How to raise capital?

Today, we’re going to find out how young companies raise the capital they need to write their financial success. You’ve got it, we’re going to talk about how to raise capital. And we’re off! Of course, get ready for a little surprise 😉.

On the agenda for this article

• ➡️ How to raise capital: Definition.
• ➡️ The process.
• ➡️ Interview.
• ➡️ Fundraisers to remember.

How to raise capital for business: Definition

Before immersing ourselves 🤿 fully in the subject, let’s first look at the definition of these terms.

Fundraising, in general terms, refers to the process by which a business or organization seeks funding 💰 or financial capital from investors, lenders or donors to support its activities, expansion or projects.

In the context of start-ups and the world of entrepreneurship, fundraising refers to obtaining external finance to develop a young company.

There are several common methods for raising funds. Let’s take a look at them now.

Fundraising for business:Venture capital

Venture capitalists provide funds to start-ups in exchange for an equity stake in the company.

Venture capital is often abbreviated to VC. It is a type of business financing where investors, called “venture capitalists” or “venture capitalists”, provide funds to start-ups and growth companies in exchange for an equity stake in the company.

They generally invest in companies with high growth potential 📈 but which may also involve a high level of risk.

Participative financing (or crowdfunding campaign)

Companies solicit small financial contributions from a large number of people via online crowdfunding platforms 🖥️. This form of financing has become increasingly popular in recent years. It offers new funding opportunities for a variety of projects and businesses.

Debt financing

This is a fund-raising mechanism. A business or organisation borrows money from lenders, usually in the form of bank loans 💳, bond issues or financing obtained from private investors. The company has an obligation to repay the amount borrowed, often with interest, over a defined period. There are several methods of debt financing, such as:

• Bank loans 💰.
• Bonds.
• Equity loans.
• Lines of credit.

Loans are often secured by collateral, such as real estate 🏢, equipment or business assets. In the event of default, the lender can seize these assets to recover its claim.

Seed capital

Seeding is also known as Seed funding 🌱. This is a crucial stage in the funding cycle of start-ups. It is the very first funding a start-up obtains to launch its activities, develop a prototype or conduct market research.

Sources of seed funding can include:

• Personal savings.
• Angel investors.
• Competitions 🖊️.

The aim is to turn a promising idea into a working business.

Grants and competitions

These are sums of money 💸 or financial benefits provided by governments, non-profit organisations to support:

• Projects.
• Activities.
• Or specific initiatives.

This is a type of non-repayable grant. This means that recipients have no obligation to repay the funds received 🤩.

Seed fundraising

In the context of fundraising, the “seed” phase 🌱 refers to the first funding stage that a start-up goes through to obtain funds. It is typically the first step after initial funding from the company’s founders or other close investors 💓.

The “seed” phase is the very first round of funding a start-up has access to. At this stage, the start-up may still be at the product design, preliminary development or market research stage.

Investments in this phase are generally modest compared with later rounds of funding. The amounts raised vary considerably depending on the nature of the company and its specific needs.

Investors may be business angels, friends 🧑🏾‍❤️‍🧑🏻, family members or venture capital funds specialising in early rounds.

These funds are used for essential needs such as product development, market research, etc…

Fundraising Series A B C

Series A, series B and series C financing rounds are key stages in a start-up’s fund-raising process. Each of these stages represents a phase in the company’s development and growth. They are characterised by larger financing amounts and higher performance requirements.

Series A fundraising

Series A is generally the first round of institutional funding for a start-up, following the seed phase. At this stage, the start-up has already validated its concept, may have developed a prototype or launched a minimum viable product (MVP) and has acquired a defined quantity of users ✅.

The amount of funding in a Series A varies considerably, but can range from a few million to around ten million dollars.

Investors in this series are generally venture capital funds and institutional investors. They look for start-ups that have demonstrated their potential for growth and profitability.

Series B fundraising

Series B is the next round of funding after series A. Typically, the start-up has a proven track record of steady growth, a solid customer base and predictable future profitability.

Funding amounts are generally higher than in Series A and can range from several tens of millions of dollars to over a hundred million.

Series B investors are generally the same as Series A investors, as well as private equity funds and private equity firms.

These funds are generally used for accelerated growth, expansion into new markets, acquisition of competitors or investment in research and development.

Series C fundraising

Series C is the third 🟢 major round of funding after Series B. At this stage, the start-up is generally at an advanced stage of development, has a solid customer base, is on track to become profitable, and may even consider an IPO in the medium term.

