Cash in the Bank: The Basics of Raising Capital

Female business owner holds a meeting with entrepreneurs to discuss ways to raise capital for growing businesses.

Starting, building and scaling a business requires significant resources. Among them is a source of capital, which is essential for developing products, launching marketing campaigns, hiring the right team members and much more. Businesses can pursue several sources of capital, including self-funding (also called bootstrapping), applying for business loans and securing grants.

Many entrepreneurs also find themselves interested in raising money from outside investors to provide a capital infusion without using their own money or taking on debt. This is appealing for many reasons—not least of which is because if your business doesn't succeed, you don't need to pay the money back.

Successfully raising capital can be exciting for a business, but there's a lot of work for businesses to put in before they secure a single dollar.

Before you seek out investors for your idea or existing business, you should know the basics of raising capital. This will help you not only find your ideal investors, but also prime yourself to succeed when you pitch them.

How Investors Can Help Finance and Guide Businesses

There are many reasons why business owners look to outside investors to raise capital. Some don't want to take on debt from business loans, and others need to raise more money for operations than standard methods of financing—including bootstrapping and start-up loans—can often provide.

And, even for those start-ups that are comfortable with taking on debt, options may be limited. Many times, loans aren't available to enterprises that don't have a track record of time in business or a history of revenue. Loans made specifically for start-ups may also be capped at smaller amounts, or carry interest rates that new businesses simply can't shoulder. These are just a few of the reasons that businesses may find outside investment appealing.

Additionally, investors provide more than capital. They can also be important strategic partners, especially for businesses in nascent days, that help provide vital guidance and assist in decisions at critical points.

Understanding Funding Rounds and Types of Investors

There are several different types of investors as well as different types of financing rounds to understand before you seek to raise capital. Here are the basics of what you need to know:

Types of Investors

Not all investors are created equal. Some invest earlier than others, and some provide more capital than others. Nearly all investors will invest in exchange for equity—an ownership percentage—of your company, but different types of investors will expect more equity than others.

  • Friends and family: These investors are close contacts who generally provide small amounts of capital to kickstart business development
  • Angel investors: These are generally wealthy, private individuals who invest small-to-medium amounts of capital early in a business's journey
  • Venture capitalists: These are private individuals—or, often, firms—that invest a more substantial amount of capital, generally further down the line
  • Syndicates: These are groups of individual investors who collectively co-invest in a company at varying levels and varying stages of operations

Types of Rounds

There are different "rounds" of financing for businesses raising money. They are sequential, beginning with the friends and family round.

  • Friends and family round: Many businesses begin by tapping close connections before engaging with formal investors
  • Angel round: This is generally a small round with just a few private investors to bridge businesses and prepare them for a larger capital raise
  • Seed round: This as seen as the first "formal" round of financing, which often includes venture-capital firms, more high-profile investors and larger amounts of capital
  • Series A, B, C, etc.: These are generally large rounds with venture capital firms, which provide businesses with major capital amounts, often into the millions of dollars

Before you proceed with soliciting investment and targeting investors, it's critical to have a sense of where your business financial health stands, what your goals are for the money you're looking to raise, and how much capital you need before going forward with your plans.

Preparing to Pitch Your Company

Pitching your company is generally a very organized process. You should always have your "elevator pitch" ready (in which you can quickly describe your company and point of difference) just in case serendipity strikes. But it's much more likely that you'll present a pitch deck to an investor. These presentations explain the details of your company and what you'll be using a capital infusion for.

Effective pitch decks are succinct and give a direct and easily understandable overview of the problem that exists and the solution your company is solving as well as the team behind it. Don't forget to point out your "secret sauce," which explains why you are uniquely positioned to solve the problem. There are some well-known templates that can help guide you in creating an effective deck. Additionally, you may want to look toward successful pitch decks for inspiration.

Knowing your company inside and out is the foundation of creating a strong pitch deck that will help investors connect to your company and see your potential. When you think you've come up with something strong, test your deck on different audiences to make sure that you're communicating your intentions before you take your show on the road.

Targeting the Right Investors

When it's time to start reaching out to investors, it's critical that you don't just reach out indiscriminately. You'll generally find the most success by homing in on the investors who understand your sector and your technology, as well as have a strong connection to the problem you're trying to solve. (Plus, reaching out to investors takes time—so you want to use your resources effectively.)

Some investors specialize and tend to stick to certain sectors of investment in which they have expertise and a strong track record of successful exits. Others, such as angel investors, only finance certain rounds of fundraising. What's more, some investors only finance up to a certain amount of money, which is important to keep in mind as you're figuring out who can help you reach your capital goal.

If applicable, you may also want to look out for investors who specialize in financing certain groups, such as underrepresented founders including racial minorities, indigenous people and women.

Connecting with investors, and getting yourself in the room with the decision-makers, can happen in different ways. Sometimes, cold emails are required. Some of the biggest companies have secured millions with a simple unsolicited inquiry. However, if you have other opportunities to connect with investors, it's important to leverage them. For instance, if you have relationships with other businesses that have received investments, consider asking for an introduction. You may also want to participate in networking events that could expose you to investors, and vice versa.

Although you may hear about major capital raises often, it's important to know that raising capital is a challenging process, and it takes many businesses—even the most successful ones—a long time to gain traction among investors. You may hear "no" often, so it's important to keep persisting. Remember that the better your know your business, industry, and the investors whom you're targeting, the better shot you'll have at succeeding. And don't forget that it only takes one "yes" to get you rolling.

The views expressed by the author are not necessarily those of Fifth Third Bank, National Association, and are solely the opinions of the author. This article is for informational purposes only. It does not constitute the rendering of legal, accounting, or other professional services by Fifth Third Bank, National Association or any of their subsidiaries or affiliates, and are provided without any warranty whatsoever. Deposit and credit products provided by Fifth Third Bank, Member FDIC.