Have you thought about raising capital for your business, but the process seems daunting? Your instinct is to secure a bank loan, but this may not be an option for you because banks want loans secured by a personal asset. You will need to seek capital from other people or companies. There is a process that every scalable business goes through to raise money, which I will explain here for you. Typically at the beginning of your business journey, a lot, if not most of the funding is coming from you or your loved ones. This initial funding allows you to get the business off the ground, create some marketing materials, and secure sales to show investors. After the Friends and Family Round, which is self-funding and small investments from friends, family, mentors, and a proven track record, you are ready to start a seed round.
A seed round refers to the initial round in which a few investors, typically angel investors, believe in your company and see growth potential. They will invest between $50,000 to $2 million as a way of "seeding" you with the money needed to take the business to the next level or get the company off the ground. Angel investors are investing in the concept of what the company can become. The money invested in seed rounds typically goes to foundational costs such as market research, hiring essential team members, and product development. In return for their investment, investors receive a convertible note or equity in the company. This investment is typically a riskier investment for investors, so they expect a much higher return in the long run.
What is an angel investor?
An angel investor is a high net worth individual that provides personal financial backing for your idea – they might make a one-time investment into the business or become a regular backer that stays with the company as it grows. Many angel investors provide financial support and act as a mentor for your growth and development. This type of investment that comes with support and connections is referred to as Smart Money.
In the early stages of your business post-development, you might look into a Series A funding round. At this stage, you are looking for a group of angel investors to give you anywhere from 2 to 10 million dollars to further your business past the development stage. Series A rounds are typically used to grow production, secure marketing, inventory, social media strategies, and continue product development. What sets a Series A apart from Seed Round is that you now have a valuation for your business so you can distribute shares versus convertible debt. AS of recent, some venture capitalists are venturing into the series A or B rounds.
You have done the market research, you have secured initial funding, and you have sales traction to prove your company is on the right track. What is the next step you can take to raise capital and continue to grow? It might be a Series B round. In this round, your potential investors will be drawn in and secured mostly by a previous player who becomes a key anchor investor. However, this round can also include venture capital firms that specialize in investing in later business stages. With the capital asked for and raised in a Series B, your business will be able to clear the development stage and begin to focus on product expansion, marketing, and more complex systems to have long-term growth.
If your business is already running smoothly and succeeding in its niche, you might look into Series C funding to continue growing and expanding. Many companies turn to this form of raising capital to expand into different markets or even acquire other companies. Investors who participate in a Series C expect a heftier return in a quicker time frame and thus are focused on growing and scaling the business as quickly as possible to see their return. In these rounds, the investors are typically no longer singular people but mostly hedge funds, venture capitalists, banks, and private equity firms. These new investors expect to invest significant sums of money into companies that are already thriving as a means of either selling or having the company go private. Venture capitalists and institutional investors expect to have a board seat, more oversight, and MORE reporting than angel investors.
EXIT- IPO (INITIAL PUBLIC OFFERING) or SALE
All investors want to know how they will be getting their money out of the company. From beginning to end, most seasoned investors expect a seven to ten-year time frame exit. You can exit two ways. An IPO is "going public," which is the process of a private business opening up its stocks to the public, thus securing capital and funding from public investors. An IPO can be a massive step for your business and allow your private investors to realize their gains from investing in your business entirely. There is usually a lock-up period or your stick for 180 days after an IPO.
You could also sell your company to another company, thus allowing investors to cash out their investments. Sometimes, the company's sale requires the management team to stay on or receive stock instead of cash.
There is a lot to think about when raising capital for your company. It is best to hire an experienced advisor to help you through the process, but it is wise to research on your own so you are knowledgeable about the process of fundraising.