How To Raise Capital For A Startup

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The raising of funds in entrepreneurship is a huge step, and is often a grueling process. In this guide, we’ll review the types of raising capital, 4 sources of capital, as well as the advantages and disadvantages of raising capital. 

 

First, you might be asking some questions like, “what is raising capital?” or, “why is raising capital important?”. Simply put, raising capital is the means of acquiring more money in order to run or grow the business. Raising capital is important because it allows companies to continue growing their business, expand their teams and place in the market, and develop new opportunities. 

 

The types of raising capital are equity or debt. You can also raise capital through grants or net earnings. Equity raise involves issuing shares for capital, whereas debt involves borrowing money. Depending on the stage and model of your business, each option will provide different pros and cons. There are a plethora of sources that you can look to for funding, which range all the way from friends and family, to family offices, banks, government agencies, angel investors, crowdfunding, Venture Capital firms, and the list goes on. The most common sources of capital are friends and family and debt raises.

 

Some advantages to raising capital are fairly obvious; the ability to expand your team, to further build out a product, to increase sales and marketing spendings - all of these are opportunities when fundraising. Before starting a fundraising campaign, make sure you fully understand what you’ll utilize funding for, as this will be something investors want to understand. 

 

Disadvantages of raising capital come in many shapes and forms, depending on the route you choose. For example, when pursuing an equity raise, make sure you fully understand your valuation and have an organized Cap Table, along with understanding your offers and vehicle of investment, such as SAFE notes, which are a much more recent instrument.

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Ways To Raise Capital For A Company

More specifically, how can a private company raise capital, and what are the ways to raise capital for startups? Well first, let’s dive into the different methods of raising capital for a company.

 

We’ve briefly touched on the concept of the types of raising capital, so what are the details of the different methods of each type? First, equity raises can be raised through various methods, including friends and family, VC and angel investors, and even crowdfunding. Debt raises mean you’re borrowing money, so this could be from a bank, a family office, a financial institution, peer-to-peer lending, etc. Finally, don’t forget about grants! Many grants are available for small businesses and startups, as well as demographic financing. 

 

Depending on what stage your startup is in, each method will have its advantages and disadvantages. A majority of startups are either personally financed or have raised funds through friends and family. Check out this infographic from Entrepreneur that details the different funding methods. As you can see, less than 1.5% of all funding comes from VC’s and Angel Investors. That means if you are raising from Angels or VC’s, you really need to stand out. That’s why having a strategic approach to your fundraising campaign can help accelerate your efforts.

 

If you’re looking for a startup funding pdf, methods of raising capital pdf, or a startup fundraising process flowchart, please send a request for a Startup Guide here.

Methods Of Raising Capital

Having a campaign is just the beginning to understand how to raise capital for a startup. The ways a company can raise capital are directly influenced by their current growth stage, and who they are trying to raise from. As you continue to grow and raise more funds, you’ll need to understand methods of raising share capital as well. Having a firm understanding of your valuation and cap table is key to any successful raise, but as you continue to raise funds, equity begins to dilute. 

 

Strategically approaching fundraising means having a plan and executing. Too often, founders approach as many investors as they can and try to pitch as many times as they can. Now, practicing and perfecting your pitch is great - but let’s face it, it’s time consuming! Fundraising is a timely and resource draining process, so why extend the time it takes? 

 

Start with an archetype, or an investor profile. Once you understand who you are trying to communicate with, you can develop a campaign around their preferred message, channels, and methods.

Sources Of Equity Financing

There are several methods of raising equity capital, and once again each has its own pros and cons. Equity capital is raised through selling of shares, but how a company values, sells, and distributes its shares can dictate if a fundraising campaign is successful or not. Typically for startups, most equity raises are done through private markets, though some equity crowdfunding can take place - this is still not within the public IPO markets.

 

Once you’ve chosen to pursue an equity raise, it’s just as important to understand your investment vehicle. An example of an investment vehicle is SAFE notes. SAFE notes are fairly new, being introduced by Y Combinator in 2013. SAFE notes is an example of convertible securities that allow investors to buy shares at a certain price in future rounds. 


