How to Raise Capital: The Essential Guide for Entrepreneurs

by Ilyas Omari

September 10, 2024
Blog, Solopreneurs

Raising capital is a crucial step in growing your business, and the good news is that there are several ways you can raise capital for your business.

The most important thing is to understand the capital raising options available to you. To make things easier for you, we’ve covered everything that you need to know on how to raise capital as an entrepreneur, the various stages in the capital raising process, the terms involved in the capital raising process, and answers to other frequently asked questions in this detailed guide.

If you’re looking to raise capital, this guide will help with the key steps, so read along!

What is capital raising?

By definition, capital raising for companies is the process of securing funds to finance operations, growth, or investment opportunities. Companies raise capital through equity (selling shares), debt (taking loans or issuing bonds), or hybrid methods. This funding supports business expansion, research, and other financial goals.

There are several ways to raise capital in Australia, including the following methods:

The capital raising process typically involves presenting a business plan or investment proposal to potential investors and negotiating the terms of the investment. Capital raising is a crucial step in growing a business and can provide the necessary resources to do the following:

Expand operations
Launch new products or services
Acquire assets
Enter new markets

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What is the funding process in capital raising?

In capital raising, the funding process generally refers to when investors provide funding to a business in exchange for equity in the business. Before each of the rounds in capital raising commences, a valuation of the business is released. The valuations are calculated based on management, the proven track record of the company, including product offerings and customer base, market size and associated risk with the startup.

What are the Seed Round and Angel Funding in capital raising?

The Seed round is often the first step of capital raising, where entrepreneurs will go outside family and friends to obtain funds for their business. The funds raised will be used to cover business expenses, build and launch early products and allow the business to gain traction until the company can start earning revenue.

It’s during this stage that a startup may attract an angel investor, which are individual investors with a high net worth that provide capital in exchange for equity in the business.

What is Series A in Capital Raising?

Once the business has an established track record, it may attempt to raise capital through a Series A round. It’s during this round that shares are offered to external investors for the first time in exchange for equity in the business. By the time a startup reaches this stage, it will have developed a business model with the aim of generating long-term profit.

The startup will also have an established user base and product by this stage. The investors involved here often include professional angel investors, venture funds and venture capitalists.

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What is Series B in Capital Raising?

Series B capital raising is similar to Series A. However, the focus of this round is raising funds for building and scaling the business. By this stage, the business model is established, and traction is occurring with their customers.

A common goal here is for the startup to not only break even but to achieve a net profit. The investors involved in Series B are similar to Series A, but this stage often includes Venture Capitalists with a focus on later-stage growth.

What are Series C, D, E, and onwards in Capital Raising?

Subsequent rounds of capital raising will be used by a company if they are attempting to increase the business’s market share, expand operations internationally, planning to undertake mergers and acquisitions of other firms, and continue to develop products and services.

By this stage, the company is established, and therefore more investors will be willing to provide capital. Often this means that hedge funds, investment banks and private equity firms may provide funds during this round.

Series C	Series C is a stage of capital raising in Australia that typically occurs after a business has already raised a significant amount of funding through earlier stages such as Series A and B. It’s typically used to fund the expansion of the business, and it can also be used to acquire other businesses. Businesses generally have a proven business model at this stage.
Series D	This round of capital raising is typically pursued by well-established companies that have already proven their business model and achieved significant growth and are seeking to raise a large amount of capital to fuel further expansion. Series D rounds typically involve participation from large institutional investors.
Series E	At this stage, a business has likely already gone through multiple rounds of fundraising and is now looking to raise a significant amount of capital to fuel growth and expansion, enter new markets or pursue new product development. Investors at this stage may be institutional investors or large venture capital firms, and the funding round may involve a mix of equity and debt financing.

What are the six main sources of capital?

There are many sources of capital, six of which are the following:

1: Self-Funding

Self-funding refers to using your own money as capital for your business. Although this source of capital raising may seem risky, using your own money can be the quickest and easiest to raise capital for your business. Furthermore, investing your own money into your business will create the impression that you’re confident to invest in your business.

Therefore, it is more likely that investors or lenders will also feel confident in providing capital to your business. Other benefits of self-funding include the fact that you won’t have to worry about showing investors and lenders how profitable your business is and why they should provide your business with capital.

2: Crowdfunding

Crowdfunding refers to the method of raising capital by collecting small contributions from a large number of individuals through an online platform. It is a form of crowdsourcing that allows small businesses to get around traditional funding sources, such as venture capitalists or banks, and obtain funding from the crowd.

