How to raise capital?

by Adarsh Raj Bhatt in August 3rd, 2021

TLDR

  • Startup capital refers to the money that an up-and-coming company raises to get itself off the ground. It is a measure of the funds that startups raise for the purpose of covering their early expenses.
  • Capital, for startups, often implies considerable sums of money. This, coupled with the fact that early-stage startups are an inherently risky investment, means that the individuals and institutions that are going to invest in your startup will need to be thoroughly convinced that your business plan makes sense.
  • For budgeting, capital is generally divided into three types: working capital, equity capital, and debt capital.
  • Some of the ways founders can raise capital are to run their ventures include bootstrapping, crowdfunding, angel investment, venture capital, etc.
  • Based on the startup’s current financial position, its capital could be divided into seed capital, startup capital, and expansion capital.
  • The only way to secure funding (beyond bootstrapping) is by convincing potential investors that your startup is worth financing. There are many ways to pitch to an angel investor or venture capitalist. The popular method of doing so is by creating a pitch deck. 
  • You can go to websites where you can find pre-created capital-raising templates that can be used to create your pitch. These templates are categorized by the type of startup, project, or research that you are trying to get funding for. 
  • To better understand capital-raising templates, look at existing startups that made it big. Get ahold of the business proposals that companies like Facebook and Youtube first pitched to their investors.

What does capital mean?

Capital is a broad term used to identify the net worth or total assets owned by a startup. To be more specific, “capital” describes any money which is used to produce the product or services provided by the startup. Therefore, if cash is just lying around without being put to productive use for the startup, it cannot be considered capital. At the end of the day, capital is essential for running any startup successfully. 

For budgeting, capital is generally divided into three types: working capital, equity capital, and debt capital. Working capital indicates the current liquidity of a startup. It is measured by deducting the startup’s current liabilities from its current assets. Equity capital is the measure of money that was collected from investors in exchange for stocks. Debt capital refers to the assets or funds collected by borrowing from various lenders (the best example of this would be conventional bank loans). 

While this broad definition can be used for companies of all sizes and scales, capital in terms of startups may take a different definition. 

What does capital mean for startups?

Startup capital refers to the money which an up-and-coming company raises to get itself off the ground. It is a measure of the funds that startups raise for the purpose of paying for their early expenses. Fundraising is commonly observed to be among the most important things that early-stage founders have to do and the funds that are raised this way are referred to as capital.

Capital, for startups, often implies considerable sums of money. This, coupled with the fact that early-stage startups are an inherently risky investment, means that the individuals and institutions which are going to invest in your startup will need to be convinced that your business plan makes sense.

As a result, founders who’re looking to raise this capital are generally able to do so after coming up with a good business model (or strategic roadmap) which lets them convince investors to buy into their vision. Their chances of being successful in fundraising are also improved by creating a compelling MVP (minimum viable product) or even a basic prototype that represents the idea behind the startup. 

But who invests in startups exactly?

Startup capital comes from financial entities such as: 

This capital plays a significant role in paying the startup’s early expenses like real estate, administrative paperwork, operational costs, recruiting the founding team, obtaining permission, marketing research, testing, building the product, and/or marketing and selling it. It enables the startup to bear such expenses before it becomes profitable and can cover some costs on its own. 

While there are various factors and alternatives to consider, many founders choose VC funding since VCs have to be repaid if -- and only if -- the startup turns a profit. 

Most of the time, multiple rounds of funding have to be raised before an early-stage startup is truly considered to be established. These successive rounds of funding are aligned with the startup's growth as the product/service is delivered to more and more customers. In exchange for the capital, investors usually receive equity in the startup. The last funding round could be an IPO. In an IPO, the founders raise funding that is sufficient to offer monetary awards to its investors as well as spend on developing the startup further. 

Startup capital can be divided into a few categories depending on your current financial position or the source(s) of your capital. 