The amounts of funding in this round are even larger than in previous rounds, and can exceed several hundred million dollars.

Investors often include private equity firms, institutional investors and sometimes venture capitalists.

These funds are used for massive growth, global expansion 🌍, market consolidation, strategic acquisitions, or to prepare the company for a potential IPO.

How to raise capital for business: the process

As you can imagine, the process is complex and requires meticulous preparation. Let’s take a look at the different stages involved in raising funds for a start-up.

Developing the stages 👇.

1. Initial preparation

This phase involves preparing your business for fundraising. You need to make sure you have a good team 💪 a well-defined business plan and a clear understanding of your funding needs.

There are, of course, several stages to this preparation:

• Business analysis: you start with a thorough assessment of your business. You will examine
  • ➡️ Your business model.
  • ➡️ Your finances.
  • ➡️ Your performance indicators.
  • ➡️ Your positioning…
• Funding requirements: Here you will really identify why you need funding.
• Financial objectives: Determine the financial objectives of the fund-raising. How much money do you hope to raise?

2. Valuation assessment

It is essential to determine the value of your business. This includes its financial value, before you start looking for investors. And, this is known as a pre-money valuation and is the process of estimating the value of your business before you raise funds.

This value is important because it determines the share of ownership that investors will receive in exchange ♻️ for their investment. A realistic valuation is crucial to attracting investors, as it reflects the true value of your business and sets clear expectations for all parties involved.

3. Investor searches

Identify potential investors who are aligned with your business and objectives. This may include angel investors, venture capital funds, private equity firms..

As you can imagine, this is an essential step. Before you start, you need to be 💡 clear about your funding needs. Work out how much money you need, what stage of development you’re at, and what you can offer in return.

Of course, you’ll also need to create a solid investment plan that explains how you’ll use the funds you’re seeking. Highlight your business model, your growth strategy and your financial projections.

To find your investors, build a network, you can try LinkedIn, use online platforms or attend networking events.

4. Pitch and presentation

When we talk about pitching, we’re not talking about that delicious little bun 🥖… No, the pitch is a short, punchy presentation.

Prepare a convincing pitch that highlights your company, its value, its market, its team and its growth plan. This presentation is extremely crucial to attracting the attention of investors.

You must succeed in capturing the audience’s attention. You can use storytelling, an interesting statistic or a question.

There are stages in your presentation, and here they are 👇:

• Introduction.
• Problem: Explicitly identify the problem your company solves. Investors need to understand why your solution is needed.
• Solution ✅: Present your product as the solution. Highlight what makes your solution unique.
• Target market 🎯: Describe who your customers are, show the size of the market and its growth potential.
• Business model : Explain how you make money.
• Traction : Highlight your company’s key achievements.

5. Negotiations

Discussions 👄 and negotiations with potential investors are a key part 🔑 of the process. It is important to find common ground on the terms of the investment.

To succeed in negotiations, it is essential to explicitly define objectives, set priorities and prepare by gathering information about the other party. Active listening and constructive communication are key skills, as they enable you to understand the needs and concerns of the other party.

Making strategic concessions is often necessary, while seeking win-win solutions that create value for all parties. Clear, legally binding documentation is essential to record the terms of the agreement. Time management is an important consideration, as negotiations can drag on over time ⏳.

6. How to raise capital: Due diligence

Due diligence is a process of thorough examination and investigation that companies, investors and other parties carry out before engaging in commercial transactions, such as mergers and acquisitions, investments, partnerships or contractual agreements.

The aim of due diligence is to gather accurate and reliable information 📄 about a company. The aim? To assess the risks, benefits, value and legality of the transaction. It typically includes examining the company’s finances, assets, contracts, governance, human resources, regulatory compliance, pending litigation and other relevant aspects.

Investors conduct extensive due diligence to assess your company’s financial health, viability and potential. Be prepared to provide detailed information.

7. Finalizing the deal

This is the stage where all parties involved in a business transaction commit 🫱🏼‍🫲🏼 to the agreed terms and conditions. This is a critical moment which occurs after the negotiations have been successfully concluded and the details of the agreement have been agreed.

Once the negotiations are complete and due diligence is satisfied, you can finalise the agreement and obtain the funds.

8. Closing

And, this is the final phase, we review the signatures 🖋️ on the final documents such as contracts, agreements..

