Capital raising is bringing money into a business from outside it, by selling shares to investors (equity), borrowing it (debt), or a mix of the two. A capital raise can be anything from a first £50,000 from an angel to a £50m round led by a fund.
I’ve raised £250m+ for my own companies and funded more than 750 businesses with over £1bn, so I’ve seen raises as a founder, as an investor and as a lender.
Equity, Debt or Both
Equity is money in exchange for shares. The investor becomes a part-owner and gets their return from dividends or when the business is sold, and there’s nothing to repay. How that works in detail, from the valuation to what investors ask for besides their shares, is covered in what is equity financing.
Debt is money a business borrows and pays back with interest. The lender doesn’t own any of the business, but it needs to see how the loan will be repaid and usually wants security: something it can sell to get its money back if the loan isn’t repaid, such as property or equipment. For UK businesses, Funding Guru arranges this kind of borrowing.
Many raises use both, layered into what’s called a capital stack. A business buying its own premises for £1m might borrow £700,000 against the building and put in £300,000 of equity. The lender has security over the building and, if the business defaults, is paid back first. The owners of the equity get whatever the building is worth once the lender has been repaid.
Larger deals add more layers, each from a different funder securing against a different part of the business. A company buying another business might combine a main loan secured on the whole company, a loan secured on its property, finance secured on its machinery, and a mezzanine loan, which ranks behind the main lender and charges more for taking that extra risk. The Capital Stack System sets out how the layers fit together.
How Much to Raise
The amount a business needs to raise is based on what it’s looking to achieve and what it will cost to get there.
The starting point is the cost of everything the business needs to pay for to get there:
People. The staff being hired and what they cost in full, including employer taxes, pensions and the equipment they need.
Product. Development, testing and anything else needed to build or finish what the business sells.
Stock and materials. Anything bought before customers pay for it.
Sales and marketing. What it costs to win customers, based on what it has cost so far.
Premises, equipment and systems. Anything the plan needs that the business doesn’t have yet.
Working capital. The money that covers the gap between paying costs and being paid by customers. A business that invoices on 30-day terms and pays its staff monthly funds a month of costs before any money comes back, and that gap grows as sales grow.
The raise itself. Legal fees and any adviser fees.
Many businesses raise in stages, planned around milestones: specific points the money is meant to get them to, such as a finished product, a first major contract or a set level of revenue. Reaching a milestone proves something to investors, so it can make the business worth more the next time it raises. For some businesses the milestone is the point where they make enough profit to fund themselves and never need to raise again.
The costs are added up over the time it takes to reach the next milestone. On top of that go two more amounts. Runway is enough cash to keep the business going for a period after it gets there, while it raises again or starts to fund itself. Contingency is a margin in case things take longer or cost more than planned.
The percentage the investor ends up owning follows from that amount and the valuation, which is what the business is agreed to be worth before the money goes in. A business valued at £2m that raises £500,000 is worth £2.5m afterwards, and the investor owns 20% of it.
Getting the amount wrong can go either way.
Raising too little. The money runs out before the business reaches its next milestone, so the founder has to raise again without the progress the first money was meant to buy. The valuation may be lower second time round, and a founder with little cash left has less room to turn down poor terms.
Raising too much. Every pound raised is paid for in shares. Taking more than the plan needs, because it was on offer or a bigger number sounded better, means giving away more of the business than necessary.
Of the two, raising too little is more dangerous. Raising too much costs some extra shares, but running out of money can stop the business.
The amount also decides who will look at the raise. Some investors write cheques of tens of thousands of pounds, and some funds won’t consider less than several million. A round in between can be too big for most individual investors and too small for most funds, which is where angel syndicates, smaller funds and crowdfunding are useful.
Who Provides the Money
Different investors are interested in different businesses, for several reasons. Some invest in sectors they know and understand. Some need their money back within a set time, while others can wait as long as it takes. And some invest their own money, while others invest on behalf of clients or a fund, which comes with its own rules about what they can back and the return they have to deliver.
Friends and family are often the first money in. On a small raise they can be all of it. On a bigger one, money from people who know the founder shows later investors that others already believe in the business.
Angel investors are individuals investing their own money, usually early and usually in a sector they understand. Many bring contacts and experience with the cheque. Angel syndicates are groups of angels following a lead investor who does the work, so a founder deals with one person for several cheques. More on both in how to find an angel investor.
Venture capital funds invest other people’s money and have to return several times what they raised within a fixed life, often around 10 years. They expect many of their investments to be written off, so they only back businesses that could become enormous, which is where they differ most from angel investors.
Private equity buys into established, profitable businesses it can grow and sell for substantially more. Not every deal is a takeover: many are minority stakes, where the firm buys less than half the shares and the founder keeps the biggest holding.
Family offices invest a wealthy family’s money in whatever the family understands, as debt or equity. Corporate investors are larger companies investing in smaller ones that could give them a new product, market or group of customers. Crowdfunding platforms let many small investors buy shares, which suits consumer brands with a following.
Getting the Business Ready to Raise
Before investing, an investor wants to see a clear plan and a founder who can deliver it. Then they check that everything they’ve been told is true, which is called due diligence. Much of the work of raising capital is getting the business ready for both, before the first investor is approached.
The numbers. Accounts going back as far as they exist, current management accounts, and financial projections showing how the money turns into growth. Every assumption in the projections an investor reads needs to hold up when they test it.
The company’s records. The share register, past share issues, filings, contracts, and ownership of the brand and any intellectual property. Gaps here don’t usually kill a deal on their own, but they slow it down and they come up in due diligence.
