the primary purpose of building a business plan is to raise capital

LIKE WHAT YOU’VE READ? WHY NOT SHARE

Capital Raising 101: Understanding the Basics and Best Practices

In the ever-evolving landscape of business, capital raising plays a pivotal role. Whether you’re an aspiring entrepreneur looking to launch a startup or an established company seeking growth opportunities, understanding the fundamentals of capital raising is essential. In this article, we’ll delve into the basics and best practices of capital raising 101, providing you with valuable insights to navigate this crucial aspect of business development.

Introduction to Capital Raising 101

Types of capital, the capital-raising process, best practices for effective capital raising 101, pros and cons of different capital sources, evaluating investment offers, building investor relationships, mitigating risks and challenges, case studies: successful capital-raising 101 stories, what is the main purpose of capital raising, how do i choose the right type of capital, what should be included in a business plan for investors, what is due diligence in capital raising, how can i maintain control of my company while raising capital.

Capital raising 101 is the process of obtaining funds to finance a business’s operations, expansion, or development of new products and services. It involves securing financial resources from various sources, each with its own terms, conditions, and expectations. Capital can be raised through equity, debt, or hybrid instruments, depending on the company’s goals and risk appetite.

Equity Capital

Equity capital refers to the funds raised by selling shares of ownership in the company. Investors who contribute equity capital become shareholders and have a stake in the company’s success. While this type of capital does not require repayment, shareholders expect a share of the company’s profits and a say in its decision-making processes.

Debt Capital

Debt capital, on the other hand, involves borrowing money from external sources, such as banks or financial institutions. Unlike equity capital, debt capital requires regular interest payments and eventual repayment of the principal amount. Debt financing allows companies to maintain full ownership but increases financial obligations.

Mezzanine Financing

Mezzanine financing combines elements of both equity and debt capital. It involves offering lenders the opportunity to convert their debt into equity if certain conditions are met. This form of financing is commonly used to bridge the gap between equity and debt financing.

Preparing Your Business

Before embarking on the capital-raising 101 journey, it’s crucial to have a well-defined business plan and a clear understanding of your financial needs. Investors will want to see a solid strategy, market analysis, and growth projections.

Identifying Potential Investors

Research and identify potential investors who align with your industry and business model. Whether you’re seeking venture capital, angel investors, or crowdfunding, finding the right fit can significantly impact your success.

Pitching Your Idea

Craft a compelling pitch that outlines your business’s value proposition, market opportunity, and growth potential. Tailor your pitch to resonate with the specific interests of the investors you’re approaching.

Due Diligence

Investors will conduct thorough due diligence to assess the viability and potential risks of your business. Be prepared to provide detailed financial records, operational plans, and legal documentation.

Unlock Your Business’s Potential: Mastering Capital Raising 101 with Easy Capraise!

Are you ready to take your business to new heights? Discover the secrets to successful capital raising with Easy Capraise . Whether you’re a startup founder or an established company, our comprehensive guide covers everything you need to know about obtaining funds, choosing the right investors, and navigating the process like a pro. Don’t miss out on this opportunity to secure your business’s future. Let’s elevate your success together!

Develop a Solid Business Plan

A well-structured business plan demonstrates your commitment, vision, and understanding of the market. It should outline your target audience, competition, marketing strategies, and financial models .

Know Your Numbers Inside Out

Investors will scrutinize your financial data, so be prepared to explain your numbers and assumptions. Present a clear picture of how you plan to use the capital and how it will lead to profitability.

Tailor Your Pitch to the Audience

Different investors have different priorities. Customize your pitch to address their concerns and show how their investment aligns with their goals.

Highlight Your Unique Selling Proposition (USP)

What sets your business apart? Clearly articulate your USP and how it positions your company for success in the market.

Venture Capital

Venture capita l firms invest in early-stage companies with high growth potential. They provide not only funding but also expertise and mentorship. However, venture capital often comes with giving up a significant portion of equity.

Angel Investors

Angel investors are high-net-worth individuals who provide capital in exchange for equity. They can offer valuable industry connections and insights but may have less capital to invest compared to venture capital firms.

Crowdfunding

Crowdfunding platforms allow you to raise small amounts of money from a large number of individuals. It’s a way to gauge market interest and validate your idea, but success isn’t guaranteed.

Traditional bank loans offer a straightforward way to secure funding, but they require collateral and regular repayments. Interest rates and terms can vary.

Valuation of Your Business

Determining the value of your business is a critical negotiation point. Understand how investors arrive at their valuation and be prepared to negotiate based on your growth potential.

Terms and Conditions

Carefully review investment terms, such as equity share, board seats, and exit strategies. Ensure the terms align with your long-term goals.

Transparency and Communication

Open and honest communication with investors fosters trust. Keep them updated on company progress and challenges.

Delivering on Promises

Meeting milestones and achieving growth as promised demonstrates your competence and commitment.

Overreliance on Capital

While capital is essential, overreliance on external funding can lead to loss of control and unsustainable growth.

Loss of Control

Equity investors become stakeholders in your company. Be cautious not to give up too much control in exchange for capital.

Airbnb: A Journey from Seed Funding to IPO

Airbnb’s success story started with seed funding from Y Combinator. Strategic partnerships and continuous innovation led to subsequent funding rounds and, ultimately, a successful IPO.

Tesla: Disrupting the Auto Industry with Strategic Funding

Tesla secured early investments and government grants to fuel its electric vehicle revolution. The company’s vision attracted investors who believed in its potential to reshape the automotive industry.

The Future of Capital Raising 101

The rise of impact investing and environmental, social, and governance (ESG) considerations are shaping new investment trends.

Technology’s Role in Shaping Capital Raising

Blockchain, tokenization, and online platforms are democratizing access to capital and revolutionizing the investment landscape.

Capital raising aims to secure funds for business operations, expansion, and development.

Consider your business’s financial needs, risk tolerance, and growth objectives when selecting between equity and debt capital.

A business plan should cover your market analysis, growth projections, marketing strategies, and financial forecasts.

Due diligence involves a comprehensive assessment of your business’s financials, operations, and potential risks by potential investors.

Carefully negotiate investment terms and consider hybrid financing options to strike a balance between capital infusion and control.

Capital raising is a complex yet vital aspect of business growth. By understanding the various types of capital, navigating the capital-raising 101 process, and implementing best practices, entrepreneurs can secure the funding needed to realize their visions. Remember that each business is unique, so tailor your approach to align with your goals and values.

Leave a Reply Cancel reply

Your email address will not be published. Required fields are marked *

Post Comment

Related Articles

Capital-raising Consultants vs. Broker-dealers – Which One is the Best?

7 Strategies for Successful Capital Raising

The Cost of Capital: Assessing the Value of Capital-Raising Services

Good to have you here! If you have any queries, please leave your message. Our team will reach out soon:)

Subscribe to Easy Capraise newsletter: Stay up to date with the latest capital raising trends from Easy Capraise!

[quform id=”6″ name=”sub222″]

Quick Links

• Personal Checking
• Business Checking
• Business Financing
• Wealth Planning
• Personal Credit Cards
• Mobile Banking
• Fraud Center

Comerica Web Banking ®

• Comerica Central
• Web Banking for Small Business
• Comerica Business Connect
• Comerica Financial Advisors
• Comerica GlobalTRADE Web
• Comerica Business Deposit Capture
• Comerica eFX
• Comerica Money Market Manager
• Comerica Credit Card
• Comerica Wealth Connect
• Comerica Trust Online
• Benefits Payments Online
• Comerica Commercial Card
• Business Finance

How to Raise Capital for Your Business: Useful Options and Strategies

Business leaders must learn how to raise capital or they could risk failure. Fortunately, there are many funding paths to take. As a leading business lender, we feel it is important that you understand the players, the process and the pitfalls of securing capital for your business. This article will get you started on the road to successful fundraising.

Why raise capital for your business

Raising capital is a crucial activity for many companies on the path to long-term stability and success.

While the specific objectives and context can vary greatly from one business to the next, the general goal is clear: Funding can support an organization as it secures opportunities for development, growth and continued relevance in the future.

From startup through the growth stage of any enterprise, raising money is necessary. However, the funding players change from your friends and family to savvy angel investors and institutional investors that will need a sophisticated proposal covering factors such as management experience, financials and the plan for profitability. Understanding where to find capital investment for your business is the first step.

Your business is an investment opportunity

Before reviewing the methods for raising capital, it's important to know the different types of investors, which can help you make a more informed decision about the best path forward for your business.

Where’s the capital for your business?

The two principal groups of capital available to your business are through debt or equity. Each group has different types of investors. Keep the basics of each in mind throughout your business journey.

Small business lenders

There are governmental and private investors that focus on small business generation and expansion, including the Small Business Administration (SBA), private and public group lenders, banks, and credit unions. Small business lenders provide cash to your business in return for regular interest payments. Often, a lender requires collateral or asset (i.e. a bond or real estate) for the lifetime of the loan.

Bank loans for small businesses range from $10,000 to $1 million with terms and conditions suitable for business owners growing and reinvesting much of their profit back into their business. If you are looking for a loan that does not require collateral, check in with the nearest SBA office.

Angel investors

Unlike small business lenders, an angel investor is typically a high-net worth individual who can offer cash for a piece of your business profits or equity. A wealthy angel investor is looking for early-stage companies with the potential to become profitable. The investment can be in the hundreds of thousands (or higher) and it typically is not a long-term relationship. Depending on the angel investor, business owners may also receive mentoring, though that is not guaranteed.

Venture capital

Another potential investor that will take a greater interest in building a relationship with a business’s leaders are venture capitalists. Venture capital typically involves a collection of entrepreneurs, bankers, product developers and so on. Their goal is to find business owners and companies that might go public. Venture capital funds manage portfolios in the hundreds of millions, but their equity stake in a company tends to be relatively small. Your company could receive multiple rounds of equity investment from venture capital lasting years.

Institutional investors

Public companies able to sell shares can raise capital from institutional investors. These types of equity investors include mutual funds, public and private pension funds, hedge funds, banks and insurance companies. Institutional investors pool large sums of money and look for established businesses that can provide a greater assurance of return. Typically, enterprises raise capital on the stock market, but institutional investors like banks can offer you lines of credit, corporate bonds and business loans.

There are potential investors throughout your business journey once you know where to look. How to raise capital requires a fundraising roadmap to guide you along the process and help avoid capital raising pitfalls.

The process of raising capital for your business

Business opportunities require capital. The promise of significant return that comes from growth — bringing new technology to market, expanding product lines, opening new manufacturing locations, acquiring a competitor or complimentary business — requires some form of investment to get started. In times of expansion, financial capital might be required to take action.

Moving forward with a strategy that aims to limit risk and maximize rewards in such circumstances is usually in your organization's best interest, and that is true for new as well as mature companies. Financial institutions, not to mention private investors, may look more favorably on a business that has demonstrated continued competency and positive results.

