7 Steps to Prepare for Raising Capital
Raising capital is crucial for any business looking to expand, innovate, or stay competitive during the startup and growth phases.
Whether you’re seeking a business loan or trying to attract outside investors, preparing your business for funding can ensure you get the capital you need while preparing for long-term business growth.
Here, we provide a comprehensive guide to help you get your business ready for raising capital.
1. Assess your financial health and funding needs
Before approaching lenders or investors, you need to clearly understand your current financial status and how much financial support you need.
Make sure your financial statements, including your balance sheet, profit and loss statement, cash flow statement, and other financial reports, are up-to-date and accurate. Then, use those numbers to track key performance indicators (KPIs) that lenders and angel investors will use to evaluate your business health.
While KPIs can vary from industry to industry, some useful ones to consider include:
Monthly recurring revenue (MRR). MRR measures how much revenue your company generates from month to month through contracts or subscriptions. It's an indicator of reliable and consistent revenue.
Lifetime value (LTV). LTV is the total revenue you expect to generate from a single customer over a lifetime with you. A higher lifetime value demonstrates customer retention, making you more attractive to potential investors and lenders.
Gross margin. This metric measures the profitability of your company's products or services, giving investors a good indication of your pricing power.
Customer acquisition cost (CAC) ratio. Your CAC ratio helps you evaluate the effectiveness of your sales and marketing strategies by determining the cost of acquiring new customers.
Debt-to-equity ratio. This metric measures your company's total debt relative to the amount initially invested by the owners and the earnings the company has retained over time. It's one of the first metrics lenders look at the asses your financial situation before agreeing to make a loan.
Current ratio. The current ratio measures your ability to meet the short-term obligations coming due within the next year. A current ratio under 1.0 can signify liquidity problems, while a current ratio between 1.5 and 3.0 is generally considered healthy.
2. Create a detailed business plan
If you don't have one already, now is the time to create a detailed business plan. A well-structured business plan demonstrates your business's potential to investors and lenders. It should include:
Executive summary. Brief overview of your business model, mission, and objectives.
Market research. Insights into your industry, target market, and competitive landscape.
Marketing and sales strategy. How you plan to attract and retain customers.
Operational plan. Day-to-day operations and long-term strategies.
Financial projections. Revenue, profit, and cash flow forecasts for the next three to five years.
You might also include a SWOT (Strengths, Weaknesses, Opportunities, Threats) analysis to show you've thoroughly considered all aspects of your business environment.
If you already have a business plan, make sure it's up-to-date. You might want to tweak it to emphasize how you plan to generate additional profits, invest proceeds from your funding into growth and expansion, and provide a great return to investors.
Check out the SBA for more guidance on creating a business plan and to download examples.
3. Strengthen your management team
According to the Harvard Business Review, 65% of new venues fail not because of flawed technology, a misguided product, or a lack of cash but because of people issues—specifically issues with senior executives.
Investors often look at the people behind the business as much as the business itself. They want to see a proven track record of expertise and experience.
Make sure your C-suite or management team covers all the necessary business areas, including finance, operations, marketing, and technology. Establishing an advisory board with industry experts can provide additional credibility.
A strong, experienced management team can significantly boost investor confidence.
4. Optimize your operations
Many companies still rely on manual processes for day-to-day operations, including gathering data, collaborating between departments, and tracking revenues and expenses. These manual tasks are time-consuming and error-prone, leading to limited visibility into operations and poor financial decisions.
Efficient operations can improve profitability and make your business more attractive to investors. Focus on using technology to streamline processes, enhance efficiency and reduce costs without sacrificing quality.
5. Address legal and regulatory compliance
Many startup founders learn as they go, often missing essential legal and regulatory requirements along the way. However, before you try to raise funds, it's crucial to get your proverbial ducks in a row.
The laws and regulations that apply to your business vary depending on your industry, location, and size, but some critical areas to consider include:
Securing a business license and other permits, if required, in your area
Registering as a sales tax vendor and properly withholding and remitting sales taxes
Securing patents, trademarks, and copyrights as necessary
Review and update all contracts with suppliers, customers, and employees
Correctly categorizing employees and independent contractors
Ensuring you're properly withholding and remitting payroll taxes
Having all legal documents in place, including operating agreements, partnership agreements with a co-founder, and contracts for strategic partnerships
Non-compliance can lead to hefty fines and legal issues, deterring potential investors and lenders.
6. Prepare for due diligence and loan underwriting
Venture capital firms and angel investors conduct due diligence before committing funds, and loan officers underwrite your loan package. While the process looks different for each, expect them to take a thorough look at your business, its financials, and operations.
You can prepare for this process by getting all your documentation organized and easily accessible. This includes financial, legal, and operational documents.
During the investigation phase, be honest about your business's strengths and weaknesses. Responding quickly and accurately to investor questions and requests for additional information builds trust and credibility.
7. Develop a pitch deck
A pitch deck is a brief presentation that gives potential investors an overview of your business plan, products, services, and vision for future growth.
A compelling pitch deck helps you attract investors. It's not as in-depth as your business plan, but it covers the key aspects of your business and hopefully gets them intrigued to learn more. Use storytelling techniques to make your business memorable and clearly show the potential to accelerate growth and deliver a return on investment.
Hubspot has some great examples of pitch decks and a template to help you get started.
Need help preparing for business growth?
Preparing to raise capital takes a lot of time and effort, but it can potentially transform your business by giving you a necessary infusion of cash and preparing your business for the next stage of growth and long-term success.
If you need help getting your financials in order, analyzing how much you need, tracking KPIs, and other aspects of preparing for sustainable growth, contact Slate. We can provide expert guidance and support in your capital-raising journey so you'll be well-prepared to schedule meetings with the right investors and secure the funding you need to facilitate growth.