Question: Why do I need to raise capital?Answer:
When deciding whether to capital raise for your startup business, it is important to ask yourself whether you need to raise capital, or whether other options of funding your startup are more suitable. Many startups do not need to raise capital and grow to become successful businesses through self-funding (also known as ‘bootstrapping’).
You should consider raising capital if you need more capital to grow, or if you have used up your own funds and need capital to continue operating.
The decision to raise capital is a significant one, factors that you need to consider are:
It may be too risky to continue to self-fund your startup. For example, you may be unwilling to risk your assets through leveraging your mortgage or take on further risk by opening up a line of credit. In this case, you could consider looking to raise capital from external investors.
If your business needs funds to grow or to reach a significant milestone, you could consider raising capital. What differentiates a startup from other businesses is the focus on rapid growth rather than becoming profitable quickly. If you are close to exhausting your capital but your business has significant potential, such as an engaged existing client base or access to lucrative new markets, you may want to consider to look to raise capital.
New shareholders and directors
You will have new and enduring relationships with incoming shareholders and directors. This will change the existing dynamic of running your business. New shareholders may want to have specific shareholder rights. They may also negotiate for higher levels of control or involvement in the business. This is not a decision to take lightly.
Time and effort
Capital raising can be a very time consuming and lengthy process. It depends on how sophisticated your investors are and how readily terms can be agreed. The process of raising capital starts from seeking investors to negotiating, documenting agreed terms and mechanics, transferring funds and issuing shares. Each step in the process can require significant time and attention.