The fundraising is complete when the funds are transferred and the legal agreements are signed. From then on, you can use the funds to develop your business in accordance with the established plan.

It is essential to monitor and respect the terms of the agreement, so that all parties comply and the objectives set are achieved.

Now that we’ve seen the definition and the process, why don’t we ask someone who has actually raised money to give us the information we need?

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Fundraising for business: Interview with Tom Benattar

We put a series of questions to Tom Benattar, who raised funds for his company PixelMe.

I should point out that the fund-raising I’m about to talk about was for my company before PixelMe. Which I sold a year

ago

Can you introduce yourself? Introduce your company? And tell us what it does?

You’ve successfully raised funds. Can you explain to us what fund-raising is? How would you explain it to an audience new to the subject? And why is it important for businesses?

Fund-raising involves giving a portion of your capital in exchange for a sum of money to investors, with the aim of enabling your company to grow faster.

For a novice, it’s simply a case of granting part of your company’s shares to an investor in exchange for money that the investor injects into the company. The aim is for the investor to recoup 10 to 100 times his initial investment after five years.

This is only important if the company is experiencing real growth, which requires a lot of capital to go faster and conquer a market while waiting to find a point of equilibrium.

What types of investors are generally involved in raising funds for start-ups, and what are their motivations?

There are two types of investor. Firstly, there are the business angels 👼 entrepreneurs who have sold their companies or done very well and who want to give a little back, tax-free, and hope to make a handsome capital gain.

Then there are the professional investors (VCs), who are financed by massive corporates. For them, it’s simple: they know that for every 10 companies, there’s one that’s going to make x100 of the investment, so they’ll be able to return a large multiple of the money to the corporates.

What are the main criteria that investors look at when considering financing a start-up?

It really depends on the stage (seed, series A, B, C…). In our case, the seed stage, investors will mainly be looking at the team and the market. Is this team capable of delivering something incredible over five years in this market?

What I’m talking about are financing rounds with implicit, codified rules. A seed round, for example, will raise between 500K and 2 million euros, with a valuation of between 1 and 5 million euros. Series A, B and C are the subsequent rounds that a start-up will go on to finance itself.

What are the advantages and disadvantages of raising funds from investors, compared to financing on your own or from other sources?

Advantages: money available before you have a turnover or a lot of turnover, recruiting en masse and quickly to go faster, having access to a somewhat closed network.

An investor gives money in exchange for shares in a company.

They aim to eventually recoup a multiple of their investment (10 to 100 times, for example). The problem with this is that the sale price of the company has to be very high for the investor to get what he wants.

Whereas an entrepreneur who has not raised any money will be able to sell his business for a few thousand or even millions of euros and will be very happy to do so.

Disadvantages: loss of autonomy, having to be accountable and, above all, what most entrepreneurs forget is that a company that raises nothing more than a seed of 1 million will have a valuation of 4 to 5 million. This means that, at the very least, the VC will be expecting an exit of 20 to 50 million. The entrepreneur, on the other hand, can become rich by selling his company for 5 million.

How to raise capital: examples to remember

We’re now going to talk about those companies that have managed to stand out from the crowd with their fundraising for business.

Fundraising for business: Uber

You’re probably familiar with Uber. Yes, we’re talking about the mobility technology company. It was founded in 2009 and offers a mobile app 📱 that connects passengers looking for a ride with available drivers. Uber’s service is primarily focused on car transportation, although the company has expanded its offering to other modes of transport, such as:

• Bicycles.
• Electric scooters.
• Meal delivery via Uber Eats.

Now that we know what it is, let’s take a look at its fundraising, which is one of the most remarkable in start-up history 🌠.

When it launched in 2009, founders Travis Kalanick and Garrett Camp initially self-financed their business. However, to accelerate growth, they approached venture capitalists. In 2010, Uber raised $1.25 million in venture capital funding.

With this initial funding, Uber was able to expand rapidly in many US cities and internationally. The ride-sharing model was innovative and attracted a great deal of interest.

In 2011, Uber raised $37 million in its Series B funding round, led by Menlo Ventures. This round was critical to the company’s international expansion.

Over the years, Uber has completed several rounds of funding, with investors including Google Ventures, Benchmark and others. The company has continued to expand its global reach and diversify its services, including UberX, UberEATS and UberPool.

After amassing billions in private funding, Uber finally went public 💰 in 2019. However, its IPO was marred by questions about its valuation and financial losses.

Mélisande 19/04/2024