Moreover, organizations with a long track record of consistent and stable operations often find it easier to secure funding than a new venture because they have a fundraising roadmap.

Fundraising roadmap

Selecting the most relevant and effective option to raise capital for your business can make the path forward more certain. Due diligence is non-negotiable, but with these steps you will spend less time worrying about repayment obligations and more time focusing on turning the investment into positive progress.

Preparation steps

Capital raising requires leadership and trusted employees take the following critical steps:

• Develop an informative plan that describes how capital raised will lead to positive outcomes.
• Create financial projections that a lender, investor or another contributor will likely want to closely review.
• Identify the most effective options to fund the proposed diversification or development.

Selecting the best method for your business

In the best case, your company has a variety of options for capital raising, including equity capital, which is raised by sharing ownership in exchange for payment, or debt capital, which provides funding in exchange for repayment with interest later on.

Corporate bonds are a type of debt capital. In simple terms, corporate bonds involve a few key actions:

• The company seeking funds issues the bond.
• Buyers pay the cost of the bond to the business, providing funding for current or future activity.
• The business makes interest payments to the bondholders, either at a fixed or variable interest rate (but generally on a schedule).
• After the last scheduled interest payment, at the bond’s maturity date, the company pays back the initial investment.

Corporate bonds avoid sharing equity in the business with a single investor or group of investors. While the interest rate can vary, creating some uncertainty about the total amount owed to bondholders, it is possible to estimate these costs and create a business plan that accounts for them.

Bank loans , a type of debt capital, are frequently used for a variety of financial needs by businesses. That includes raising capital. In this arrangement, a business applies for a loan and, if approved, receives a lump sum payment from a financial institution. In return, the company pays both principal and interest over a previously agreed-upon timeframe until the debt is settled.

Bank loans, assuming approval, should offer predictability and clear expectations. Companies with a customer base and revenue may find them easier to secure than startups and ventures with less robust revenue.

Syndicated debt , also referred to as a syndicated loan, is a specific type of bank loan. The unique quality that distinguishes syndicated debt is the participation of a group of lenders, as opposed to just one. Syndicated debt is a practical approach if a standard loan does not seem to address your needs.

A syndicated loan distributes the risk and commitment of funds presented by the loan across several providers. While a single bank may not have the risk tolerance to take on a loan or may not be able to dedicate a substantial portion of available funds to it, a group of investors can mitigate these risks.

Private placement involves the sale of stock or corporate bonds to specific outside investors instead of through a public market available to all. A fundraising approach using stocks is a form of equity capital. This strategy allows a business to raise funding from a carefully selected, pre-qualified group and carries fewer regulatory requirements than an initial public offering (IPO) does.

Identifying and preparing for fundraising can feel overwhelming for a business owner. The following are some fundamental errors many businesses make while seeking investment.

Pitfalls to avoid when seeking investor funding for your business

Potential investors understand that an entrepreneur or CEO may not know how to raise capital. However, they do want to know that your business is fundamentally prepared to turn money into profit. The more you know about your business underlying financials, the better chance you will have to find and get a suitable investment for your business.

Avoid neglecting the following critical factors of raising capital for your business:

• Debt. Personal or business debts do not automatically cut you off from funding, but it can adversely affect your loan conditions or shrink your investor pool to only those with a higher risk tolerance.
• Liquidity. A potential investor or lender looks at your cash flow and available sources of cash to help determine how much to invest or loan your business.
• Collateral. Match your collateral — shares, real estate or equipment — to the lending method to avoid wasting time on the wrong strategy.
• Business plan. A crucial part of raising capital is your business plan. Investors want to know how you intend to make money from their investment and approximately when you might reach your business goal.
• Financial statements. The three most important financial statements for investors and lenders are the balance sheet, income statement and cash flow statement.

Most importantly, look for a partner to support your business goals for raising capital.

External funding and financing support continued success for companies aiming to grow and diversify.

Determining the best method to secure this capital is vital for the best chance at success. Comerica Bank can empower your business to raise the capital it needs to realize key objectives. Learn more for details about working with our experienced and knowledgeable business financing specialists.

This information is provided for general awareness purposes only and is not intended to be relied upon as legal or compliance advice.

This article is provided for informational purposes only. While the information contained within has been compiled from source[s] which are believed to be reliable and accurate, Comerica Bank does not guarantee its accuracy. Consequently, it should not be considered a comprehensive statement on any matter nor be relied upon as such.

Related Content

Site Navigation

• Small Business
• Wealth Management
• About Comerica
• Investor Relations
• Privacy & Cookies Policy
• Terms and Conditions
• Consumer Complaint Notice
• California Privacy Rights Act (CPRA) Notice
• Member FDIC
• Equal Opportunity Lender
• Equal Housing Lender E
• NMLS ID 480990

• Recently Active
• Top Discussions
• Best Content

By Industry

• Investment Banking

Private Equity

• Hedge Funds
• Real Estate

Venture Capital

• Asset Management
• Equity Research
• Investing, Markets Forum
• Business School
• Fashion Advice
• Technical Skills
• Deals and Transactions

Capital Raising Process

A company raises funding from an outside source to realize its strategic goals

• Capital Raising Process – An Overview
• What Are The Different Types Of Capital Raising Processes?
• Why Do Companies Raise Capital?
• Steps Involved In The Capital Raising Process
• Pricing: A Crucial Component Of The Capital-Raising Process
• Other Sources Of Capital Raising

Capital Raising Process – An Overview

In this article, we will discuss the capital raising process. We will define the different types of capital, why companies need to raise capital, and the steps for raising it.

Capital raising refers to the process through which a company raises funding from an outside source to realize its strategic goals. 

Some examples of a company’s strategic goals may include investing in its business development or other assets. A company may attempt to carry out an M&A transaction, joint venture , or other strategic partnership. 

A company can raise capital in three ways:

• Retained earnings
• Equity 

Retained earnings are a company’s net income after expenses and obligations are accounted for. Using retained earnings is the simplest form of capital raising because it means that the company does not owe anyone anything. A company can use its retained earnings to fund business projects. 

Debt capital raising is when a company borrows money to fund its growth and projects. 

A company can also raise capital by selling shares to stockholders. This process is called equity funding.  

Key Takeaways

• Capital raising allows companies to raise external funding for strategic goals.
• This can be done through retained earnings, debt, or equity.
• Companies raise capital for purposes such as mergers and acquisitions, purchasing fixed assets, raising working capital, and company restructuring.
• The process involves steps like underwriting, book building, and roadshows.
• Pricing an offering is crucial, and alternative sources of capital include private equity, private debt, angel investors, and venture capital.

  What are the different Types of capital-raising processes?

There are a few different types of capital raising, including debt financing, equity financing , and a hybrid of the two. 

• Other times, a company will sell a bond to investors. Once the bond matures, the company will pay investors interest payments on the bond. 
• Equity Raising : Also referred to as equity financing, this is the process of raising capital through the sale of shares of a company’s stock. One disadvantage of equity financing is that the firm issuing shares essentially sell off bits of its business ownership to investors to raise capital. 
• Essentially, investors loan money to a company and are repaid with equity instead of principal and interest. 

  Why do Companies Raise Capital?

The overarching purpose of raising capital is for a company to grow. We will further discuss the different ways company growth occurs and why capital raising is needed.

1. Mergers and Acquisitions (M&A)

Typically, companies do not have enough cash to finance a merger or acquisition entirely on their own. Thus, they look to equity and debt financing to raise capital for M&A transactions. 

2. Purchase of Fixed Assets

Companies looking to expand require regular reinvestment in their property, plant, and equipment ( PPE ). 

3. Raise Working Capital

Working capital is a company’s current assets , less its current liabilities . Net working capital measures a company’s short-term financial strength, liquidity, and operational efficiency. 

Early-stage companies often look to raise capital for hiring employees, marketing, and technology to increase their working capital. 

4. Company Restructuring

When a company is looking to restructure (i.e., rebrand, shift management, or move locations), it may raise capital to fund these efforts. 

Everything You Need To Break into Private Equity

Sign Up to The Insider's Guide on How to Land the Most Prestigious Buyside Roles on Wall Street.

Steps involved in the capital Raising Process

In this article, we will primarily discuss the process that banks carry out for raising capital. This is typically the job of investment bankers, who raise capital for the bank’s clients.

Here are the main steps in the capital raising process:

Underwriting Process

In the underwriting process, investment bankers raise capital for a client, which is typically a company, institution, or government. 

Underwriters get capital from investors, either in the form of equity or debt. Investment bankers must evaluate the current market, newsflow, and benchmark offerings to determine the expected investor demand accurately.

The information collected on all these conditions will be the content of the underwriters’ prospectus. The prospectus will include a price range that is deemed to be reflective of projected investor demand. 

Book Building Process

With the prospectus, investment bankers enter the book-building process. As the underwriters receive orders from investors for certain prices, they compile the orders into a list called the “book of demand”. 

This list will allow the underwriters to solidify a  clearing price  to ensure the offering is sold. 

Sometimes, a book is oversubscribed, meaning the demand for the offering exceeds the supply being sold. In this case, some investors may not receive their complete order.

Road Show Process

A roadshow occurs when a company’s management team travels with investment bankers to meet investors who will potentially invest in their company (which is soon to go public). 

The roadshow provides a company with the opportunity to convince investors why their business is a great investment during the capital raising process. 

Here are several criteria for a successful roadshow:

• Proper management and governance structure: investors demand that a company maintains management and governance that ensures profitability for the firm. On roadshows, a company’s management must demonstrate its operationally efficient business procedures. 
• Accounting for risk: when presenting to investors, management must be transparent about the risks involved. Management must also be sure to iterate the risk management tactics involved in their business operations.
• Discussion of long-term strategies and tactics: investors want to know what a company’s strategies are for long-term growth and how they will be sustained. 
• Acknowledging competition: management must demonstrate to investors that they have done proper research about the key competitors in their industry. Management should point out to investors how their company holds a competitive advantage in some way. 
• Summarize funding purpose and requirements: the management team must clearly describe to investors why they need more cash and the particular uses for the money.
• Industry/sector analysis: investors need to know about the industry, not just a single company. It is important that investors are informed about how the company’s growth rates compare to the industry as a whole. 

Pricing: a crucial component of the Capital raising Process

Determining the “right” price for an offering is a challenging task for investment bankers.

There are a lot of factors to be considered:

1. Stability of price

Investors dislike volatility because volatility usually infers that the security was either undervalued or overvalued . 

2. The resiliency of aftermarket

If there is a strong performance after the security issuance, that insinuates that the offering was underpriced, which is beneficial to investors. 

3. Investor depth

If there is a strong investor depth (which means more investors), an offering will have more stable prices and less volatility. 