The process typically involves the creation of a campaign page on a crowdfunding platform, where the business is described, and investors are encouraged to contribute money in exchange for rewards or equity in the venture. You should be aware that crowdfunding platforms usually take a percentage of the funds raised as a fee.

In Australia, crowdfunding(crowd-sourced funding) is regulated by the Australian Securities and Investments Commission(ASIC). In Australia, there are four types of crowdfunding models. These are the following:

Equity-based crowdfunding: Equity-based crowdfunding allows investors to receive shares in the company in exchange for their investment
Rewards-based crowdfunding: Rewards-based crowdfunding involves investors receiving a reward or product in return for their contribution
Debt-based crowdfunding: Debt-based crowdfunding involves investors lending money to the business, which is paid back with interest
Donation-based crowdfunding: Donation-based crowdfunding is when investors make a donation to a business without expecting anything in return

Popular crowdfunding websites you can use include the following:

3: Venture capitalist

A venture capitalist is an investor who provides capital to startup companies and early-stage businesses in exchange for an ownership stake in the company. Venture capitalists typically invest large amounts of money with the expectation of a high return on their investment.

In addition to providing financial support, venture capitalists also do the following:

Offer strategic advice and guidance to the businesses they invest in
Helping businesses refine their business plans and build their teams
Venture capitalists can also provide additional funding to businesses when they require it

Popular venture capitalists in Australia include the following:

4: Personal Contacts

A personal contact refers to an individual or group of individuals personally connected to an entrepreneur or business owner seeking to raise capital. These contacts may include family members, friends, colleagues, or acquaintances who have a personal relationship with the entrepreneur or business owner.

Personal contacts are often a valuable source of funding for startups and small businesses, as they are more likely to invest based on their relationship with the entrepreneur rather than the growth potential of the business alone.

However, personal contacts may not always have the financial resources or expertise to provide significant amounts of capital, and relying too heavily on personal contacts for funding can carry risks, such as straining personal relationships or limiting the entrepreneur’s ability to access additional sources of capital in the future.

5: Angel Investment

An angel investment refers to when an angel investor, who can be an individual or group of individuals with a high net worth, provides capital to a business in its early stages. These angel investors are provided with an equity stake in the company in exchange for the investment they have made.

Angel investors can also do the following for the businesses they invest in:

Provide mentorship
Provide strategic guidance
Provide networking opportunities

6: Business loans

A business loan in relation to capital raising refers to a loan provided to a business by a bank or financial institution to allow the business to support its operations or fund new projects. Business loans can be used for a variety of purposes, such as purchasing equipment or inventory, hiring staff, or expanding operations.

You should be aware that to qualify for a business loan in Australia, businesses typically need to demonstrate their ability to repay the loan, provide financial statements and other documentation, and meet the lender’s credit criteria.

Frequently Asked Questions (FAQs)

Which laws govern capital raising in Australia?

In Australia, capital raising is governed by the Corporations Act 2001(Cth), and it’s regulated by ASIC. There are several regulations and legal requirements that businesses and entrepreneurs must follow when raising capital, such as compliance with the Corporations Act and ASIC guidelines.

What is involved in the capital raising process in Australia?

The capital raising process in Australia typically involves several steps. These include the following:

Preparing a business plan or investment proposal
Identifying potential investors
Negotiating the terms of the investment
Outlining financial projections
Creating a pitch to attract potential investors
Depending on the type of capital raising, the process may involve seeking approval from ASIC, preparing a prospectus, offer information statement, profile statement, a two-part simple corporate bonds prospectus and complying with various regulatory requirements

How can companies raise funds in Australia?

According to ASIC, public companies have the ability to raise capital through the issuance of securities to the general public. Whereas private companies can raise capital using the following methods:

Private companies can raise capital through their current company employees, current company shareholders or through a subsidiary company
The general public can also help private companies raise capital only where the capital raising is not subject to a disclosure document

Conclusion

To conclude, raising capital is a critical step for entrepreneurs looking to grow their businesses, but it can also be a complex and challenging process. By following the guidelines outlined in this article, entrepreneurs can make informed decisions about their capital-raising strategy.

However, if you still feel unsure about the legal aspects of capital raising, you should hire a lawyer. A lawyer can help you navigate the legal complexities of capital raising and ensure that you comply with all the relevant laws and regulations. By receiving the right legal advice, you can minimise the risks associated with raising capital and increase your chances of success.