3 things to think about before fundraising

Most small business owners need to take advantage of growth opportunities that come along.

However, so many founders get brainwashed into thinking it’s all about the funding—“If we could only find an investor, we would be off to the races…”

Capacity has built out a large group of growth partners to connect with founders of revenue-generating companies looking to double in 12-24 months.

Yes, in most cases, that kind of growth requires access to funding in advance of sales revenues, but many founders only listen to the loudest drumbeat of “do a fund raise,” “find an angel,” “enter a pitch competition,” etc. This ends up being blindly accepted as the only path to growth.

Here are three things to think about before running down that road.

1. Funding isn’t one-size fits all

Funding comes in all different shapes, sizes, and costs.

When you take money, you usually have to pay it back. The specifics of those pay-back terms are the main thing that defines different types of funding.

Don’t mix up long-term needs and short-term needs.

Long term needs are things like:

• Hiring talent to develop a product that you won’t be able to sell for a while
• Buying assets that will generate revenues for a long time (real estate; equipment)

Short term needs are things like:

• Buying inventory (and paying for it) before getting paid by customers
• Spending on marketing expenses in advance of sales

More on this subject: Funding that Fits

2. Debt vs Equity

Funding sources are usually grouped into these two big buckets, debt & equity.

Let’s talk about debt first.

Do you have any assets that a lender could acquire from you if you don’t pay them back? This is referred to as collateral and is a foundational part of what makes debt work. Banks aren’t allowed to lend to startups without it.

In the US, loans from banks are regulated by the government.

Traditional banks make decisions based on two things:

• If you can’t make the payment, can you return the money some other way?
• Are you able to make the payments?

Other types of lenders can be more flexible with these two questions, mostly around how they would get their money back. Depending on the lender, things of value can be personnel assets, receivables, equipment, real estate, sales contracts, anything they understand how to value and can grab if the payments aren’t made.

And now, equity.

If you have some evidence of customers and the potential for very high growth, an angel investor (or venture capital) may work. You also must plan to sell the company within a reasonable time frame in order for them to get their money back.

Investors usually make decisions based on two things:

• If I buy part of the company, will my portion grow enough to return 10X my investment?
• Are you able to build it big and fast enough to sell it for that multiple?

The catch-22 is that most companies aren’t a fit for either one and waste a lot of time and effort chasing funding that doesn’t fit.

The good news is that there are a number of options in between.

More on this: Bridging the gap between Debt & Equity and Debt Funding 101

3. The fundraising platform is as important as the type of funding

Finding funding—from sourcing to closing—takes a lot of time and effort, which is almost always underestimated.

This is true regardless of the type of funding and especially when raising equity from venture capital. Most lenders have a long list of information they need to see in order to make a decision. Even the format is rigid so it fits their process.

“I hear crowdfunding is easy!” We hear this a lot. It’s true it can be less complicated than a typical equity raise, but only if you select the right platform—of which there are more than 1700—and do the prep work.

It’s important to know that each platform focuses on different types of funding, like loans, equity, and pre-purchases, just to name a few. And just like every other source, they each have their own process. Knowing exactly what will work best for your company is crucial when choosing the right source of crowdfunding.

The good news: We are partnered with seven of the largest platforms and have spent a lot of time with founders to help prepare for a successful funding process.

More about crowdfunding and how we can help: 3 out of 4 crowdfunding campaigns fail