If you’re scaling up a SaaS business, raising equity funding can be a huge accelerant. While bootstrapped businesses often go on to achieve success, the capital your business can access through equity funding acts as rocket fuel for your growth trajectory, helping your business reach significant scale in just a few years, rather than decades.
But at the same time, raising capital for your business can be an intimidating process, especially for first-time founders. These are huge deals: investors infuse hundreds of thousands, or even millions of dollars, into your company, receiving a share of ownership in return.
It might take months of prospecting, pitches, and negotiations to close investments. Throughout this process, founders still have a business to run. Raising capital can feel like a full-time job, but you can’t afford to take your eye off the ball: maintaining your business’s momentum is non-negotiable. Once you raise capital, you’ll have responsibilities to your new partner, including reporting, budgeting, board meetings, and more.
The key to success lies in ensuring that your business is fully prepared to raise capital. As we’ll explore in this quick guide, there are various elements to this, from having a clean set of financials to crafting your investment proposition.
G-Squared Partners offers a wide range of outsourced CFO, accounting, and bookkeeping services to startups and established businesses. Interested in working with us to prepare for your next round of investment? Get in touch today.
Equity Financing: The Basics
Equity financing occurs when a business trades a slice of ownership (equity) in return for capital (funding). Many successful startups go through this process multiple times, from seed stage to Series B, C, and beyond.
Virtually all of the most successful startups in recent years have raised gargantuan amounts of equity funding. Airbnb, now worth around $70 billion, raised close to $3.5 billion in equity funding before its IPO. Countless other examples exist: Uber, Shopify, Stripe – all successful startups that raised equity funding and are now worth billions of dollars.
There are several distinct types of equity investors. The most common include angel investors, venture capitalists, and private equity funds. They typically invest in slightly different ways:
- Angel Investors: individuals who typically write smaller checks and invest in early-stage companies, from Seed to Series A.
- Venture Capital Funds: professional investors that invest on behalf of their clients. VC firms often specialize by industry and/or company stage and aim to invest in high-growth companies that will deliver outsized returns over 6 - 10 year time horizons.
- Private Equity Funds: these funds tend to invest in more established businesses, acquire majority ownership stakes, and focus on streamlining operations to improve profitability.
If you’re an early-stage startup, you will likely be considering a combination of angel investors and venture capital. Build a list of individuals and funds that invest in businesses similar to yours: tools like Crunchbase are extremely helpful here.
Setting Goals for the Fundraising Process
Before you start reaching out to potential investors, take the time to consider what you hope to achieve from the fundraising process. How much money do you need to raise? What percentage of equity in the business are you prepared to give away? What valuation do you have in mind? What are the use of proceeds?
Every business is different, but in general, fundraising goals for each round will look something like this:
- Seed Stage: expect to give up around 20% of your business to raise anywhere from a few hundred thousand to a couple of million dollars. At this stage, investors are investing more in the idea and your vision than any tangible business results.
- Series A: you’ll likely have to give up another 20% or so in equity, but this time you’ll raise a few million dollars and use the capital to accelerate the growth trajectory your business has already shown.
- Series B, C, and Beyond: as you progress through fundraising rounds, you will gradually start to give away less equity in exchange for more funding. In a typical Series B round, a business might raise around $10 million in exchange for 15% equity, and existing investors may increase their commitment.
Of course, it’s important to ask yourself how much your business needs to raise. This depends heavily on your strategic goals: if you want to invest heavily in growth, product, and hiring, clearly you need to raise higher levels of capital. It’s also worth bearing in mind that every round of equity funding is dilutive, reducing your ownership stake.
Cleaning Up Your Books
As part of the due diligence process for any equity financing, potential investors will want to closely scrutinize your business’s financial records.
For many early-stage businesses, this can be a problem. Before a Series A, it’s unlikely you have an accountant, controller, or even a full-time bookkeeper. As a result, your books might be out-of-date, inaccurate, or just generally disorganized: a reality you certainly don’t want to share with potential investors.
Clean, accurate books demonstrate that your business will be a responsible steward of the investor’s capital. Beyond just cleaning up the books, as the founder, you must deeply understand them. Investors will ask difficult, probing questions, and you must be equipped to answer them effectively.
The support of an outsourced CFO and accounting team helps you get your business’s books into order and keep them there. These partners can work with you to build the financial infrastructure that’s required to scale efficiently: satisfying potential investors and giving you the clarity you need to run your business.
Dive Deeper: The Ultimate Guide to SaaS Business Accounting
Establishing a Forecast
Your business’s historical financial records are important, but perhaps just as important is the way your business plans to allocate the funds you raise from investors. Your investors will expect to see a clear plan that illustrates how your business will take their capital and use it to generate growth that increases the value of their investment.
The best way to do this is by building a comprehensive financial forecast that outlines when you plan to spend capital, what you plan to spend it on, and what kind of return this investment will produce. You don’t have to stick rigidly to this plan, but investors do expect to see financial projections that are grounded in reality, so do the work to produce a data-backed plan. If you’re not sure where to start, an outsourced CFO can help.
Get Financial Support from G-Squared Partners
Raising equity funding, particularly in today’s economic climate, is tough. But if you have a strong business proposition and are well-prepared, there’s no reason to be apprehensive.
If you’re not sure where to start, the team at G-Squared Partners is here to help. Together, we’ve helped startups across a variety of industries raise hundreds of millions of dollars in equity funding. Our outsourced accounting professionals have the skills and experience to clean up your books, build a robust financial forecast, and help you navigate the wider fundraising process.
To learn more about how we can support your business, contact us today.
