Seeking external capital can be a daunting process for the uninitiated or unprepared, and while business owners should not be put off seeking the capital they need for the next phase of growth, understanding certain strategic considerations when entering the fund-raising process can be the difference between securing the capital you need on favourable terms, or finding yourself in a one-sided negotiation with potential investors.

What you need vs what you can obtain

Before you enter any negotiations, start by getting explicit on the purpose of the capital you are raising. Is it for a short-term project, a long-term investment, growth capital or perhaps working capital? Whatever its purpose, clearly define the exact amount required, and the duration for which it is needed. It may seem like an obvious point, but ensuring there is clarity around the purpose of any external funding or investment ensures you are targeting the most appropriate funding sources, while avoiding any unnecessary financial burdens.

Once you’re clear on the purpose, ensure that you understand the various forms of capital available to you. There are many distinct types, including straight equity, secured or unsecured debt, and hybrid options such as debt with warrants. Not every form of capital will be a fit for your specific needs and objectives, so it’s important to understand the specific constraints, risks and costs of each form, and how these funding types best align with your financial strategy and goals.

Along with traditional fund-raising routes, you may also want to consider the pros and cons of more unconventional funding strategies. Take for example an entrepreneur that has invested significant personal funds in developing a product for market, and now requires additional capital for launch. Instead of raising equity, they opt for leveraging an existing commercial mortgage, accessing cheaper and less restrictive capital without diluting equity in their new venture. This highlights the importance of thinking creatively and leveraging your existing assets to fund new opportunities.

Getting the narrative right

A common mistake amongst entrepreneurs when raising funding is the belief that their brilliant idea and drive alone will be enough to convince capital providers to invest. The reality is that, while these things are of course important to a successful pitch, the primary concern of capital providers lies in protecting their capital while optimising the chances of a strong return. Put yourself in the shoes of your chosen capital provider’s decision-maker and consider the key factors that would positively influence your confidence in the safety of your capital and the mitigation of any potential risks.

Identifying your biggest perceived risks from the perspective of a capital provider and understanding what such providers are looking for to protect their investments, allows you to directly address these pain points in your pitch and presentation. It’s crucial not to shy away from these concerns, but rather address them upfront and thereby present a more compelling and reassuring case to your potential investors.

Finally, your pitch should demonstrate an alignment between both you and your capital provider’s interests. Capital providers expect a strong commitment from the company raising capital, so it’s essential that your pitch demonstrates your dedication to protecting their interests and minimising potential risks – and this means an ability to demonstrate that you have substantial skin in the game when it comes to the success of your venture. It is rarely, if ever, a good strategy to pitch for funds when you yourself have no personal investment at stake. Investors want to see that you are not only willing to invest your time, energy and expertise into your venture, but that you stand to lose personally if it does not succeed, whether that be financial investment, personal reputation or a significant career risk.

Demonstrating a significant level of personal commitment is reassuring to investors, helping to align your interests with their own, and fostering a sense of shared responsibility and trust in the success of the venture. Given that you have something substantial to lose, capital providers can be reassured that you will not simply walk away from the investment, significantly enhancing their confidence in your commitment and perseverance.

Creating optionality

One golden rule of raising funding is don’t wait until you’re in desperate need of capital. Waiting until you’re desperate can severely narrow the options available to you and can quickly result in one-sided negotiations with potential providers, putting you at a distinct disadvantage. Instead, start as early as possible when it comes to preparing your pitch, as it will give you the room you need to refine it, anticipate questions, and address potential concerns before they become major obstacles.

Taking this approach also allows you to create optionality by expanding the scope of your search to include a diverse set of capital providers and types of capital. Instead of pitching to the most prominent and promising providers, consider pitching to parties that may not be your first choices. These initial pitches can be invaluable opportunities to practice and learn in a non-hypothetical situation, acting as important dry runs for the eventual real target of your pitch: the sources of capital that you truly want.

By practising your pitch in this way, and beginning the entire process early on, you can create optionality around fund-raising, while refining and improving your presentation and delivery, and building confidence for when it matters most. This iterative process not only enhances your own capital-raising skills, but importantly, increases the chances of securing the desired capital from your preferred sources.

Final thoughts

Seeking external funding or investment can be a complex process, but by starting early and incorporating these strategic considerations, you can substantially enhance your ability to attract the right type of capital on the right terms, build strong and long-lasting investor relationships, and ensure sustainable growth and success.