Let’s talk: Raising capital

Raising capital can be a challenge for many small business owners or entrepreneurs looking to grow, or even simply start their business.

Without a financial background, it can be hard to know where to start with capital raising and finding the appropriate funding to give your idea the backing it requires. 

There are more traditional options (bank loans) and newer alternatives (crowdfunding) for business owners to choose from, with the best choice often completely dependent on your business and plan.

There’s no strict how-to’s when it comes to raising capital, but the main thing to consider around it is whether or not you do in fact need it, which some of our commentators explore today.

In the Top10 Dynamic Entrepreneurs event last November, our judge Jeremy Liddle (founding partner at SDGx) shared that he has seen instances where service based businesses with little overheads were still pitching for capital when it wasn’t really required in order to make the business work in the early stages.

When raising capital is done for the right reasons, i.e. to grow, it is often much more successful in both the pitching process and in the future that follows in terms of using that money.

In today’s Let’s Talk feature, we asked our business experts “How do you know which option is best for you?” regarding capital raising, and here are their thoughts.

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Raju Vegesna, Zoho Chief Evangelist

For businesses focussed on rapid, short-term growth, raising capital, and accepting external funding has its benefits. However, for those who prioritise steady, sustainable growth, there’s a strong argument to be made for not raising capital at all. That’s because accepting external funding comes with caveats, and opens up businesses to influence from external shareholders who can have very different motives. When they invest, they’ll likely want to see a near-immediate ROI, which means businesses are under pressure to compromise a longer-term strategy in the pursuit of short-term growth. Many businesses cannot and do not survive this rapid growth-at-all-costs approach.

Often, businesses – particularly smaller ones – are started in the pursuit of autonomy, freedom, or a passion project. When a company is unburdened from the influence of external investment, it can prioritise steady and sustainable growth and the needs of customers rather than investors. So before you decide which option is best for you, first determine if it’s even the right option in the first place.

Dr. Adir Shiffman, Chairman, Sleeping Duck

Accessing the right “growth capital” depends on your company’s maturity level, potential, and your own long-term personal plans.

Many founders dream of raising venture capital (VC), but these are professional investors of other people’s money who need massive exits. Unless you can reach at least $100m a year in sales, forget it. Most also prefer momentum and will be more attracted if you’re already doing $1-2m a year in sales.

If your business is still too early, has more modest potential, or you want to run it for the long-term then there are better options. “Angels” are wealthy individuals who invest earlier and don’t need billion-dollar outcomes. Many won’t even demand you sell out provided there are profits and dividends. The best even mentor young founders so look for Angels Investors on LinkedIn or at meetups.

Best of all is “customer funding”. Billing customers in advance is an age-old technique as is reducing expenses to deliver profits. It’s usually the best model for every services firm and agency. It may not be sexy or deliver newspaper headlines, but many startups “bootstrap” until they are well beyond $1m of revenue. And you’ll keep 100% ownership and control of your destiny.

Kenneth Gitahi, Senior Associate at Sierra Legal

Capital raising options for businesses include family loans, government grants, crowd-sourced funding, commercial loans, venture capital funding, and selling a share of the business (i.e. through private equity investment or an IPO).

The best option will depend on your business and funding requirements and may be influenced by factors such as the speed with which funding is required, cash flow of the business, the maturity of the business, the amount of funding required, the cost of funding, the flexibility with which the funds can be used, and the appetite for increased regulatory burdens that may apply to some forms of capital raising.

For example, borrowing from a family member can mean that the payment arrangements and use of funds are flexible and the money can be available quickly, whereas, approval for a commercial loan can take longer as a bank undertakes due diligence and commercial interest rates may be high.  In addition, the use of funds may be restricted to a specific project.

Seeking independent professional advice can help to determine the best capital raising option for your business.

Bruce Perry, Chief Operating Officer, Wontok 

Raising funds is a significant part of the effort of any entrepreneur. Many very promising startups have failed due to a cash crunch. For a new business, with no track record or collateral, accessing capital can seem an insurmountable challenge. Choosing what capital raising option is best for your business depends on your plan and strategy. Are you looking globally, or is your market strictly local? How much funds do you need? Knowing what you need, and being able to demonstrate exactly how you plan to spend it and the anticipated results, will give you a far better chance of getting investors over the line. For some startups, newer and less conventional options may be the way to go, such as crowdfunding or even entering competitions, which may also be helpful for publicity.

Vu Tran, Co-Founder, GO1.com

Raising a seed round, followed by a Series A and B, is the oft-trodden path for many start-ups on the road to success. It is important to note though that raising capital is not for everyone and in fact, in many circumstances, the best form of funding is revenue. This is something many start-ups forget to focus on and may result in unnecessary dilution and even ceding control of something you love.

So why raise capital? In general, investment should only be sought to accelerate growth. Whether it be through access to funds, channels or expertise, investors can be the key ingredient in growing your business faster. When it comes to deciding whether to fundraise, like Simon Sinek says, focus on the “why”. If it’s to grow faster, go for gold. If it’s for survival you may want to think twice about how to better grow your business.

Bill Fry, Managing Director of EVE

One of the key aspects of raising capital is understanding markets for entry and what complimentary attributes or resources a potential investor may give you that is in line with your company’s strategic objectives.

From our standpoint, the key for EVE when it came to our capital raises was finding a financial partner that was willing to be more proactive – particularly from a distribution perspective. We wanted to make sure there was a real alignment, particularly as we set ourselves up to expand and grow the business into new markets. What we were actually looking for was capital that came with other attributes, such as strategic investors, who could help accelerate our overall business growth and expansion. If you’re dealing with a prospective investor that can provide capital but also knows your customer and controls certain customer segments from a targeted distribution standpoint, then that is most certainly an attractive option, when considering which avenue for raising capital is right for you.

Stella Xu, Associate at Main Sequence Ventures