The pitch deck. A short presentation that gets an investor interested enough to take a meeting. It covers the problem the business solves, how it makes money, the market, the progress so far, known as traction (sales, customers or contracts), the team, the numbers and the raise.
The business plan. The fuller document behind the deck, for the investors who go further.
A data room. An online folder holding everything an investor will want to see in due diligence, prepared before it’s needed so the raise doesn’t stall while documents are found.
The valuation. What the business is worth before the money goes in, and the reasoning behind it. Early businesses with nothing to value them on often use an instrument such as a SAFE or an advance subscription agreement, which turns into shares later, at a price set in a future round.
How a Raise Runs
Most raises are organised as a round: a set amount raised from one or more investors, on the same terms, over a set period.
The investor list. It starts with the right names, matched on sector, stage and the size of cheque they write. An investor who backs software businesses at seed stage, the earliest round, won’t back an established manufacturer raising growth capital to expand.
The approach. Approaching several investors at the same time, rather than one after another, keeps a raise moving. Waiting for each answer before trying the next name can take weeks per investor, and with only one interested party the conversation drifts towards their terms.
Meetings. An investor interested in the deck will want to meet, often more than once. They question the numbers and the plan, and they’re judging whether the founder can deliver it.
The lead investor. In a round with several investors, one usually leads: they negotiate the terms, do most of the checking and often take a seat on the company’s board. The others follow on the same terms, relying on the checking the lead has done.
The term sheet. A short document setting out the price and the main rights the investor will have, such as a board seat or a say over major decisions. Once it’s agreed, the investor carries out due diligence on the legal, financial and commercial side of the business.
Completion. Lawyers turn the term sheet into the subscription agreement, the shareholders’ agreement and usually new articles of association, the company’s rulebook. The money arrives and the new shares are issued.
Why Raises Fail
Often, a raise fails because it never properly starts. The founder keeps preparing, waits for a better moment or never approaches investors, and money that was available never gets asked for.
When founders do approach investors, these are the reasons raises fail.
- The business isn’t yet one an investor wants to back. Investors are looking for a business worth backing: one that makes money or clearly can, in a market big enough to matter, run by people who can deliver the plan.
- The deck or the numbers don’t hold up. A deck that doesn’t get meetings, or forecasts an investor can’t believe when they question them, ends the conversation early.
- The wrong investors. A good business approached by investors who never back its sector, stage or size will be turned down every time, and those rejections say nothing about the business.
- The founder can’t talk the investor’s language. Investors discuss a deal in terms of valuation, dilution, returns and exit. A founder who can’t follow that conversation struggles to hold their own in it.
- The raise isn’t run as a process. Investors approached one at a time, meetings without follow-up and no timetable let interest go cold.
Advisers and Brokers
Some founders run the raise themselves, and some pay an adviser or broker to find the investors and manage the process. Advisers usually charge a monthly retainer, a success fee of a percentage of the money raised, or both.
A retainer is paid whether or not the raise completes. A success fee is only paid on completion, so the adviser is motivated to get it done, but it comes out of the money raised. An adviser earns their fee where the introductions are ones the founder couldn’t make, and where the founder’s time is worth more spent running the business. On a small round from individuals the founder already knows, the fee can be a large share of the money for introductions the founder could have made themselves.
The Rules on Who You Can Offer Shares To
Promoting shares in a private company to the public is regulated in most countries, usually with exemptions for investors wealthy or experienced enough to judge the risk themselves. Many private raises happen under those exemptions.
In the UK, section 21 of the Financial Services and Markets Act 2000 stops anyone communicating an invitation to invest in the course of business unless an authorised firm makes or approves it. Exemptions cover high net worth and sophisticated investors, who confirm in a signed statement that they meet set tests of wealth or investing experience.
In the US, companies raising privately under Rule 506(b) of Regulation D can raise an unlimited amount from accredited investors (people and firms that meet wealth or income tests set by the SEC), plus a limited number of other investors, but can’t use general solicitation or advertising to market the shares. Regulation Crowdfunding is one route for raising from the public, up to $5m a year through a registered platform.
In Australia, a company doesn’t need to give a prospectus or other disclosure document to investors a qualified accountant certifies as having net assets of at least A$2.5m or gross income of A$250,000 a year for each of the previous 2 years.
In Singapore, offers to accredited investors are exempt from the prospectus rules, and one way an individual qualifies is with net personal assets over S$2m, with no more than S$1m of that coming from their home.
In the UAE, the rules depend on where the company is set up. In the Dubai International Financial Centre, the Dubai Financial Services Authority licenses crowdfunding platforms through which investors can buy into businesses.
FAQs About How to Raise Capital for a Business
What is a capital raise?
A capital raise is a single round of bringing money into a business, whether by selling shares, borrowing or both. A company that sells £500,000 of shares to 3 angels has completed a capital raise, and so has one that borrows £2m against its property.
Can you raise capital without giving up equity?
Yes. Borrowing raises capital without selling any shares, as long as the business can show how it will repay the loan. Revenue-based finance, where repayments rise and fall with sales, and asset finance, secured on equipment, are other ways to raise money without giving up ownership.
Where do you find investors?
Through people who already know investors, angel networks and syndicates, investor databases, crowdfunding platforms and advisers.
How much equity do investors take?
There’s no fixed percentage. It depends on how much is being raised and what the business is valued at before the money goes in. The investor’s share is the amount they put in divided by what the business is worth afterwards.
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If you’re raising and want it run properly, from making the business investable to getting in front of the right investors, that’s what Capital Raiser does. If you’re earlier than that, join Capital Catalyst for free and learn how the main types of funding work.