4. Tradeoff of Pricing

There is a strong tradeoff between optimizing aftermarket price performance and underpricing an offering. 

The goal for an investment banker is to price the offering low enough so that the performance of the aftermarket is strong but high enough so that the issuer feels like the offering has been undervalued. 

5. Underpricing Consequences

Investment bankers must be careful with the temptation to underprice an offering every time. Essentially, if an offering is underpriced, the investors receive a surplus from the issuers. Investors benefit when they can buy an undervalued offering. 

The issuer gives up an opportunity cost when it sells the offering below its value. 

6. Initial Public Offering ( IPO ) Pricing

An initial public offering (IPO) is a private company ’s offering of shares to the public in the form of new stock issuance. It is a way for the company to raise capital through public investors.

During the pricing of an IPO, the company considers the following factors for its valuation :

• Discounted cash flow
• Comparable companies
• Precedent transaction analysis  

Investment bankers can use those financial models to determine the company’s IPO discount. The company's full value, less the IPO discount, gives the price range that will be presented to potential investors.

The typical discount ranges from 10% to 15% of the full value. If demand for the offering is lower than anticipated, the discount may be altered and re-priced below that given range. 

  Other Sources of Capital Raising

Banks are typically the most common source of capital raising for companies. Especially when looking to raise debt, banks are usually the go-to target. Equity raising tends to be less common for banks.

Because of the constant, universal need to raise capital, several other methods have evolved to help companies raise capital. 

Here, we will discuss some of the other sources of capital raising:

Private equity is a form of alternative investment that is independent of the public exchange. Private equity firms either invest directly in private companies or buy out public companies . Institutional and retail investors raise capital for private equity. 

Private Debt

Private debt is an investment of capital to acquire private companies' debt. Like private equity, transactions are not listed on the public exchange. An example of private debt investment is a  Leveraged Buyout (LBO) , where a private company purchases a target firm using debt. 

Angel Investors

An angel investor is a private investor with a very high net worth . These individuals offer to finance small startup companies and entrepreneurs. In exchange, they receive ownership equity in the company. 

Venture capital is another form of private equity where investors provide funding for startups with high projected growth.  Venture capital can come from various sources, including investors, investment banks, and other financial institutions. 

Venture capital funding is great for companies that do not have access to capital markets, bank loans, or other methods of raising debt. Because investors receive equity in the company, they also receive a say in company decisions. 

Everything You Need To Break into Venture Capital

Sign Up to The Insider's Guide by Elite Venture Capitalists with Proven Track Records.

Free Resources

To continue learning and advancing your career, check out these additional helpful WSO resources:

• Due Diligence
• Initial Public Offering (IPO)
• Joint Venture (JV)
• Mergers & Acquisitions (M&A)

Get instant access to lessons taught by experienced private equity pros and bulge bracket investment bankers including financial statement modeling, DCF, M&A, LBO, Comps and Excel Modeling.

or Want to Sign up with your social account?

• Business Plan Consultants
• FP&A Consultants
• Interim CFOs
• Market Research Analysts
• Startup Funding Consultants
• Startup Consultants
• Investment Bankers
• Fundraising Consultants

The Undeniable Importance of a Business Plan

We often hear about business plans in the context of early-stage companies; however, constructing excellent business plans is difficult and time-consuming, so many entrepreneurs avoid them. But, is this a mistake?

While most people may be aware of the “soft” arguments for and against writing a business plan, in this article, a Toptal Finance Expert takes a data-driven approach to addressing the debate. In it, he finds strong evidence to support the notion that writing an excellent business plan is time well spent.

By Sean Heberling

Sean has analyzed 10,000+ companies, built complex models, and helped facilitate $1+ billion in investment transactions.

PREVIOUSLY AT

Executive Summary

• Individuals who write business plans are 2.5x as likely to start businesses.
• Business planning improves corporate executive satisfaction with corporate strategy development.
• Angels and venture capitalists value business plans and their [financial models](https://www.toptal.com/finance/tutorials/what-is-a-financial-model).
• Companies who complete business plans are 2.5x as likely to get funded.
• Even if a small-scale early-stage venture seeking just $250,000 in capital spent almost $40,000 on business planning and another almost $40,000 on capital raising, it should still expect to "break even" on a probability-weighted basis.
• Larger early-stage ventures enjoy extraordinary probability-weighted returns on investment from business planning. Because the target net capital so greatly exceeds the money spent on business planning, the prospective ROI is huge.
• Company Overview: An explanation of why your company is relevant and the need you are addressing.
• Market Overview: A description of the state of your market and its important trends, a detailed description of your customers, and a description of your current competitors and their advantages.
• Product/Service Overview: A description of your product(s), how they compete with other brands, why they are needed, and why customers will pay a fair economic value for it.
• Financial Projections: Three thorough financial plans with conservative, moderate, and optimistic assumptions.
• The process of writing forces the author to ask introspectively how they reached their conclusions and each of the sub-conclusions along the way because they must explain their logic to a cynical reader.
• The written author needs to support all conclusions with facts and logic to prove that they are not "making it up" or relying upon popular "myths."
• Outlined reports and outlined business plans are not generally subject to the same level of reader scrutiny.

We often hear about business plans in the context of early-stage companies , but constructing excellent business plans is difficult and time-consuming, so many entrepreneurs avoid them. That’s a mistake, as there is strong evidence demonstrating that business plans generate positive returns on time and money invested .

The business world has long debated the importance of business plans, and most involved understand the “soft” arguments. However, this article delves into the data to conclude that writing an excellent business plan is time well spent. I developed a similar view over my 20+ year financial career , during which I have analyzed well over 10,000 different types of companies. I have noticed that while a business plan may not be required for a venture to become successful, having one does seem to greatly improve the probability of successful outcomes.

Expert Opinions Support the Value of Business Planning

Expert opinions support the four following conclusions:

• Angels and venture capitalists value business plans and their financial models.

Individuals Who Write Business Plans Are 2.5x More Likely to Become Entrepreneurs

Many people have business ideas over the course of their careers, but often, these ideas never come to fruition, or they get lost amidst our daily obligations. Interestingly, studies support the notion that those who write business plans are far more likely to launch their companies. Data from the Panal Study of Entrepreneurial Dynamics in fact suggests that business planners were 2.5x as likely to get into business . The study, which surveyed more than 800 people across the United States who were in the process of starting businesses, therefore concluded that “writing a plan greatly increased the chances that a person would actually go into business.”

Of course, causation of this phenomenon is hard to pin down. There are several different possible reasons why this correlation between writing business plans and actually starting a business may exist. But William Gartner, Clemson University Entrepreneurship Professor and author of the Panal Study, believes that “‘research shows that business plans are all about walking the walk. People who write business plans also do more stuff.’ And doing more stuff, such as researching markets and preparing projections, increases the chances an entrepreneur will follow through.”

Research shows that business plans are all about walking the walk. People who write business plans also do more stuff. And doing more stuff, such as researching markets and preparing projections, increases the chances an entrepreneur will follow through.

William Bygrave, a professor emeritus at Babson College, reached a similar conclusion despite having previously shown “that entrepreneurs who began with formal plans had no greater success than those who started without them.” Bygrave does admit, however, that “40% of Babson students who have taken the college’s business plan writing course go on to start businesses after graduation, twice the rate of those who didn’t study plan writing.”

Business Planning Improves Corporate Executive Satisfaction

Another important way in which business plans can provide tangible help is by aligning everyone in an organization with the vision and strategy going forward. And this, in turn, has important ramifications on corporate executive satisfaction. A study by McKinsey & Company which surveyed nearly 800 corporate executives across a range of industries confirms this conclusion. In it, McKinsey found that “formal strategic-planning processes play an important role in improving overall satisfaction with strategy development. That role can be seen in the responses of the 79 percent of managers who claimed that the formal planning process played a significant role in developing strategies and were satisfied with the approach of their companies, compared with only 21 percent of the respondents who felt that the process did not play a significant role. Looked at another way, 51% of the respondents whose companies had no formal process were dissatisfied with their approach to the development of strategy, against only 20% of those at companies with a formal process.”

Of course, not all planning is equal. Planning just for the sake of planning doesn’t have the desired effects. As McKinsey itself noted in their study, “Just 45% of the respondents said they were satisfied with the strategic planning process. Moreover, only 23% indicated that major strategic decisions were made within its confines. Given these results, managers might well be tempted to jettison the planning process altogether.” As such, entrepreneurs and business managers should take the time and effort required to put together a well-written and well-researched business plan. Later in the article, I outline some of the elements of a well-written plan.

Business Plans and Their Financial Models Are Valuable to Angels and Venture Capitalists

Many entrepreneurs will eventually need to raise outside capital to grow and develop their businesses. In my experience, a business plan is a crucial tool in maximizing the chances of raising money from external investors. A well-written plan not only helps investors understand your business and your vision, but also shows them that you’ve taken the time to carefully assess and think through the issues your business will face, as well as the more detailed questions surrounding the economics and fundamentals of your business model.

Nathan Beckford, CFA, is the CEO of FounderSuite, the funding stack used by startups in Y Combinator, TechStars, 500s, and more to raise over $750 million. Nathan illustrates the above point nicely in an email he wrote to me recently: “Prior to starting Foundersuite.com, I ran a startup consulting business called VentureArchetypes.com. For the first few years, our primary business was cranking out bold, bullish, beautifully-written business plans for startups to present to investors. Around the mid-2000s, business plans started to go out of favor as the ‘Lean Startup’ methodology became popular. Instead of a written plan, we saw a huge uptick in demand for detailed financial models. Bottom line, I still see value in taking time to be contemplative and strategic before launching a startup. Does that need to be in the form of a 40-page written document? No. But if that’s the format that best works for you, and it can help you model scenarios and ‘see around the corner’ then that’s valuable.”

Nathan and I have frequently interacted, as I maintain a subscription to FounderSuite, software I use when running capital campaigns for early-stage companies on whose boards I sit, or when raising capital for my own firm’s investment projects. Nathan’s feedback is helpful, as he frequently interacts with thousands of entrepreneurs simultaneously running capital campaigns, providing him with a great perspective on which approaches work and which don’t. Clearly, he sees that financial models and business plans in some form help entrepreneurs raise capital.

Companies Who Complete Business Plans Are 2.5x as Likely to Get Funded

Following the section above, naturally, if business plans are useful to outside investors, these are therefore likely to also increase one’s chances of successfully raising capital. A study by Palo Alto Software confirms this hypothesis. The study showed that although 65% of entrepreneurs had NOT completed business plans, the ones who had were twice as likely to have secured funding for their businesses.