When based on the startup’s current financial position, its capital could be divided into the following types:

  • Seed Capital -- This is the initial funding that a founder would raise. This funding is responsible for the development of the idea on which the startup will be based. 
  • Startup Capital -- This is the capital that will help you procure the initial infrastructure for the building/manufacturing and distributing of your product or service along with helping you to bear other (miscellaneous) expenditures of running the startup. 
  • Expansion Capital --  This capital is generally raised when the startup is looking to expand into bigger avenues, such as investing in better equipment, hiring more team members, or investing in a larger area of operations.

Best Ways to Raise Capital

There are a few ways that founders can raise capital to start -- and run -- their ventures. The following is a brief overview of some of these options:

Bootstrapping 

Self-funding or bootstrapping could be an effective way to fund the launch of your startup. In a bootstrapped startup, the capital comprises the money that you, the founder, have saved over the years. Startup founders are generally quite aware of the uphill struggle and perils when it comes to securing early investors. It gets especially difficult if the product or service that you are providing is a new concept in an emerging sector, or an early-stage, unproven technology.

Self-funding may not be able to bring in as much money as an angel investor might, but it will help lay the early foundation required to build momentum. This kind of funding will help you hit the ground running and move toward establishing yourself as a serious startup which could later help you in attracting more critical and larger investments.

Due to the (generally) limited amount of money that founders can put in by themselves, bootstrapping is best fitted for small projects and ventures.

Crowdfunding

Crowdfunding is a relatively novel way of raising capital for startups but nonetheless, has caught the eye of many founders. Through this form of raising capital, startups reach out to people (generally online) and ask them to contribute. In return, crowdfunding contributors are promised early access to the products and services that the founders plan on developing. 

When crowdfunding, you need to make an honest pitch to the people about what your startup is all about, just like when applying for a bank loan. However, unlike a bank loan, you need not go into the complexity of your business model. In crowdfunding, your target investors are the consumers themselves. You are primarily asking your future customers to fund the product they want to use. This helps you create a following even before your startup takes flight. 

Crowdfunding can take some time as it relies on how much demand there is for your products or services. Recent years of development in social media have paved pathways for applications like Kickstarter and GoFundMe where founders can post about their startups and capital goals. It is a fun way to collect capital as well as customer validation while engaging potential customers at an early stage. 

Angel Investment

Angel investors are individuals who have surplus cash reserved for investment and are looking to expand their portfolios by investing in promising startups. Though many of them work individually, there are groups and networks of angel investors that exist which collectively invest in startups and budding businesses. AbstractOps’s Syndicate is an example of this.

Angel investors have helped many startups launch and become incredibly successful. Companies like Google, Yahoo, and Alibaba owe their success to the early angel investors who bet on them. Angels are generally well-versed in the field of business (especially pertaining to startups); therefore, you need to make a genuine, thoughtful, and strong pitch to them to gain their investment. Many angels won’t be put off by a startup that has not nailed product-market fit yet and will go ahead with the investment if they see business potential (and, by extension, PMF) in the future. The terms you finalize with your investor may vary, although usually, angels like to settle on somewhere between 20-to- 50% equity. They are known to prefer taking large risks if they are expecting relatively higher returns.

Although angels might end up making what seem to be large investments, they still fall short most of the time when compared to other options like venture capitalists. 

Venture Capital 

The venture capitalist can be considered professional investors with the sole purpose to fund startups and invest in existing companies that show terrific future potential. They are known to maintain their investment in a startup against equity and remain until there is an IPO or an acquisition. 

Most venture capitalist groups comprise veteran business leaders with many years of experience under their belt. Many VCs also have experience in fields like investment banking and management consulting. Therefore, other than providing the capital, they also provide expertise and mentorship to founders, which is a much-required resource in today’s expanding startup market. VCs also help to evaluate the future of a startup and assess a profitable path for them. 

Venture capitalists are a good fit for startups that are past their early stages (including pre-seed and even seed stages) and have established some form of revenue before the involvement of VC financing. Companies like Uber, which already have some form of an exit strategy, can likely secure funding in the millions. 

