The founder or founders of a startup corporation typically take care of the initial funding for the business, which is how about 99% of all businesses take off. However, also typically, businesses need to increase funding when the growth mode of the corporation begins. The corporation is caught between a viable concept, a fully-designed product, or a completed service model, yet hasn’t enough funding to pave the way toward exponential growth. Frustrating, right? It’s time for the CEO to raise funds through external sources. And, in order to do so as effectively as possible, it’s time to engage a capital raising consulting service.
Raising Capital Through External Sources
Before discussing the process of raising funds through external sources, let’s first examine the nature of those sources. Raising capital is done through one of three or four main avenues:
Debt capital raising
Equity raising
Hybrid raising (using debt and equity raising)
SAFE capital raising (applicable to startup companies)
Debt capital raising refers to loans obtained from external sources to fund a business in startup or growth mode. External sources may include public debt markets and banks, financial institutions, and private equity investors. Debt capital raising allows the CEO to secure a large sum with typically reasonable interest rates. As a result of this transaction, there is no loss of ownership or control of the corporation. The repayment must be made with interest on a set schedule and, when completed, the transaction is done. The downside of obtaining a loan is that repayment of a large sum may be difficult on a set timeline, while product or service introduction to the marketplace may not meet that schedule.
Equity capital raising is the process of issuing shares to external sources on the stock market or privately in exchange for funding. Equity capital raising is popular with CEOs because the funding does not need to be repaid. The investor is depending on the performance of the corporation to pay back the investment with additional profits added. Examples of external sources may include venture capitalists or private equity investors, and private investors. The downside of equity capital raising is that the investor owns a portion of the business and the shares sold dilute the ownership of the corporation.
Hybrid or convertible capital raising is a combination of both methods, which involves the process of raising funds from external sources to combine the positive sides of both debt and equity capital raising. The corporation will receive funding, however, shares are not typically offered in the process. The funding assists in growing the corporation and when in a stable condition, the agreed-upon shares at a set price are issued. The positives of this method are that the arrangement is flexible for both investors and corporate shareholders.
SAFE capital raising is aimed at startup corporations and involves a simple agreement for future equity in the form of a note. It offers startups a great deal of freedom because there are no repayment schedules until the agreement upon milestones are met.
The Process of Raising Capital through External Sources
After the avenue for raising capital has been established, the CEO has one decision to make: select in-house a manager to oversee the capital raising process, or contract with a capital raising consulting service to oversee the process and create the presentation on behalf of the CEO. While it’s tempting to make the decision based on cost, with the in-house manager requiring no payment, two salient questions come into play in this decision:
- Does the in-house manager have several hours each day to collect and process data, conduct research, compose a forecast of the corporation, prepare a presentation for investors and prepare the executive team on best presentation methods? If not, the in-house selection may become problematic.
- Will the in-house executive or manager be able to maintain a completely objective viewpoint when making hard choices, such as reconstruction, divestiture, or hiring a turnaround team? These can be extremely difficult choices; subjectivity may intervene in the process.
After deciding that the capital raising consulting service will be the best choice for the process and outcomes, those efforts will begin and continue through to the end, after the investors have made their choices. The process of the capital raising consulting service includes:
- Data research
- Data collection
- Historical records of corporation
- Present performance records
- Calculation of current financial needs
- Future forecasts for performance
- Innovation in products or services
- Financial forecasts for revenue and expenses
- Presentation preparation
- CEO preparation for presentation
- Investor invitations to presentation
- Investor follow-up
Making the decision to contract with a capital raising consulting service saves time, energy, and complex research, freeing the CEO to conduct business and continue vision-casting the next product or service introduction. Follow-up includes the allocation of funds and the evolution of the corporation continues.