This study surveyed 2,877 entrepreneurs. Of those, 995 had completed business plans, with 297 of them (30%) having secured loans, 280 of them (28%) having secured investment capital, and 499 of them (50%) having grown their businesses. Contrast these percentages with the results for the 1,882 entrepreneurs who had not completed business plans, where just 222 of them (12%) had secured loans, 219 of them (12%) had secured investment capital, and 501 of them (27%) had grown their businesses. (Note that the percentages among the business plan population sum to over 100% because of some overlap between each of the sub-categories.) These results led the study authors to conclude that “Except in a small number of cases, business planning appeared to be positively correlated with business success as measured by our variables. While our analysis cannot say that completing a business plan will lead to success, it does indicate that the type of entrepreneur who completes a business plan is also more likely to run a successful business.”

Calculating the Return on Investment for Business Planning

The data and studies outlined above all serve to prove something that I have come to understand very clearly throughout my career. Nevertheless, I still often find that startups struggle with the idea of having to put together a business plan, and in particular with the option of hiring an outside professional to help them do that. As such, I quantified the ROI of such an activity, using data and numbers based on my many years of business consulting. The results of the exercise are summarized in the table at the end of the section, but there are two overarching conclusions:

• Even a small-scale early-stage company can “afford” to pay a finance expert $191 per hour both to create a business plan and to guide the capital raising process, at worst “breaking even” on the investment.
• Larger early-stage companies can expect significant returns on investments in business planning, perhaps as much as 6,700% (67x the amount of money invested).

Diving into the analysis, my inputs included:

• My professional experience with writing business plans. I have spent 25 - 200 hours apiece creating business plans I feel comfortable sharing with founders, advisors, and investors.
• Data from the Palo Alto study discussed earlier in this article. This study showed that 30% of early-stage ventures with business plans had secured funding, 2.5x as great as the 12% of early-stage ventures without business plans who managed to secure funding despite the absence of such plans.
• The hourly rate for a finance expert x (150 to 200 hours) for one round of financing, OR
• 10% of the amount of capital targeted

My analysis illustrates the following:

• Early-stage companies should expect to spend $4,000 - $40,000 on business planning, including the financial modeling associated with it.
• Early-stage companies should expect to spend $30,000 - $200,000 for an initial round of financing between $250,000 and $2 million in size, resulting in net financing of $200,000 - $1.8 million.
• Even if a small-scale early-stage venture seeking just $250,000 in capital spent almost $40,000 on business planning and another almost $40,000 on capital raising, it should still expect to “break even” on a probability-weighted basis. In other words, because the odds of success with a professional business plan are 2.5x greater than without one, small-scale early-stage ventures can justify such a significant investment. This also assumes NO additional odds for success from engaging a professional to coordinate the fundraising effort. I suspect that doing so may push the odds of success from 12% without a business plan and 30% with a business plan to above 50%. It is also likely that a smaller-scale venture may require significantly fewer hours for business planning and capital raising that what is outlined in the “worst case” below.
• Larger early-stage ventures enjoy extraordinary probability-weighted returns on investment from business planning. Because the target net capital so greatly exceeds the money spent on business planning, the prospective ROI is huge, and this analysis just assumes ONE round of equity financing. Most successful startups will experience several rounds of financing.

Thoughts on Writing an Excellent Business Plan

An extensive overview of how to write an excellent business plan is beyond the scope of this article. However, here are two key thoughts that have emerged from my years of experience with startups.

First, there are four common elements to an excellent business plan. In Alan Hall’s Forbes article, “ How to Build a Billion Dollar Business Plan: 10 Top Points ,” he interviews Thomas Harrison, Chairman of Diversified Agency Services, an Omnicom division that has purchased “a vast number of firms,” to share his views on the key elements of a great business plan. Although each of these ten elements is essential, I reorganized the list into four broad categories:

1. Company Overview

• An explanation of why your company is relevant and the need are you addressing
• A description of corporate priorities and the processes to achieve them.
• An overview of the various resources, including the people that will be needed, to deliver what’s expected by the customer.

2. Market Overview

• A description of the state of your market and its important trends.
• A detailed description of your customers.
• A description of your current competitors and their advantages. Which ones will you displace?

3. Product/Service Overview

• A description of your products, how they compete with other brands, and why they are needed.
• An explanation of why customers will pay a fair economic value for your product or service. This element is conspicuously absent from some of today’s most expensive unicorns. Companies such as Uber and Tesla are losing massive amounts of money on rapidly growing sales because these companies may not be selling their services/products for fair economic value. Of course, sales grow rapidly when customers can buy your services/products for far less than their fair economic values!

4. Financial Projections

• Conservative
• Each scenario should have realistic and achievable sales, margins, expenses, and profits on monthly, quarterly, and annual bases. Again, these elements appear to be conspicuously absent from some of today’s most expensive unicorns.

Second, written business plans are superior to those just “outlined.” As an adjunct professor of finance for Villanova University, I require my students to write research reports prior to developing slide decks to present their findings from a full semester of industry research. The process of writing forces the authors to ask themselves how they reached their conclusions and each of the sub-conclusions along the way because they must explain their logic to cynical readers. The written authors need to support their conclusions with facts and logic to prove that they are not “making it up” or relying upon popular “myths.” Outlined reports and outlined business plans are not generally subject to the same level of reader scrutiny. Therefore, written business plans are superior to those just “outlined.” Outlined plans are often kept on 10-12 slide decks, and the slide deck is an important tool in the capital raising process, but the written business plan that stands behind it will differentiate an entrepreneur from their seemingly infinite competition.

Parting Thoughts

Some argue that many public multi-billion-dollar companies such as Apple or Google never had formal business plans before they started, but this argument is flawed because most of these companies likely developed business plans either during the solicitation of venture capital or during the process of going public. Apple and Google were both funded with venture capital, and soliciting venture capital involves business planning. The founders of Apple and Google likely created financial projections and outlined strategic paths.

Moreover, Apple and Google are both public companies, and going public involves business planning. Underwriters employ research analysts creating financial forecasts based on business plans projected by management at the companies going public. Buy-side firms purchasing and holding shares in newly public companies create forecasts based upon the business plans projected by public company management teams.

Admittedly, you don’t need a written business plan to have a successful company. You may not even need a business plan at all to have a successful company. However, the probability of success without a business plan is much lower. Angels and venture capitalists like to know about your business plan, and public companies need to project business plans to persuade underwriters and investors to purchase their securities.

Further Reading on the Toptal Blog:

• Creating a Narrative from Numbers
• Business Plan Consultants: Who They Are and How They Create Value
• Building a Business Continuity Plan
• Building the Next Big Thing: A Guide to Business Idea Development
• Mission Statements: How Effectively Used Intangible Assets Create Corporate Value

Understanding the basics

Why it is important to have a business plan.

Expert opinions and numerous studies show that business plans improve corporate satisfaction, are useful for angel investors and venture capitalists, and increase a company’s chances of raising capital by 2.5x.

What are the benefits of a business plan?

Individuals who write business plans are 2.5x as likely to start businesses. Moreover, business planning improves corporate executive satisfaction with corporate strategy development. Finally, investors value business plans, making the chances of raising capital 2.5x greater.

What does an investor look for in a business plan?

The four key sections of a business plan are: the company overview, a market overview, your product/service overview, and the financial projections.

• BusinessPlan

Sean Heberling

Philadelphia, PA, United States

Member since October 18, 2017

About the author

World-class articles, delivered weekly.

By entering your email, you are agreeing to our privacy policy .

Toptal Finance Experts

• Blockchain Consultants
• Business Management Consultants
• Business Process Optimization Consultants
• Certified Public Accountants
• Economic Development Consultants
• Equity Research Analysts
• Excel Experts
• Financial Benchmarking Consultants
• Financial Forecasting Experts
• Financial Modelers
• Financial Writers
• Fintech Consultants
• Fractional CFOs
• FX Consultants
• Growth Strategy Consultants
• Integrated Business Planning Consultants
• Investment Managers
• Investment Thesis Consultants
• Investor Relations Consultants
• M&A Consultants
• Market Sizing Experts
• Pitch Deck Consultants
• Private Equity Consultants
• Procurement Consultants
• Profitability Analysis Experts
• Real Estate Experts
• Restructuring Consultants
• Risk Management Consultants
• Small Business Consultants
• Supply Chain Management Consultants
• Valuation Specialists
• Venture Capital Consultants
• Virtual CFOs
• Xero Experts
• View More Freelance Finance Experts

Join the Toptal ® community.

• Capital Raising
• Trading Hubs
• Investor Hubs
• Trading Hub Listing
• For Shareholders
• Capital Raisings
• For Advisers
• Thought Leadership
• Case Studies
• Knowledge Centre
• About Primary Markets
• Why Raise Capital With Us
• Why Trade With Us

How to Raise Capital and Why It Matters

Understanding the importance of raising capital.

Raising capital is a critical aspect of business growth and development. It is the process of obtaining funds from investors to finance your business operations, expand your product or service offerings, or launch new ventures. Without adequate capital, it is nearly impossible for businesses to survive and thrive.

Having access to capital enables companies to invest in resources that drive growth, including research and development, marketing campaigns, hiring talented employees, and more. Furthermore, raising capital can help businesses stay competitive in a rapidly changing market and build a strong foundation for long-term success.

Whether you are just starting a business or expanding an existing one, having a solid plan for raising capital is essential to reaching your goals and achieving sustained growth.

Identifying Potential Capital Sources

There are many sources a company can go to to source capital when they are beginning to raise funds.

• Venture Capital: Investments made by venture capital firms into early-stage companies with high growth potential.
• Private Equity: Investments made by private equity firms in companies that are not publicly traded.
• Angel Investors: High net worth individuals who invest in early-stage companies.
• Crowdfunding: A method of raising capital through small contributions from a large number of people.
• Bank Loans: Loans from financial institutions to finance business operations and growth.
• Family and Friends: Personal investment from family and friends in a business.
• Initial Public Offerings (IPO): Selling shares in a company to the public for the first time.
• Secondary Market Transactions: The buying and selling of previously issued securities in a market other than the primary market.

Preparing Your Business for a Capital Raise

Preparing your business for a capital raise involves several key steps to ensure that you are in the best position to attract investors and secure funding. First, it’s important to have a clear and concise business plan that outlines your company’s goals, growth strategy, and financial projections.

This will help investors understand the potential of your business and why they should invest. Additionally, it’s crucial to have a strong management team in place and to demonstrate a strong track record of executing on your plans. You should also ensure that your financials are in order, including keeping accurate records of your income and expenses, as well as having a solid understanding of your current cash flow position.

Finally, it’s important to understand the regulatory and compliance requirements for raising capital, and to have a professional team in place to help you navigate these requirements.

Navigating the Capital Raise Process and Maximizing Your Outcome

Understanding the capital raise process.

The capital raise process can be complex and time-consuming, with various stages that need to be navigated to secure investment. It is important to have a clear understanding of the process, including the various players involved, and the timeline from start to finish.