Venture capitalists like to be quite “hands-on” with their support which sometimes can be a little claustrophobic for founders. Considering the size of their investment, it’s no wonder that they like to keep a close watch on their money and generally expect returns in the next 3-to-5 years. They prefer to invest in “stable” startups that have a few years of experience and have figured out product-market fit, differing in this respect from angels for whom the absence of PMF is not a complete deal-breaker. By and large, VCs will expect some form of control and expect you to be flexible with your management of the startup and its operations

Capital Raising Template

So you’ve looked into most of the prevalent avenues that founders can pursue to raise capital for their startups. Having understood the options that are available to you, the next step is to develop the fundamental skill of pitching your venture

The only way to secure funding (beyond bootstrapping) is by convincing folks that your startup is worth investing in. There are many ways to pitch to an angel investor or venture capitalist. The popular method of doing so is by creating a pitch deck

A pitch deck is a digital presentation, generally created in PowerPoint, which helps investors understand the various aspects of your startup. The pitch deck should include information deemed necessary for your investor’s knowledge. Forbes Magazine has identified the basic slides that you should include in your pitch deck.

  1. Vision/Elevator pitch -- An elevator pitch is a form of speech where you broadly explain your startup, the product hypothesis, and/or your motivation for founding it.  
  2. Traction/Validation -- Traction is considered the rate at which your business model will capture the monetizable attention of your users. 
  3. Market Opportunity -- This slide should explain the current trend(s) in the market that you are targeting and your validity in said market. 
  4. The Problem -- This slide will include the issue that the consumer faces which your product or service will solve.
  5. Product/Service -- Here, you explain the product or service that your startup plans on providing. This is the selling point that will often make or break the pitch. Make sure to explain your product with as much relevant detail as possible without making it too lengthy. 
  6. Revenue Model -- In this segment, you must explain the framework you will follow in order to generate income.
  7. Marketing and Growth Strategy -- Explain your marketing strategy and your outreach plan to your consumers. You must also show your plans for future expansion.
  8. Team -- Introduce the team responsible for running the startup. 
  9. Financials -- This slide should detail your financial situation and the condition of your capital. This is more applicable to a startup that has progressed beyond the early stages
  10. Competition -- You should have an idea about the competition that you may face in the current market.
  11. Investment "Ask" -- This is where you pitch the amount of funding that you are requesting. You can also include the equity that you are willing to give in return -- which can also be negotiated later.

In the early days, founders would create large poster boards which they used to pitch their startup to potential investors. As the years went by, PowerPoint presentations became the best platform to pitch ideas. Today, you can go to websites where you can find pre-created capital raising templates that can be used to create your pitch. These templates are categorized based on the type of startup, project, or research that you are trying to get funding for. 

There are a lot of platforms that provide these templates and you can choose the one that suits your needs best. You can find templates for startups in various sectors such as IT security service proposals, catering business proposals, real estate business proposals, etc. 

Although all the templates offered are great and can get the job done, the IT Security service proposal template might serve as a great example.

To better understand the capital raising templates, you would do well to look at the startups that came before you and made it big. Get a hold of the business proposals that companies like Facebook and Youtube first pitched to their investors. These will give you a better understanding of the factors that successful startups consider necessary when pitching to an investor.  

Summary

In an age where startups have become an essential part of today’s market, founders must understand the game of raising capital. It is this money -- self-funded or from third-party sources -- that will create the foundation for everything your startup can achieve further down the road.

The government, too, is doing its part by creating special loans just for startups

Bottom line?

Make sure you are aware of all the fundraising options available to you in the U.S. and take full advantage of them to build a strong foundation for your startup. 

Citations

https://www.investopedia.com/terms/c/capital.asp

https://www.investopedia.com/terms/s/startup-capital.asp

https://www.thebalancesmb.com/initial-investment-393328

https://www.upcounsel.com/startup-capital

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