Capital raising is the process where business owners or founders generate enough capital to get their business up and running. Typically, raising capital is one of the core processes for startup companies so they can get their business off the ground, however businesses do often raise capital through various funding rounds throughout the establishment of their company.
Startups tend to raise capital through either equity or debt raising.
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What Is Equity Raising?
Equity raising is when business owners exchange a percentage of their company in return for an investment.
Equity raising can include investments from a variety of different establishments or individuals, including venture capitalists and angel investors. Investors such as these will inject capital into a business and in return they are entitled to part of the company.
Venture capitalists (VCs) are a type of private equity investor, whilst angel investors are typically individuals with a high net worth. Both types of investor are seeking businesses with a potential to generate a high revenue for their investment.
Some startup companies are wary of receiving investments from both venture capitalists and angel investors as they do not want to relinquish any control over the running of their business, or share any potential revenue.
On the other hand, some businesses welcome investments from both venture capitalists and angel investors as they can often provide industry specific knowledge and expertise alongside their cash investment. Both types of investors typically have significant knowledge in the field in which they are investing, meaning it could be valuable for them to be shareholders within the company.
Some startup companies prefer to raise capital through crowdfunding instead. Crowdfunding is also a type of equity raising, whereby the business can raise funds either online or in person whilst simultaneously generating interest in their business.
What Is The Difference Between Venture Capitalists and Angel Investors?
The difference between venture capitalists and angel investors is that angel investors do not require the business to repay their investment if the business does unfortunately go bankrupt.
This means that angel investors will be searching for businesses which they truly believe have the potential to generate a high revenue, and from whom they will profit immensely through investing for company shares. Business owners therefore often prefer to seek investments from angel investors as opposed to venture capitalists due to the risk of bankruptcy.
In addition to this, venture capitalists are not necessarily individuals, but firms who invest the funds of their shareholders.
What Is Debt Raising?
Debt raising is when business owners exchange debt for an investment. Credit cards, loans and bonds are all examples of debt which can be exchanged for capital as part of a debt raising agreement.
Debt raising occurs when a company sells fixed income products to investors in order to attain capital. If the company in question does go bankrupt, the shareholders will be behind the lenders when it comes to claiming any liquidated assets.
Why Do Businesses Raise Capital?
Capital raising also allows established companies to scale their business if they are looking to expand through taking on more employees, arranging office space or looking to offer additional products or services.
Capital raising tends to occur when businesses have established a solid plan surrounding their growth. This process requires significant planning, as the business should be able to provide sufficient evidence of it’s potential for growth in order to attain the investments it is seeking. The more faith the investors have in the business plan, the more likely they will be to invest their funds, meaning the capital raising process will be more successful.