“You know what sounds like fun, let’s call a bunch of investors and let them poke around the business for the next several months.”
– Said no entrepreneur, ever.
Entrepreneurs who are satisfied with the current state of their businesses and financial positions, do not need to raise capital and shouldn’t. Their time is better spent running their businesses.
Before you spend more than thirty seconds exploring a capital raise, you need to have a good reason to do it. There are only three reasons:
- To Accelerate Growth
- To Get Liquidity
- To Fund Negative Cash Flow
Let’s dive into each of those motivations in a bit more detail:
Raising Capital For Growth
Take the next few minutes to think about the following question: “If you had unlimited access to capital, how would you grow your business and where would you spend that capital?”
If you can’t answer this question, growth capital isn’t right for you. Capital is a tool that can help you meet your goals and accelerate your business’s growth trajectory. Capital alone doesn’t grow a business.
Before you set out to raise growth capital, you should have a plan for how to deploy that capital.
Raising Capital For Liquidity
There is no marketplace to quickly and easily take money out of your company. If you want to buyout another shareholder or sell a portion of your ownership, you will likely need to raise outside capital to turn illiquid value into cash.
FYI – If you sell a piece of your business but retain a meaningful amount of ownership, this is called a “recapitalization.” As you explore investor websites, you’ll see this term used often.
Growth capital and liquidity aren’t mutually exclusive. Entrepreneurs can raise capital to fund growth initiatives and cash out a piece of their ownership stake for liquidity at the same time.
Raising Capital To Fund Negative Cash Flow
There are three types of businesses that need to raise capital to fund negative cash flow:
- Startups that need to fund the build-out of their companies
- Business owners who need to fund working capital
- Business owners who are going through a downturn and need capital to fund operations
If none of the above scenarios describe you, do not raise capital. If one of these does, then keep reading through our capital raise prep guide.