SAFE notes are just one example of an investment vehicle. If you’d like to learn more about the different types of investment vehicles, we highly recommend reading The First-Time Founder's Equity Bible.

What Are The 3 Sources Of Capital

Capital sourcing can be a headache unless you know a few millionaires or billionaires in your own personal network. If not, what options do you have? Well, there are three core sources of capital when starting a business: private, public, and governmental/grants. Let’s start with private funding. What is private funding? What are some sources of funds for private companies? Private funding is the funding of private companies. Private companies are companies not required to post earnings reports and public documentation which public companies are subject to.

 

Typically private companies are owned by a handful of individuals or entities as opposed to public companies which have often undergone an Initial Public Offering (IPO) and are actively traded on the open market. But what are the types of private funding? Funding for private companies often comes in the form of debt funding or equity funding–both of which have positives and negatives involved. However, sources for debt, depending on the size of the company, can often be subsidized by small business support systems in your home country. In the United States, there are loans which can be subsidized through Certified Development Corporations (CDCs) which are often local nonprofits which help small businesses apply for loans through the Small Business Administration (SBA) which subsidizes the loans in the event of a default, making banks more likely to lend to less than ideal borrowers (a category in which entrepreneurs often find themselves). If you’re looking for equity financing instead of debt, it may be best to give some examples of private funding: Jamal wants to start a Beard Oil company and knows his friend Greta has a lot of money. Jamal asks Greta to fund his business. Greta asks what his plan to pay her back is–Greta is asking about a business loan, or private debt. If Greta asks him what her returns will be, she is asking about an investment and could be asking about debt or equity. If she wants equity, then Jamal has to think about the type of ownership he wants Greta to have in exchange for her money.

 

All of these types can be found in the The First-Time Founder's Equity Bible. If all this is for private companies, how do Public Companies raise capital? Can a private company raise funds from public sources? Public companies are publicly traded, meaning they can directly sell portions of their equity to the public who will buy their stock at whatever the market price is at the time. These sales make the company money. A private company can raise money from the public, but only under specific circumstances. Most of the time, the public offer of securities has to be to qualified investors as defined by the SEC.

How To Raise Money For A Business Without A Loan

So, if you had a business and needed money which would you choose: equity financing or debt financing? Why? There is a hierarchy of funding types, and, in my opinion, debt will almost always be better than equity financing because it allows for retention of ownership of the business. You might Google things like, “Can I start a business without a loan?” or “How to raise capital without a bank?” but I highly recommend thinking about the trade-off of selling parts of your business for startup capital.

 

If you’re in a position where you’ve exhausted your debt options and have also checked with all local Certified Development Corporations and the Small Business Administration for startup options, then consider something like a SAFE note which requires no SEC filing immediately and is debt which converts to equity at a later date. However, you have to find your own SAFE note investors. Another option is crowdfunding for business which can be a viable option if you’re a highly productized business. If you make cool things that people want and would be willing to buy now and wait on until you can get them their products, then consider crowdfunding. There are other specialty crowdfunding sites, but the most commonly successful campaigns are products.

How To Get Funding For A Business Idea

Alright, it’s time for some rapid-fire How-To questions on, broadly, how to raise money for a business idea or how to get capital for a small business. First off, how to raise funds for a project and how to raise money to start a business are often the same question and answer: debt, equity, or grant funding. Either you’re asking for someone to give you money for no return but a good cause, or you’re trying to broker a deal to accomplish a specific goal of your project or business. If you’re looking for how to raise funds for charity, you’re in the first camp of asking for nothing but a good cause. However, the 501c3 status of your charity can provide tax incentives to those who donate. There may be 501c3 status crowdfunding sites like Patronicity which can help with matching grants as well. Whether you’re trying to raise money for a business startup, a project, a charity, or your own medical bills, there are only a few types of funding you can look for.

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Want to Accelerate Business Growth?

Our passion is helping early-stage impact businesses gain financial clarity through growth strategy and fundraising readiness.

Built For The Long Haul

Mutual success is not just about achieving the goals set today. Argona Partners is committed to fostering long-term relationships and leveraging our dynamic partner ecosystem to help companies realize success in the long run.

Looking for FREE Resources?