[] min read

Which Fundraising Is Right for My Business? Navigating the Capital Raise Landscape

Stuart Cook

Stuart Cook

May 24, 2022

Raising capital is a core part of being an entrepreneur, and it is important to understand that the capital raise process can be the difference between long-term success or failure. While raising capital may seem daunting, it is an essential step towards taking your business to the next stage. However, there are various factors to consider; from structuring the deal, to timing, to raising the amount. Should you be raising equity or debt? How much do you need to raise? What parties do you need to involve? There are several steps a business owner can take to determine the right fundraising strategy and break down the process into small manageable steps. Once you identify your distinct business needs, raising capital will be a much simpler process.

It’s time to explore the exciting world of raising capital, and determine if it’s the ideal business move for you.

What is capital raising?

In its most simple form, capital raising is the process of raising money to provide additional resources for a business, either in the form of equity or debt. Businesses raise money to get a business started, expand or transform. They may also want to raise funds to accelerate growth and capture market share faster, refinance other debt, or navigate challenging circumstances.

Should you fundraise to scale quickly?

Once you’re ready to scale your business, raising capital will allow you to move quickly. Fundraising for added technology, improved operations, or specialised talent can take your company to new heights and aggressively take market share. However, be aware that by raising capital you take on certain risks and responsibilities. You must also accept that the dynamic of control will also change.

Consider the following questions when deciding whether you should fundraise to scale quickly:

  1. Is there a space race, i.e. a race to become the market leader? Is speed to market important?
  1. Do you have a predictable growth model and strong acquisition model that you know can get better with investment in marketing/sales and therefore capital will bring immediate and strong revenue return?
  1. Do you fundamentally believe you need the help of others that are vesting in the interest of the business, strategic influence and advisors with a share?
  1. Do you have proven and strong unit economics that may only become plausible at scale?

Boost Credibility

While some people may think raising money for a business is a sign of weakness, it is often quite the opposite. Once investors have the confidence to grant you funding, it means they see potential in your company and the value you can provide to your customers. Bringing on high-profile investors (or other funding partners) can boost the credibility of your business, put you in the spotlight and facilitate future transactions. Adding investors also then means that there are more people with a vesting interest of wanting your business to succeed, to derive a return. They will provide introductions, advice, mentorship, and at times even provide services.

What Is the Difference Between Equity and Debt Financing?

There are two primary options to raise capital: debt and equity financing. Sometimes businesses may even choose to combine these two options to create some sort of hybrid funding package to address their requirements.

Equity Financing

Equity financing is the process of raising capital by selling company shares. For instance, if you need to raise money to expand your operations, you can give up 10% of your company ownership and sell it to investors. Moving forward, these investors own 10% of your company and have a vested interest in seeing the business succeed. Investors may be individuals, companies, venture capital firms or other equity finance providers.

The main advantage of this investment type is that you won’t have to repay the money you acquired, nor do you have to pay interest or royalties. Investors want the business to succeed to achieve their return on investment (ROI) targets. In the early stage market, most investors want capital growth, while in more mature businesses dividends are another way to distribute wealth back to shareholders.

Angel Investor Financing - Angel investors typically get involved very early and receive a piece of the action in return for their money and knowledge in helping a small business get off the ground or grow. Angel investors may take an active or passive role.

Venture Capital Financing – Unlike angel investors, VC firms don’t use their own funds to invest in businesses. Groups of professional investors pool money into funds, which are in return provided to start-ups or emerging companies in exchange for equity, and often, board seats.

Crowdfunding – Crowdfunding enables businesses to collect money from a large number of public investors, typically in small parcels, in exchange for equity ownership. These raises are facilitated via online platforms. Each jurisdiction has different rules around crowdfunding. In Australia, Crowd-sourced Funding is regulated by ASIC, which provided the legislative framework through the Corporations Amendment (Crowd-sourced Funding) Act 2017.

Debt Financing

Debt financing involves borrowing money from lenders and paying back the monies with interest. This investment type involves traditional bank loans, personal loans, credit cards, lines of credit, and more.

With debt financing, lenders won’t take an equity position in your business — which can be a major benefit if you grow your company exponentially. While the costs may appear high at first, for certain companies debt financing may be the smarter way to expand. It is also important to note that it is unlikely that a startup, making minimal revenue without years of traded profitability, can get debt easily. There is a large and new wave of smart financing, like revenue-based financing, to explore. There is also the ability to secure R&D tax incentives and pre-finance, and there are great companies out there such as Wayflyer, Clearco, and Fundsquire to help you achieve this.

It should also be noted that often you will need to put up security for working with traditional banks, which means they are often not startup-friendly, and entrepreneurs should avoid this at all costs.

Capital Raising Strategies

Now that you understand the basics of raising capital, it’s time to discuss five techniques you can use for your business.

  1. Bootstrap it. Using your personal savings is the fastest way to raise capital. While this move carries risks, it will pay off once your business booms. This is often the first step for a first-time entrepreneur and may need to show early traction before approaching third parties.
  1. Obtain a business loan. You need to meet specific requirements for such loans, but they can help you get up and running relatively quickly. A virtual CFO can help you determine if this is the right strategy
  1. Connect with an Angel Investor. These investors are typically wealthy, accredited individuals who provide capital for startups in exchange for debt or ownership equity. TWIYO Capital specialises in early stage fundraising and we have a vast network of angel investors and help businesses prepare for that journey. (Contact us here to learn more). In particular, Sydney Angels is a fantastic business investing in Australian startups with high growth potential.
  1. Meet a venture capitalist. Venture capitalists invest in companies with high growth potential. Unlike angel investors, these specialists often operate out of a firm and typically want to see a lot more traction before taking a stake.
  1. Consider crowdfunding. The internet has been a life-saver for many startup companies. Try Kickstarter, GoFundMe, and Indiegogo to raise enough funds for your business. Birchal is another great crowdfunding platform that we here at TWIYO have worked with in the past, and would highly recommend for any new business looking to learn more about crowdfunding.

So… should you raise capital?

This is the million dollar question (quite literally) and it is a complex one too.  Debt and equity financing are ways that businesses acquire necessary funding. Which one you need depends on your business goals, tolerance for risk, and need for control.

You may benefit from talking to a Virtual CFO or one of our capital finance specialists. Apart from capital, our team can provide you with the knowledge, experience, and the network to take your business to the next level. Get in touch with us to begin your company’s transformation.

Stuart Cook

Founding Partner

World Economic Forum Young Global Leader and Australian Young CEO of The Year. Former CEO of Zambrero aged 23, growing sales from $1m to over $75m and expanding the business into three countries. Investor, advisor, board member and mentor to over a dozen businesses and charities.

More insights