Identifying the Right Investors

It is crucial to identify investors that align with your business goals, values and are committed to helping you grow. This requires research and due diligence to find the right investors that fit your business, as well as an understanding of their investment criteria and process.

Negotiating the Terms of Investment

Negotiating the terms of investment can be one of the most challenging parts of the capital raise process. It is important to understand the key terms, including investment amount, valuation, and equity ownership, and negotiate to ensure that the terms are favorable to your business.

Closing the Deal and Ensuring Compliance

Closing the deal involves executing the investment agreement and completing any other necessary legal and regulatory steps. It is important to have the right legal and financial advisors in place to ensure that the deal is structured correctly and all compliance requirements are met.

Maximizing Returns and Managing Risks

Once the deal is closed, it is important to focus on maximizing returns and managing risks. This requires monitoring the performance of the business and ensuring that the investments are being used effectively to support growth and deliver returns to investors. It also involves monitoring the compliance and regulatory requirements associated with the investment and ensuring that they are met.

How PrimaryMarkets delivers the power of private equity

PrimaryMarkets is a platform that offers businesses a unique opportunity to access the power of private markets and raise capital for their ventures. By utilizing the platform, businesses can present their investment opportunity to a large, engaged community of investors who are interested in alternative investment opportunities.

This can help businesses to quickly and efficiently raise capital from a diverse range of sources, including high net worth individuals, family offices, and institutional investors. Furthermore, PrimaryMarkets provides businesses with the tools and resources they need to streamline the capital raising process and increase their chances of success.

From start to finish, PrimaryMarkets offers a seamless and user-friendly experience that makes it easy for businesses to access the power of private markets and raise the capital they need to grow and thrive.

Read more articles about Raising Capital for your Business , or speak with PrimaryMarkets today about our capital raising services .

View all of the capital raising opportunities on PrimaryMarkets.

by James Hickson | February 09, 2022 | 11 min read

Everything you need to know about raising capital

Last updated: April 18, 2022

Let's examine two ends of a company spectrum. On one end, there is the seed company raising money to pitch a business idea to venture capital firms. And at the other, there is the decades or even centuries-old incorporated company with a healthy amount of cash flow. What do they have in common? Both entities must know how to raise capital.

This can be an overwhelming process for many businesses. But it also can mean the difference between success and failure regardless of your growth stage. To remove some of the pressure around capital raising, this article summarises everything you need to know.

We cover its importance, define key terms based on the stage of your company, provide guidelines for raising capital, examine key documentation, and give some key tips on how to raise capital quickly. If raising money for your business is a weak point, read on.

Table of contents

What does it mean to raise capital, why is it important to raise capital, how can a company raise capital.

A simple business definition for raising capital is when a business owner receives money from an investor or several investors to facilitate the start, growth, or daily operations of a business. Again, this can be a burden for some business owners. But most entrepreneurs consider it essential, and the cornerstone for their success.

A business owner might look at different fundraising methods to service different capital needs. These methods fall under two forms of fundraising: equity financing and debt financing – also known as dilutive or non-dilutive.

What is equity capital raising?

Equity capital raising is the process of raising money by selling shares of stock. This offsets the need to borrow money and creates debt. But it also dilutes the current pool of shares by increasing the total number of available shares. For capital raising, there are two types of shares sold: common and preferred.

Common stock shares give investors the right to vote, but that's all. And if the company liquidates or goes bankrupt, other shareholders will have first rights on any payments.

Preferred shares offer no voting rights and limited rights on ownership. Instead, preferred shareholders receive specific dividends before common shareholders receive payments.

Equity finance

When examining equity capital raising, you'll hear common terms like equity finance and equity funding. These all fall under the same umbrella. Equity finance also involves selling shares to investors to raise capital for business operations. But it's more of a blanket term that can include investment from friends and family, an angel investor (business angels) or other private investors, venture capital firms, private equity firms or institutional investors, or an initial public offering (IPO) on public markets.

You'll generally hear equity finance regarding public companies, but it also applies to private equity investment.

What is startup capital raising?

While equity finance can refer to capital raising for both established companies and startups, startup capital raising narrows the focus. When entrepreneurs have a solid business plan or prototype, they can raise capital in a variety of ways.

Startup capital can come from equity financing channels like venture capital, seed investors, angel investors, and institutional investors. But it can also come from debt financing channels like bank loans and bonds. Small businesses may also use credit cards to get things off the ground.

Debt financing can have a higher risk than equity financing, as startups will pay interest as part of their business loan agreement. But the bank will have no control over the company, and on fulfilment of the loan agreement is fulfilled, the contract dissolves.

Startup finance

Startup finance is another interchangeable term for startup capital raising. It includes all the means for a new business to either launch a product or grow the business – including dilutive and non-dilutive financing .

Unless you're sitting on tons of cash or your established business has a healthy cash flow, you'll need more money for growth and expansion plans. Many successful business owners boast that they never had to raise capital from venture capitalists, but it's not necessarily the best course. Here are some key reasons to raise finance for your business:

It's easier to scale your business – If you're beholden to interest payments on bank loans, it can make it difficult to launch a small business or project. Venture capital and equity investment make it easier to scale and often provide more money up front.

Capital gives your company credibility – When venture capitalists or private equity firms invest in your company, it shows others that your idea and business plan are credible. And venture capital firms often release news of the investment to the media to increase visibility.

You could gain access to additional resources – Raising finance often comes with access to additional resources. Think tax and legal resources along with access to extensive industry research.

The funding terms could be helpful – If you opt to work with an equity investor over a business loan, your business could receive better payment terms. You won't have to make monthly payments or pay interest at all.

When should you raise funds for a startup?

Business fundraising rarely happens just once. It happens in stages – known as 'rounds' – and each round has a different purpose and set of parameters. These are the common stages:

Pre-seed – This is the first investment and idea stage where a company has no customers or employees yet.

Seed – There should be a prototype or demo available of your product or idea at this stage.

Series A – Stage that raises funds to put a product on the market.

Series B-D and possibly more – Stages reserved for scaling, growth, and expansion.

Every company has a different path and different needs, so there's no actual premiere time for capital raising. Mostly, you can raise funds when you have a valid problem to solve and the demand for the solution is both viable and verifiable.

However, there are many valid reasons to wait before raising funds. You could need more time to generate interest in a solution before investors will bite. Or you have the funds to finance it yourself for a while. Another good reason to wait is that you may not have the time or resources to invest in pitching your idea to investors.

It's up to you as a business owner to consider the stages and reasoning for fundraising and discern what's best for your company.

Earlier, we defined what it means to raise capital, so now let's dive into the nuts and bolts of how you can do it for your company.

What are the methods of raising capital?

Each method for raising capital falls under the two forms detailed earlier: equity or debit. No matter which method you pursue, it's important to understand the reasoning for your choice.

Is it more helpful for your company to give up some equity in order to meet your goals? Or would your company profit more by taking on debt because you know you can pay back the loan quickly?

Regardless of which category you choose, you'll use the common methods detailed below.

3 common sources of equity capital

Note that the listed equity funding sources are outside of friends and family or money from your own pocket.

Angel investor or private investors – Angel investors are private individuals with a high net worth. They invest in small business startups or directly with entrepreneurs – with excellent business plans – in exchange for equity in the business.

Venture capitalists – These individuals generally work for venture capital firms and invest in businesses after angel investors. They tend to invest for longer terms and focus more on the growth potential of the company, as opposed to a solid business idea.

Initial Public Offering (IPO) – An initial public offering takes your company onto a stock exchange to raise capital from the public market. This option is complex, expensive, and usually only viable for established companies.

3 common debt capital sources

Debt capital comes from financial institutions through three common methods:

Loans – A company borrows money from a bank or government agency and pays it back over time with interest payments according to the loan agreement.

Credit lines – Companies use lines of credit to support growth. Obviously, you'll also pay interest using this method.

Bonds – Bonds are a corporate finance option where established companies allow large pools of investors to lend money directly to the company.

How does a capital raise work?

Capital raising happens when large or small businesses approach investors (equity capital raising), lenders (debt financing), or investment bankers – for both categories, and to process documents – with the purpose of raising capital.

Raising finance for businesses – new or old, big or small – requires tons of preparation and planning. Think about it – you're asking investors or lenders to commit their money to your company based on its potential for growth. You'll need to provide evidence that your business or idea has a high chance of succeeding and you'll be able to pay back these individuals or institutions.

What happens in a capital raise?

Capital raising can be a long process, so don't expect things to happen overnight. Below is a breakdown of both an equity and debt capital raise.

Unless you have a company to take on the public stock exchange, you can sum up the equity capital raise process in seven steps:

Determine your strategy for funding – This is the pre-offer stage where you'll define exactly what it is you're looking for in the capital raise. If you're giving an equity stake, how much are you willing to give up? If you're engaging in debt financing, how much debt are you willing to take on? And how high of an interest rate can your company pay and still accomplish its goals?

Organise your business details – You can't just pitch what's in your head. You must compile research, documentation, and accurate projections of the numbers your business can attain – revenue, profits, customers or users, etc.

Seek out investors – It's important at this stage to do your research and look at your network. Do you have a connection who can give you a solid contact? Or do you plan on reaching out to an investment firm? Working with investment bankers could be another viable option.

Create your pitch – Your pitch is where your capital raising campaign will live or die. It's important to create a presentation that's both immaculate and impossible to refuse. Then, present it to anyone and everyone who will listen and provide useful feedback to perfect your presentation.

Set up meetings – It's a numbers game, so don't expect every pitch to go well. But the more investors you pitch your idea to, the higher your chances are of getting funding.

Post-pitch due diligence – After your pitch, you'll need to follow through and provide even more evidence for the viability of your business or idea. This means possibly reaching out with more data and confirming your commitment.

Negotiation – This is also known as the closing process. You'll have to draw up paperwork and work out the finer details and work out what is in the best interest of both parties.

Sign the agreement – This is where the work begins. It's time to take the capital and put your plan into motion.

The process for raising debt capital can be similar equity financing if you're seeking a bank loan. You'll go through all seven of the steps listed above, but instead of pitching to investors, you'll pitch to lenders.

Otherwise, you'll take on debt through the form of a credit line. In this situation, you probably won't have to give a pitch. Instead, you'll need to show your business numbers to prove to credit lenders that you can pay back your credit loan and interest.

Documents to raise capital for your business

You'll integrate these key documents into a detailed business plan to raise capital for your business.

One-page company profile – Also known as an executive summary, this document provides potential investors and/or lenders with all the essential information they need at a glance.

A Confidential Information Memorandum – An exhaustive document ranging from 40 to 60 pages that details every aspect of your business. It includes your executive summary and lays out the elements of your company that prove it will be a success – product overviews, SWOT analysis, market opportunities, financial statements and outlook, etc.

A pitch deck – A pitch deck is like a CIM, except that it's much shorter – 10 slides – and has a lot of personality. This is what you should use to pitch your presentation to investors and lenders verbally and with enthusiasm.

