Raising Capital the Right Way

Hello everybody, and welcome back to this month's edition of Building Value. Every business needs capital to survive. In an ideal world, you've created the free cash flow where you never need to consider taking on a dime of outside money. But if you're like many other companies, there may be a time when you'd like to explore raising outside capital, either to survive or to expand. Now, simply because you need to, or feel you need to, does not mean that you should just do this blindly, accepting money from just anybody. What I mean by that is, yes, in some instances, if it's a matter of surviving, keeping the lights on or not, there isn't much thought that needs to go into this decision. You need to figure out a way to make it to tomorrow. You just need to survive.

If you are, however, in a better position, there are a number of considerations before raising outside capital. To simplify this, I wanted to break this decision into who and how. Who is who will be providing you with the capital. In some cases this may be an entity like a bank or a private equity firm, and in other instances it may be friends or family or angel investors. Much of this is going to be determined by your business type and the stage that you're in. Earlier-stage companies more often turn to family, friends, an angel, or seed investors, people willing to bet on you or the idea, but you should also understand that this is likely the riskiest stage of the company or idea, prior to having any real product-market fit or sales. Later-stage, more developed companies will often be exploring relationships with venture capital or private equity firms, depending on the goals of the company and the investor.

Now, regardless, one of the most important pieces of advice here, and one too often overlooked, is to be thoughtful about who you accept money from. Be intentional. Be strategic. Do not be indiscriminate. This may sound like common sense, but to quote a good friend of mine, I'd rather take smart money than dumb money any day. What he meant by that was, essentially, just because someone is willing to give you money doesn't mean that you should take it from them. For example, if you have the option to choose between person A and person B, and person A is simply interested in the project, viewing it as a pet project of sorts, whereas person B is passionate about the project because it solves a problem he or she is affected by directly, who would you rather have behind you? Further, if person B has had successful exits, or a robust network of potential advisors, resources, or some other expertise you can lean on along the way, it becomes a no-brainer.

Now, on to the how. There are really only two ways to raise capital: debt or equity. Both of these can be a great solution, but it depends greatly on the circumstances, so I won't sit here and provide a blanket statement to either do this or do that. What I will say is that the timing and structure of your raise plays a major role in what to use and when, and it's important to consider the levers you can pull to maximize your value today while also protecting your value in the future. For example, if you're in need of cash but are really only a few months away from turning cash flow positive and being able to support your business on your own, never needing to raise cash again, should you choose debt or equity? Again, I hesitate to give a blanket statement here, but the answer is probably quite clear. To me, all things equal, if I have the option between giving away ownership in my company or retaining more of it, betting on myself and participating more fully in that eventual upside, I think I know which one I would choose.

Now, every decision when it comes to raising capital is not always that cut and dry, and if it's the first time you're going through the process, you'll likely greatly benefit by seeking out advice and guidance from someone who has either gone through the process personally or from an adviser who has. Because it is often these types of decisions, while seemingly minor in the moment at times, that can return to be a big factor, positively or negatively, in a big way. So you don't want to get it wrong. Thanks for joining me, everyone. Until next month, keep building value.