategies.
Closing the Deal
Closing the deal is the final step in the capital raise process. This involves negotiating the terms of the investment, signing the funding agreement, and receiving the funds. Companies must ensure that they clearly understand the funding agreement and the implications of the investment. Maintaining a positive relationship with the investors and funding sources is essential to ensure future funding opportunities. Companies can successfully raise capital and achieve their strategic goals by following these steps. Effective communication and transparency during this phase can build trust and pave the way for long-term partnerships with investors, ensuring ongoing support and potential future investments.
What simple steps can you take to help raise capital for your business?
Improve your financial statements.
Cleaning up your financial statements is a simple way to capture the attention of lenders and investors. This may involve paying down outstanding debt to improve your balance sheet. Cashflow can be improved by negotiating shorter receivables periods with your debtors. You can also improve your profit and loss statement by reducing certain operating expenses.
Develop a solid business plan
Well-crafted business plans outline a company’s goals, target market, competition, and financial projections. A plan should also include a clear strategy for generating revenue and achieving growth.
Focus on your unique value proposition
What sets your business apart from the competition? Communicate your unique value proposition to existing and potential investors, and explain why your company is poised for success.
Demonstrate traction
Investors want to see that your business has gained momentum through customer acquisition, revenue growth, or other key indicators. By demonstrating traction, you can show investors that your business has the potential for future success.
Greenwich Capital Partners
At Greenwich, we work closely with small—to medium-sized enterprise owners and management teams to assist with their businesses’ continued growth.
As a capital partner, we provide the following services:
- Operational and process improvement
- Restructuring and repositioning
- Governance, leadership, talent and culture
- Mergers and acquisitions
- Capital structure optimisation
- Sourcing debt and equity capital
Frequently Asked Questions
Why would you want to raise capital?
Companies typically conduct raising to fund growth. The funds can be used for acquisition, a common practice among venture capital and private equity firms. The funds can also enable a business to expand by entering new markets or create value for customers by creating new products. Raisings can also be used to improve businesses’ balance sheets or daily operations.
Sometimes, businesses raise capital to rebalance their capital structure. For example, a highly leveraged company can lower its debt-to-equity ratio by raising equity or issuing shares to rebalance its capital structure. This practice is common among public companies, where capital structure influences various valuation methods.
Is raising capital good?
Determining whether a capital raising is beneficial depends on the allocation of the raising. If a firm’s management team can effectively allocate and invest the funds raised, a raising can enable a company to grow faster and further than possible without the raising. It also depends on the type of raising and the current capital structure of the business. For example, if the firm’s structure is heavily debt-weighted, a debt raising can be detrimental to the firm’s value when interest rates rise.
What are three sources of capital?
The three most common sources of capital are:
- Debt capital, where a company borrows money;
- Equity capital, where a company sells an ownership stake in the business;
- Retained earnings generated from profitable operations.
How do small businesses get capital?
Small enterprises can obtain a small business loan through a bank, typically presenting a solid business plan and demonstrating the ability to repay the loan. Raising capital may include providing financial statements and credit history to support their application.
Alternatively, they can approach venture capital or private equity firms specialising in fostering small businesses. These firms often provide funding, valuable guidance, and mentorship, helping entrepreneurs navigate the challenges of growth and expansion. Seeking support from these sources can be crucial for small businesses looking to thrive in a competitive market.