A financial model – This is a spreadsheet that contains core financial statements and projections of how your company will perform in the coming years. You must include your balance sheet, cash flow statement, and business income statement and be able to show how those numbers came to be.

James Hickson is the CEO and Founder of Bloom Financial Group, the winner of numerous industry awards – most recently recognized as FinTech CEO of the year as well as Payment Service of the year by AI Global Media.

Bloom is a European Fintech company focused on small to medium business lending. With their proprietary technology, Bloom offers e-commerce and retail brands access to revenue based funding (between 25,000 EUR and 3M EUR).

Latest articles

What Is a Special Purpose Vehicle?

Dive into the latest insights on Special Purpose Vehicles (SPVs) in 2024. Uncover the purpose, structure, and contemporary applications of SPVs. Stay informed about the evolving landscape of SPVs with this up-to-date guide.

Cash Conversion Cycle

Explore the Cash Conversion Cycle in 2024, understanding its significance, components, and impact on business liquidity. Stay ahead by delving into the latest insights on optimizing the CCC to enhance cash flow management.

What Is a 409A Valuation?

Gain a comprehensive understanding of 409A valuation in 2024 – its definition, importance, and applications. Stay current with the latest insights into how companies determine fair market value for their stock options.

More From Forbes

Five strategies to help you raise capital effectively.

• Share to Facebook
• Share to Twitter
• Share to Linkedin

By Juan Jose Rosas, co-founder of Rose Hill , a $144-million publicly traded SPAC fund on Nasdaq.

Developing a compelling fundraising plan can determine whether your organization will be successful or not. You might have a differentiated product and the appropriate human capital, but without the ability to deploy the necessary resources to execute on your idea and achieve scale, your business will likely not reach its full potential. Moreover, partnering with the right set of investors can quickly expand the geographic footprint of your products and be a valuable source of industry knowledge or connections.

As a business owner, you should dedicate significant resources and time toward analyzing the capital needs of your expansion plan and the type of investors you want to partner with. Here are five strategies that can help you kick-start this process in the right direction.

1. Know exactly how the capital will be deployed.

One frequent reason why some capital commitments fail is due to the lack of specificity in how the investors’ money will be spent. In your presentation to investors, consider dedicating a section that shows exactly into which areas of the business the capital will go, such as research and development, marketing, geographic locations, cohorts, suppliers, inorganic opportunities, etc. If you can provide specific budget amounts for each section, even better. You may also consider building different scenarios based on capital raised to show investors you can still execute your plan if you operate with a lower-than-expected budget.

2. Set the minimum and maximum ticket size.

Business owners seeking capital often forget to define a maximum or minimum amount on the investments they seek. You want a minimum investment amount to avoid having too many investors at the startup level and spending unnecessary time dealing with all of them. On the other hand, setting a maximum amount will help you avoid having a single investor who holds too much control of your business and potentially tampers your strategic plans. Make sure to provide investors with a clear term sheet that shows these thresholds and the general terms of their investment.

3. Prepare an FAQ document.

The quality of your responses to an investor can easily make or break a deal, so you must be prepared for any type of questions that might come up. Creating a document with frequently asked questions and answers in bullet points can be very handy, especially if conducting a virtual pitch. A good way to formulate these questions is to go through each slide of your presentation and analyze what topics or sentences investors can challenge or are likely to ask for more details about. Additionally, consider giving your pitch to other colleagues or friends to hear an additional set of questions.

4. Choose the right strategic investors.

Choosing an investor just because they are willing to contribute capital is a bad business decision. Other considerations should come into play, such as the synergies they will bring to your expansion plan or product offering and the type of investor they want to be. I recommend carefully analyzing the profiles of your existing management team, board of directors and investors to determine what expertise your structure lacks or needs more of. If your expansion plan covers different geographies or industries, consider prioritizing investors with capabilities in those areas. Additionally, remember that you will likely work with your investors for multiple years, so it is important to make sure you connect with them not only on a professional level but on a personal one as well.

5. Learn what your audience is looking for.

You must do background research on every single investor you speak to in order to tailor your pitch. Every investor has different preferences and ways to look at your business. What is the profile of the investor’s existing portfolio companies? Does the investor place emphasis on environmental, social and corporate governance (ESG) initiatives? Are they typically active or passive partners? Do they typically like growth or value stories? How much emphasis do they place on the team versus the business model itself? These are questions that will be very helpful to know prior to an introductory conversation, and you should modify your pitch accordingly to emphasize the investor’s preferences.

While success is never guaranteed and there are many factors that influence a business outcome, these strategies will help you confidently take that first step toward the challenge of raising capital. The connections, budgeting and research done at an early stage will be invaluable along the way and make the fundraising process go smoothly.

• Editorial Standards
• Reprints & Permissions

17.1 How Businesses Raise Financial Capital

Learning objectives.

• Describe financial capital and how it relates to profits
• Discuss the purpose and process of borrowing, bonds, and corporate stock
• Explain how firms choose between sources of financial capital

Firms often make decisions that involve spending money in the present and expecting to earn profits in the future. Examples include when a firm buys a machine that will last 10 years, or builds a new plant that will last for 30 years, or starts a research and development project. Firms can raise the financial capital they need to pay for such projects in four main ways: (1) from early-stage investors; (2) by reinvesting profits; (3) by borrowing through banks or bonds; and (4) by selling stock. When business owners choose financial capital sources, they also choose how to pay for them.

Early-Stage Financial Capital

Firms that are just beginning often have an idea or a prototype for a product or service to sell, but few customers, or even no customers at all, and thus are not earning profits. Such firms face a difficult problem when it comes to raising financial capital: How can a firm that has not yet demonstrated any ability to earn profits pay a rate of return to financial investors?

For many small businesses, the original source of money is the business owner. Someone who decides to start a restaurant or a gas station, for instance, might cover the startup costs by dipping into their own bank account, or by borrowing money (perhaps using a home as collateral). Alternatively, many cities have a network of well-to-do individuals, known as “angel investors,” who will put their own money into small new companies at an early development stage, in exchange for owning some portion of the firm.

Venture capital firms make financial investments in new companies that are still relatively small in size, but that have potential to grow substantially. These firms gather money from a variety of individual or institutional investors, including banks, institutions like college endowments, insurance companies that hold financial reserves, and corporate pension funds. Venture capital firms do more than just supply money to small startups. They also provide advice on potential products, customers, and key employees. Typically, a venture capital fund invests in a number of firms, and then investors in that fund receive returns according to how the fund as a whole performs.

The amount of money invested in venture capital fluctuates substantially from year to year: as one example, venture capital firms invested more than $48.3 billion in 2014, according to the National Venture Capital Association . All early-stage investors realize that the majority of small startup businesses will never hit it big; many of them will go out of business within a few months or years. They also know that getting in on the ground floor of a few huge successes like a Netflix or an Amazon.com can make up for multiple failures. Therefore, early-stage investors are willing to take large risks in order to position themselves to gain substantial returns on their investment.

Profits as a Source of Financial Capital

If firms are earning profits (their revenues are greater than costs), they can choose to reinvest some of these profits in equipment, structures, and research and development. For many established companies, reinvesting their own profits is one primary source of financial capital. Companies and firms just getting started may have numerous attractive investment opportunities, but few current profits to invest. Even large firms can experience a year or two of earning low profits or even suffering losses, but unless the firm can find a steady and reliable financial capital source so that it can continue making real investments in tough times, the firm may not survive until better times arrive. Firms often need to find financial capital sources other than profits.

Borrowing: Banks and Bonds

When a firm has a record of at least earning significant revenues, and better still of earning profits, the firm can make a credible promise to pay interest, and so it becomes possible for the firm to borrow money. Firms have two main borrowing methods: banks and bonds.

A bank loan for a firm works in much the same way as a loan for an individual who is buying a car or a house. The firm borrows an amount of money and then promises to repay it, including some rate of interest, over a predetermined period of time. If the firm fails to make its loan payments, the bank (or banks) can often take the firm to court and require it to sell its buildings or equipment to make the loan payments.

Another source of financial capital is a bond. A bond is a financial contract: a borrower agrees to repay the amount that it borrowed and also an interest rate over a period of time in the future. A corporate bond is issued by firms, but bonds are also issued by various levels of government. For example, a municipal bond is issued by cities, a state bond by U.S. states, and a Treasury bond by the federal government through the U.S. Department of the Treasury . A bond specifies an amount that one will borrow, the interest rate that one will pay, and the time until repayment.

A large company, for example, might issue bonds for $10 million. The firm promises to make interest payments at an annual rate of 8%, or $800,000 per year and then, after 10 years, will repay the $10 million it originally borrowed. When a firm issues bonds, it may choose to issue many bonds in smaller amounts that together reach the total amount it wishes to raise. A firm that seeks to borrow $50 million by issuing bonds, might actually issue 10,000 bonds of $5,000 each. In this way, an individual investor could, in effect, loan the firm $5,000, or any multiple of that amount. Anyone who owns a bond and receives the interest payments is called a bondholder . If a firm issues bonds and fails to make the promised interest payments, the bondholders can take the firm to court and require it to pay, even if the firm needs to raise the money by selling buildings or equipment. However, there is no guarantee the firm will have sufficient assets to pay off the bonds. The bondholders may recoup only a portion of what they loaned the firm.

Bank borrowing is more customized than issuing bonds, so it often works better for relatively small firms. The bank can get to know the firm extremely well—often because the bank can monitor sales and expenses quite accurately by looking at deposits and withdrawals. Relatively large and well-known firms often issue bonds instead. They use bonds to raise new financial capital that pays for investments, or to raise capital to pay off old bonds, or to buy other firms. However, the idea that firms or individuals use banks for relatively smaller loans and bonds for larger loans is not an ironclad rule: sometimes groups of banks make large loans and sometimes relatively small and lesser-known firms issue bonds.

Corporate Stock and Public Firms

A corporation is a business that “incorporates”—that is owned by shareholders that have limited liability for the company's debt but share in its profits (and losses). Corporations may be private or public, and may or may not have publicly traded stock. They may raise funds to finance their operations or new investments by raising capital through selling stock or issuing bonds.

Those who buy the stock become the firm's owners, or shareholders . Stock represents firm ownership; that is, a person who owns 100% of a company’s stock, by definition, owns the entire company. The company's stock is divided into shares . Corporate giants like IBM, AT&T, Ford, General Electric, Microsoft, Merck, and Exxon all have millions of stock shares. In most large and well-known firms, no individual owns a majority of the stock shares. Instead, large numbers of shareholders—even those who hold thousands of shares—each have only a small slice of the firm's overall ownership.

When a large number of shareholders own a company, there are three questions to ask:

• How and when does the company obtain money from its sale of stock?
• What rate of return does the company promise to pay when it sells stock?
• Who makes decisions in a company owned by a large number of shareholders?

