If there’s one saying entrepreneurs understand, it’s “money doesn’t grow on trees.” It is earned from somewhere. As one of America’s 28 million small businesses, you’re in the trenches daily thinking about where your next round is coming from, mostly because the financial health of your company, and ultimately, your bottom line, depends on it. You know that for your business to thrive, you’re going to need to raise capital. Raising money is among the many challenges that entrepreneurs face, but it doesn’t have to be the hardest one. Angel investors invest in over 50K companies each year, and VC’s write the biggest checks with an average investment size of $3 million to seed-stage companies. So, how do you cash in?
After helping 500+ clients in your shoes and 15 years of experience ourselves as business owners, here’s how we advise you to raise investment capital, and a few things you should consider when doing so:
How to Raise Capital Step #1: Start at the grassroots and be prepared.
Understand your customer base, the ins and outs of your product, and what customers like and dislike. If you haven’t already (and we hope you have), develop a business plan that outlines the steps you’re planning to take as well as the goals you’re hoping to achieve. Without establishing a clear business model, you are in a weak bargaining position. Anticipate potential questions from investors and be prepared to answer them honestly and with evidence. Showing your accounting records and financial model will impress potential investors and show them you’re serious. You’ll be able to show potential revenue as well as growth records.
How to Raise Capital Step #2: Consider all of the steps.
Raising capital is like climbing steps, and every step you take should increase your valuation. From an idea on a napkin to customers using your product to building a team, every step leads to the next. As you climb each step, your goal is to determine how to get one step closer to the next phase of increasing your valuation.
How to Raise Capital Step #3: Investment Capital
Bear in mind that you lose a little ownership in your company every time you raise. At each step, you also want to consider how much capital you’ll need to achieve each goal. Know your limits in each step, and determine at what point you’ll need to move on. Go after the right investors at the right stage of your business. You’ll start with friends and family, move to angel and seed investors and then finally move to VC. Raising money isn’t linear, even though it seems that way. It’s more of a step function; you are hitting milestones every tier of the way.
How to Raise Capital Step #4: Understand your agreement.
By now, you know that you should never sign something unless you’ve read it thoroughly. Once you’re at a stage where you’re ready to accept offers, understand the agreement on your desk. Read through any terms and conditions, and consider having a second set of eyes look over the documents, too (i.e. a lawyer, advisory board, or mentor who’s been in your shoes before). We’re happy to look at your documents, and help ensure you have a basic understanding of how a cap, a discount, or preferences might affect you down the road.
Another important point: You need to understand what both parties are getting out of the deal. What are your obligations to your lender/investor, and what are their obligations to you? Knowing this will help pave the way for an honest partnership.
How to Raise Capital Step #5: Determine the investment capital cost.
You know there’s always a price to an investment. Will you be paying interest, giving equity in your company, or both? Something is always expected in return for the investment. Consider what’s easiest (and most realistic) for you to agree to do. Doing so will ensure that your obligations are manageable and, ultimately, successful. Another reason to pay attention to the cost of your investment capital? Knowing your ultimate return. Make sure that your valuations are where they need to be. If there’s a cap on your valuation, it can be punitive to your company if your company valuation goes beyond the cap.
How to Raise Capital Step #6: Have a plan for expansion.
Once you’ve experienced growth in your market, it might be time to bring on a venture capitalist. You should think of raising VC as similar to hiring a boss. If you go the VC route, you’ll likely encounter a partner that will want to exercise some control over your business. As you explore this option, consider who you’d want to partner with and look for things like whether you share a common vision and how this partner fits into company culture. Regardless of your decision, have a plan, be prepared, and at the minimum interview somebody that the person has invested in. Seriously, make sure “talk to a human who has interacted with this person” is on your to-do list. Check their references, see who they’ve invested, and get insights into how they work, especially what you should expect from working with them.
While raising money can seem daunting, it’s what makes day to day operations run smoother and more efficient. Once you’ve raised sufficient capital, you’re well on your way to establishing a booming business ready to take on your market. Nothing is stopping you.
Want help getting started? Get in touch today. We’ve worked with hundreds of businesses as they scale and would be only too happy to be the strategic partner you need to make the next steps easy, straightforward, and successful.
How to Raise Capital: Additional Resources & Services
- Work with one of our CFOs to build a financial model that makes sense to investors.
- Sign up for free, virtual CFO Office Hours to pick the brain of one of our CFOs, have your questions answered, and test out our advisory services.
About the Author: Matthew May
I’m one of the founders of Acuity and currently serve as the VP of Sales & Marketing. I know first-hand the challenges and choices that entrepreneurs and business owners face. We’ve helped 500+ startups and small businesses navigate the hurdles that come with growing a business. Additionally I currently serve as the President of Atlanta Technology Angels where I provide mentorship, industry expertise, and networking opportunities to entrepreneurs in a variety of high-growth technology industries. I’ve also been on the advisory board of Venture Atlanta (the Southeast’s premier venture capital conference) since 2011 and a member of EO since 2017. So all that to say…raising capital is something that I can speak on for days! If you have any questions, freel free to reach out to me personally at @TheTechCPA.