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Why Raising Capital Is Important for Small Businesses

Startups need access to capital to optimize their potential opportunities. 

Raising capital is typically one of the first issues a young company will need to address, and your ability to attract investors will likely play an important role in the ultimate success of your company and its exit strategy. Raising capital will typically take place in several stages (known as rounds), each of which will likely carry different terms, conditions, and milestones. Equity is the most common approach to early-stage investment, since most startups will not have enough revenue or history to attract debt financing. 

Using equity to raise capital will also have important benefits in attracting and retaining talent, since many team members will be motivated by your company's growth potential and the possibility of equity appreciation.

Bootstrapping 

The first round, often called bootstrapping, will typically come from founders' savings and credit cards. In addition, many founders will reach out to their friends and family members to raise their initial seed capital. 

Potential investors will expect founders to have "skin in the game," and to have made a financial commitment in the growth of their startup. Investors will be less likely to invest if founders have not also taken personal and financial risks to get the startup off the ground. 

Angel investors

Angel investors are individuals or groups that specialize in making early-stage investments in startup ventures. In the United States, the Angel Capital Association has accredited nearly 200 investor groups and more than 8,000 individual investors. 

Angel investors often learn about potential investments through referrals from other investors, a startup's advisers, or through trade groups or networks. 

Strategic investors 

Strategic or corporate-backed investment funds are a growing force in the venture capital community, with most Fortune 500 companies having an internal venture investment unit. Strategic investors partner with startups to get a front-row seat to cutting-edge technology in their market segment or complementary industries. 

From a startup's perspective, there are a variety of advantages to working with strategic investors, including industry guidance, market credibility, and access to their customers. In addition, a strategic investor is likely to provide an attractive acquisition partner as the startup gains product and marketplace momentum. 

Government investment funds and grants 

A growing number of states have launched angel or venture capital funds to attract businesses and promote economic development. Startups with a strong scientific or technical focus may qualify for federal, state and local grants designed to foster the development of new technologies and tech-related employment. 

Bank financing 

For some startups, taking on debt may be a more attractive option than diluting the ownership stake of the founders or other investors through equity offerings. While traditional banks may not be a viable option for most early-stage companies, there are several players in the venture lending space who are willing to take more risk (for a higher return) and lend to startups.

KPMG Spark can help you be prepared for capital investment

Every investor will want to know that your books and financial information are accurate and up to date, and KPMG Spark can help. KPMG Spark is the new way to manage accounting for small business owners who struggle with DIY software and the never-ending administrative tasks of accounting. We take bookkeeping off your hands by leveraging intelligent automation, a custom financial dashboard, and a professional bookkeeper-in-the-loop. Contact KPMG Spark today to speak with an accounting specialist dedicated to your small to medium-sized business success.

The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG LLP.

This blog article is not intended to address or provide advice concerning the specific circumstances of any particular individual or entity and does not constitute an endorsement of any entity or its products or services.

Some or all of the services described herein may not be permissible for KPMG audit clients and their affiliates or related entities.

The following information is not intended to be “written advice concerning one or more Federal tax matters” subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230. The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.

KPMG LLP does not provide legal services.

KPMG SparkAugust 30, 2022Posted In: Business Tips

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