First, a firm receives money from the stock sale only when the company sells its own stock to the public (the public includes individuals, mutual funds, insurance companies, and pension funds). We call a firm’s first stock sale to the public an initial public offering (IPO) . The IPO is important for two reasons. For one, the IPO, and any stock issued thereafter, such as stock held as treasury stock (shares that a company keeps in their own treasury) or new stock issued later as a secondary offering, provides the funds to repay the early-stage investors, like the angel investors and the venture capital firms. A venture capital firm may have a 40% ownership in the firm. When the firm sells stock, the venture capital firm sells its part ownership of the firm to the public. A second reason for the importance of the IPO is that it provides the established company with financial capital for substantially expanding its operations.

However, most of the time when one buys and sells corporate stock the firm receives no financial return at all. If you buy General Motors stock, you almost certainly buy it from the current share owner, and General Motors does not receive any of your money. This pattern should not seem particularly odd. After all, if you buy a house, the current owner receives your money, not the original house builder. Similarly, when you buy stock shares, you are buying a small slice of the firm's ownership from the existing owner—and the firm that originally issued the stock is not a part of this transaction.

Second, when a firm decides to issue stock, it must recognize that investors will expect to receive a rate of return. That rate of return can come in two forms. A firm can make a direct payment to its shareholders, called a dividend . Alternatively, a financial investor might buy a share of stock in Wal-Mart for $45 and then later sell it to someone else for $60, for $15 gain. We call the increase in the stock value (or of any asset) between when one buys and sells it a capital gain .

Third: Who makes the decisions about when a firm will issue stock, or pay dividends, or re-invest profits? To understand the answers to these questions, it is useful to separate firms into two groups: private and public.

A private company is frequently owned by the people who generally run it on a day-to-day basis. Individuals can run a private company. We call this a sole proprietorship . If a group runs it, we call it a partnership . A private company can also be a corporation, but with no publicly issued stock. A small law firm run by one person, even if it employs some other lawyers, would be a sole proprietorship. Partners may jointly own a larger law firm. Most private companies are relatively small, but there are some large private corporations, with tens of billions of dollars in annual sales, that do not have publicly issued stock, such as farm products dealer Cargill, the Mars candy company, and the Bechtel engineering and construction firm.

When a firm decides to sell stock, which financial investors can buy and sell, we call it a public company . Shareholders own a public company. Since the shareholders are a very broad group, often consisting of thousands or even millions of investors, the shareholders vote for a board of directors, who in turn hire top executives to run the firm on a day-to-day basis. The more stock a shareholder owns, the more votes that shareholder is entitled to cast for the company’s board of directors.

In theory, the board of directors helps to ensure that the firm runs in the interests of the true owners—the shareholders. However, the top executives who run the firm have a strong voice in choosing the candidates who will serve on their board of directors. After all, few shareholders are knowledgeable enough or have enough personal incentive to spend energy and money nominating alternative board members.

How Firms Choose between Financial Capital Sources

There are clear patterns in how businesses raise financial capital. We can explain these patterns in terms of imperfect information, which as we discussed in Information, Risk, and Insurance , is a situation where buyers and sellers in a market do not both have full and equal information. Those who are actually running a firm will almost always have more information about whether the firm is likely to earn profits in the future than outside investors who provide financial capital.

Any young startup firm is a risk. Some startup firms are only a little more than an idea on paper. The firm’s founders inevitably have better information than anyone else about how hard they are willing to work, and whether the firm is likely to succeed. When the founders invested their own money into the firm, they demonstrate a belief in its prospects. At this early stage, angel investors and venture capitalists try to overcome the imperfect information, at least in part, by knowing the managers and their business plan personally and by giving them advice.

Accurate information is sometimes not available because corporate governance , the name economists give to the institutions that are supposed to watch over top executives, fails, as the following Clear It Up feature on Lehman Brothers shows.

Clear It Up

How did lack of corporate governance lead to the lehman brothers failure.

In 2008, Lehman Brothers was the fourth largest U.S. investment bank, with 25,000 employees. The firm had been in business for 164 years. On September 15, 2008, Lehman Brothers filed for Chapter 11 bankruptcy protection. There are many causes of the Lehman Brothers failure. One area of apparent failure was the lack of oversight by the Board of Directors to keep managers from undertaking excessive risk. We can attribute part of the oversight failure, according to Tim Geithner’s April 10, 2010, testimony to Congress, to the Executive Compensation Committee’s emphasis on short-term gains without enough consideration of the risks. In addition, according to the court examiner’s report, the Lehman Brother’s Board of Directors paid too little attention to the details of the operations of Lehman Brothers and also had limited financial service experience.

The board of directors, elected by the shareholders, is supposed to be the first line of corporate governance and oversight for top executives. A second institution of corporate governance is the auditing firm the company hires to review the company's financial records and certify that everything looks reasonable. A third institution of corporate governance is outside investors, especially large shareholders like those who invest large mutual funds or pension funds. In the case of Lehman Brothers, corporate governance failed to provide investors with accurate financial information about the firm’s operations.

As a firm becomes at least somewhat established and its strategy appears likely to lead to profits in the near future, knowing the individual managers and their business plans on a personal basis becomes less important, because information has become more widely available regarding the company’s products, revenues, costs, and profits. As a result, other outside investors who do not know the managers personally, like bondholders and shareholders, are more willing to provide financial capital to the firm.

At this point, a firm must often choose how to access financial capital. It may choose to borrow from a bank, issue bonds, or issue stock. The great disadvantage of borrowing money from a bank or issuing bonds is that the firm commits to scheduled interest payments, whether or not it has sufficient income. The great advantage of borrowing money is that the firm maintains control of its operations and is not subject to shareholders. Issuing stock involves selling off company ownership to the public and becoming responsible to a board of directors and the shareholders.

The benefit of issuing stock is that a small and growing firm increases its visibility in the financial markets and can access large amounts of financial capital for expansion, without worrying about repaying this money. If the firm is successful and profitable, the board of directors will need to decide upon a dividend payout or how to reinvest profits to further grow the company. Issuing and placing stock is expensive, requires the expertise of investment bankers and attorneys, and entails compliance with reporting requirements to shareholders and government agencies, such as the federal Securities and Exchange Commission (SEC).

This book may not be used in the training of large language models or otherwise be ingested into large language models or generative AI offerings without OpenStax's permission.

Want to cite, share, or modify this book? This book uses the Creative Commons Attribution License and you must attribute OpenStax.

Access for free at https://openstax.org/books/principles-economics-3e/pages/1-introduction

• Authors: Steven A. Greenlaw, David Shapiro, Daniel MacDonald
• Publisher/website: OpenStax
• Book title: Principles of Economics 3e
• Publication date: Dec 14, 2022
• Location: Houston, Texas
• Book URL: https://openstax.org/books/principles-economics-3e/pages/1-introduction
• Section URL: https://openstax.org/books/principles-economics-3e/pages/17-1-how-businesses-raise-financial-capital

© Jul 18, 2024 OpenStax. Textbook content produced by OpenStax is licensed under a Creative Commons Attribution License . The OpenStax name, OpenStax logo, OpenStax book covers, OpenStax CNX name, and OpenStax CNX logo are not subject to the Creative Commons license and may not be reproduced without the prior and express written consent of Rice University.

• Asia Pacific
• Latin America
• Middle East & Africa
• North America
• Australia & New Zealand

Mainland China

• Hong Kong SAR, China
• Philippines
• Taiwan, China
• Channel Islands
• Netherlands
• Switzerland
• United Kingdom
• Saudi Arabia
• South Africa
• United Arab Emirates
• United States

From startups to legacy brands, you're making your mark. We're here to help.

• Innovation Economy Fueling the success of early-stage startups, venture-backed and high-growth companies.
• Midsize Businesses Keep your company growing with custom banking solutions for middle market businesses and specialized industries.
• Large Corporations Innovative banking solutions tailored to corporations and specialized industries.
• Commercial Real Estate Capitalize on opportunities and prepare for challenges throughout the real estate cycle.
• Community Impact Banking When our communities succeed, we all succeed. Local businesses, organizations and community institutions need capital, expertise and connections to thrive.
• International Banking Power your business' global growth and operations at every stage.
• Client Stories

Prepare for future growth with customized loan services, succession planning and capital for business equipment.

• Asset Based Lending Enhance your liquidity and gain the flexibility to capitalize on growth opportunities.
• Equipment Financing Maximize working capital with flexible equipment and technology financing.
• Trade & Working Capital Experience our market-leading supply chain finance solutions that help buyers and suppliers meet their working capital, risk mitigation and cash flow objectives.
• Syndicated Financing Leverage customized loan syndication services from a dedicated resource.
• Employee Stock Ownership Plans Plan for your business’s future—and your employees’ futures too—with objective advice and financing.

Institutional Investing

Serving the world's largest corporate clients and institutional investors, we support the entire investment cycle with market-leading research, analytics, execution and investor services.

• Institutional Investors We put our long-tenured investment teams on the line to earn the trust of institutional investors.
• Markets Direct access to market leading liquidity harnessed through world-class research, tools, data and analytics.
• Prime Services Helping hedge funds, asset managers and institutional investors meet the demands of a rapidly evolving market.
• Global Research Leveraging cutting-edge technology and innovative tools to bring clients industry-leading analysis and investment advice.
• Securities Services Helping institutional investors, traditional and alternative asset and fund managers, broker dealers and equity issuers meet the demands of changing markets.
• Financial Professionals
• Liquidity Investors

Providing investment banking solutions, including mergers and acquisitions, capital raising and risk management, for a broad range of corporations, institutions and governments.

• Center for Carbon Transition J.P. Morgan’s center of excellence that provides clients the data and firmwide expertise needed to navigate the challenges of transitioning to a low-carbon future.
• Corporate Finance Advisory Corporate Finance Advisory (“CFA”) is a global, multi-disciplinary solutions team specializing in structured M&A and capital markets. Learn more.
• Development Finance Institution Financing opportunities with anticipated development impact in emerging economies.
• Sustainable Solutions Offering ESG-related advisory and coordinating the firm's EMEA coverage of clients in emerging green economy sectors.
• Mergers and Acquisitions Bespoke M&A solutions on a global scale.
• Capital Markets Holistic coverage across capital markets.
• Capital Connect
• In Context Newsletter from J.P. Morgan
• Director Advisory Services

Accept Payments

Explore blockchain, client service, process payments, manage funds, safeguard information, banking-as-a-service, send payments.

• Partner Network

A uniquely elevated private banking experience shaped around you.

• Banking We have extensive personal and business banking resources that are fine-tuned to your specific needs.
• Investing We deliver tailored investing guidance and access to unique investment opportunities from world-class specialists.
• Lending We take a strategic approach to lending, working with you to craft the fight financing solutions matched to your goals.
• Planning No matter where you are in your life, or how complex your needs might be, we’re ready to provide a tailored approach to helping your reach your goals.

Whether you want to invest on your own or work with an advisor to design a personalized investment strategy, we have opportunities for every investor.

• Invest on your own Unlimited $0 commission-free online stock, ETF and options trades with access to powerful tools to research, trade and manage your investments.
• Work with our advisors When you work with our advisors, you'll get a personalized financial strategy and investment portfolio built around your unique goals-backed by our industry-leading expertise.
• Expertise for Substantial Wealth Our Wealth Advisors & Wealth Partners leverage their experience and robust firm resources to deliver highly-personalized, comprehensive solutions across Banking, Lending, Investing, and Wealth Planning.
• Why Wealth Management?
• Retirement Calculators
• Market Commentary

Who We Serve

INDUSTRIES WE SERVE

Explore a variety of insights.

• Global Research
• Newsletters

Insights by Topic

Explore a variety of insights organized by different topics.

Insights by Type

Explore a variety of insights organized by different types of content and media.  

• All Insights

We aim to be the most respected financial services firm in the world, serving corporations and individuals in more than 100 countries.

Investment Strategy

What is venture capital?

Browse by topic

Innovation is a key economic driver and persistent differentiator in the United States. Many pioneering technologies, such as semiconductors, computers, the smartphone and artificial intelligence, would not exist without the risk-taking, entrepreneurship and venture capital that made them possible. Here’s an overview of venture capital, including how it works, the role it plays and how to raise it. 

How does venture capital work?

Venture capital provides financing to startups working on novel technologies and innovations with a high potential to create value—but also with a high risk of failure. Venture capital usually takes the form of equity shares or a future claim on equity, such as convertible debt, which in return allows the venture capital firm to receive a share of ownership in the business. 

Venture capital investors come in all shapes and sizes, but they generally have a long-term perspective. The time it takes for a company to grow and achieve success can be years, if not decades. From an investor perspective, success looks like an M&A or IPO transaction big enough to provide liquidity for all shareholders. However, the likelihood of any one investment resulting in a successful transaction where the return is much higher than the amount of investment, is very low. As a result, venture capitalists usually take a portfolio approach, spreading their investments across tens, if not hundreds, of companies.

The role of venture capital when building your startup

Venture capital’s main purpose is to help new, innovative startups grow. Before raising capital from a professional investor, a founder will tap their network of friends and family or participate in an incubator or accelerator to validate their idea and develop a minimum viable product. Some venture capital goes toward funding exploratory research and development and prototyping, but most is used to scale and commercialize a startup’s product or service. This includes investing in fixed assets for manufacturing, building out marketing and sales functions, or bolstering working capital.

The role of the venture capitalist or investor is to help the founders of a startup succeed. This can take many forms, but it usually boils down to advising on things like the state of the industry, achieving commercialization and benchmarking to peers. With a founder’s time often stretched, venture capitalists who advocate for and market a startup to their networks can be a big help. In addition, venture capitalists can leverage their networks to provide connections to the founder, such as other investors, potential customers and talent. 

Get in touch

Our dedicated startup banking team can help you find solutions for your business. 

How to raise venture capital

For a typical venture capital firm, capital is committed by a group of limited partners—institutions such as pensions, university endowments and insurance companies—who expect a higher rate of return given the inherent riskiness of their investment bets. To generate these returns, investors need to identify startups with the potential to create significant value. 

Here are some considerations when raising venture capital:

• Venture capitalists tend to be highly selective. Venture capitalists typically invest in only one or two companies out of potentially hundreds. Venture capital is a “power law,” which assumes only a small number of investments will be successful.
• Consider the current environment. The ease of negotiations depends on competition between investors. When a lot of capital is chasing fewer opportunities, as seen during the 2021-22 period, negotiations are easier for founders.
• It’s a numbers game. Typically, through a combination of networking and cold calling, a founder will line up many investor meetings. Additionally, a banker can have a network of connections to investors and capital that founders can explore. 
• The bar is generally high. Certain founder characteristics are often favored more than others—including the founder’s degree, university and previous experience as an entrepreneur. 
• Position yourself for success. Each investor will have their own list of preferred characteristics. You should conduct research before meeting with an investor to tailor your pitch.
• Prepare, prepare, prepare. The founder should prepare a pitch deck and be ready to answer any questions the investors may have. Questions are typically related to the problem trying to be solved, the size of the opportunity, development of the product or service, traction to date, the state of competition or the founding team’s experience. 
• Don’t rush into a deal. If a venture capitalist agrees to invest, their team will start the due diligence process culminating in a term sheet. The term sheet has terms and conditions that may be unfamiliar to founders. Founders should take the time to understand and evaluate the terms as they can have a significant impact on the allocation of value in the future. The term sheet will list the deal amount and the valuation, which translates into the amount of ownership the founder is offering in return for the capital received. In addition, things like liquidation preference, participation rights, cumulative dividends and conversion rights are often evaluated.

Evolution of venture capital

The origins of venture capital dates back to the 1940s. In the 1960s, venture capital was still a cottage industry, but by the 1970s that started to change. In the 1990s, the advent of the internet galvanized the industry, helped by notable venture-backed companies including Google, PayPal, eBay, Amazon, Netflix and Salesforce. The venture capital industry hit a setback toward the end of the decade as the dot-com bubble burst. This didn’t put off investors for too long. Since then, the venture capital industry has matured into an established asset class, hitting peak investment of $350 billion in the U.S. in 2021, $750 billion globally, per PitchBook. 

US Venture Capital Deployed by Era

This graph shows the upward trend of U.S. venture capital funding from 1980 to 2023, marked by several distinct periods.

• Cottage industry (1980-84): Funding started modestly, with capital invested ranging from $14.56 million in 1980 to $33.13 million in 1984
• Foundation for venture laid (1985-91): Capital invested increased, reaching $237.82 million in 1991
• Internet boom (1994-2000): A dramatic rise in funding, peaking at $51.31 billion in 2000
• Dot-com bust (2001-04): Funding decreased but remained substantial, with $21.97 billion invested in 2004
• Innovation and expansion (2005-13): Steady growth, with capital invested reaching $49.75 billion in 2013
• Institutionalization of venture capital (2014-20): Significant increases, peaking at $172.99 billion in 2020
• Peak venture (2021-22): Funding peaked at $350.50 billion in 2021 before dropping to $242.46 billion in 2022
• 2023: Venture capital funding dramatically decreased to $162.49 billion, about half of the 2021 peak

Stages of venture capital

Venture capital covers a broad range of companies, from seed through IPO. However, many investors prefer to focus on a particular stage of company, and founders should consider this when evaluating new and existing investors. The needs and priorities of a company varies at each stage, as reflected in the types of services J.P. Morgan offers.

Startup Needs Through Funding Stages

The bar graph illustrates the stages of venture capital from seed round to IPO or acquisition, showing how startup valuations increase as they progress through several stages.

Early stage: Seed and Series A; lower valutions. Needs at this stage include:

• Operating accounts
• Liquidity management
• Card and merchant processing
• Partnerships
• Cap table management
• Digital capital raising platform

Growth stage: Series B and C & D; more valuation than in the early stage. Needs at this stage include:

• Private capital raising
• Private placement advisory
• Debt financing alternatives
• Complex payments
• Reporting and reconciliation tools
• International expansion

Later stage: Series E & Crossover and IPO or Acquisition; highest valuations. Needs at this stage include:

• Capital raising and strategic advisory
• Investment management
• Global accounts
• Capital markets advisory
• Director advisory services
• International payments and FX

Benefits of venture capital

Venture capital fills a pivotal gap in the funding ecosystem and benefits portfolio companies in various ways, including: 

• Access to capital. Venture capital provides significant funding that startups often can't obtain through traditional methods, allowing for rapid scaling and development.
• Expertise and mentorship. Venture capital firms often bring industry expertise, business acumen and mentorship, helping startups navigate challenges and make strategic decisions.
• Networking opportunities. Venture capitalists have extensive networks, including potential customers, partners and future investors, which can be invaluable for a startup's growth.
• Credibility and validation. Securing venture capital can enhance a startup's credibility and market perception, making it easier to attract additional investors, customers and top talent.
• Support for risky ventures. Venture capital firms are more willing to invest in high-risk, high-reward ventures compared to traditional financing sources, fostering innovation and development in cutting-edge sectors.
• Long-term focus. Venture capitalists often have a long-term investment horizon, allowing startups to focus on growth and development rather than short-term profitability.

Without venture capital, many innovation companies would not succeed. However, it’s important for a founder to assess if venture capital is right for their company. 

Build your future with J.P. Morgan. We are committed to being the leading bank of the innovation economy—bringing together founders, investors, startups and high-growth companies. Learn more about J.P. Morgan Innovation Economy Startup Banking solutions . 

JPMorgan Chase Bank, N.A. Member FDIC. Visit jpmorgan.com/cb-disclaimer for disclosures and disclaimers related to this content. 

By checking the box below I consent to JPMorgan Chase using the personal data I have provided to send me:

Learn more about our data practices in our privacy policy .

Related insights

How to use life insurance as a financial asset

Aug 19, 2024

Yes, life insurance can offer a benefit to loved ones when you pass, but it can also be a financial asset during your life. Learn how it works.

Understand the ins and outs of venture capital, from how it works to tips on raising it.

What is the electric vehicle (EV) boom?

Aug 14, 2024

Electric vehicles are taking to the road in record numbers, and the entire industry is heating up in 2024. Learn about what’s happening in the EV market.

Growth fears have sparked market volatility

Aug 06, 2024

Markets are trading with a risk-off sentiment following the release of the July 2024 Jobs Report. Here’s what our strategists have to say.

How to assess the potential impact of AI on your portfolio

Aug 02, 2024

Companies and fund managers are moving quickly to tap into AI’s potential, but are they also properly weighing the risks? Here’s how we’re making our assessments.

How AI can boost productivity and jump start growth

Jul 25, 2024

Our analytic framework quantifies the potential economic impact of AI. We believe it could be transformative.

China: Navigating a real estate rescue and renewed trade tensions

Jul 11, 2024

These two policy developments, though seemingly unrelated, are in many ways interconnected. Read on to learn more.

Nothing is as good (or bad) as they say it is

Jun 28, 2024

It’s going to take the Federal Reserve longer to achieve the confidence to ease. It’s all about confidence. It always is.

You're now leaving J.P. Morgan

J.P. Morgan’s website and/or mobile terms, privacy and security policies don’t apply to the site or app you're about to visit. Please review its terms, privacy and security policies to see how they apply to you. J.P. Morgan isn’t responsible for (and doesn’t provide) any products, services or content at this third-party site or app, except for products and services that explicitly carry the J.P. Morgan name.