Entrepreneurship: The Basics Of Raising Capital

If you are an enterprising entrepreneur who is looking to kick-start your business, one of the first hurdles you are going to face is raising capital. More often than not, small or new business owners will have to seek out financial assistance in order to get their company off the ground. While this is no easy task, it is certainly not an impossible one either.

In Malaysia, there are a number of funding options open to new businesses. Entrepreneurs will  want to choose the option that gives the best connections and opportunities. You may also want to pick the type of funding based on the business’s unique aspirations and financial demands. 

Such methods include, but are not limited to:

Accelerator programs

Accelerator programs are relatively short term initiatives. They are designed to help established startups scale quickly, and often provide funding in exchange for equity in the business. It is fast-paced and intensive, taking several weeks or months to complete. Apart from funding, it can include things such as resources, training, and even mentorship from experienced entrepreneurs, investors, and business leaders. One such example of a business accelerator program is Scale Up Malaysia, which focuses on helping SMEs grow and expand.

Venture capital financing

This is a form of private equity and a type of financing for startup companies and small businesses with long-term growth potential. Venture capitalists (VC) tend to invest at any stage of a business and will usually seek to gain a percentage of ownership in the company in exchange for capital. 

VCs can offer much more than just funding to a company. They can usually connect a business to a network of investors as well as provide training opportunities. However, since VCs become partial owners of the company, the founder may no longer have complete creative control over their products. Securing a VC’s investment is very competitive, and businesses will have to offer them a very convincing pitch if they hope to secure their interest. If you have ever seen the reality TV show “Shark Tank” or “Dragon’s Den”, you will have an idea of what a VC pitch looks like.

Read More: Tips To Secure Venture Capital For Your Business

Angel investors

Similar to venture capitalists, angel investors typically offer businesses initial seed money for startup businesses, usually in exchange for ownership equity in the company. The investor’s involvement may be a one-time infusion of seed money or an ongoing injection of cash to get a product to market. 

While angel investors may be involved in a series of projects on a purely professional basis, angel investors can also come in the form of family or friends of the person seeking funding. Unlike venture capitalists, angel investors are not usually in the loan business. 

More often than not, they are simply putting money into an idea that they like, with the expectation of a reward only if and when the business takes off. Unless they know someone personally, entrepreneurs will likely have to approach an angel investor network such as the Malaysian Business Angel Network (MBAN) to find one.

Equity crowdfunding

Equity Crowdfunding (ECF) is a method to raise funds through the collective effort of a large pool of investors. These funds are generally raised through an online platform that is authorised by the Securities Commission (SC).

The money raised will usually be released once a predetermined funding target is reached. As with the methods mentioned above, equity crowdfunding is offered to businesses in exchange for equity in the company being given to investors. ECF is gaining more popularity in Malaysia as more and more crowdfunding platforms are being founded with the SC’s approval.

Peer-to-peer (P2P) funding

Peer-to-peer lending is similar to crowdfunding in many ways as they both allow you to raise funds without going through a bank. Like crowdfunding, P2P funding is often done via an online platform which has been approved by the SC.

P2P funding does not necessarily have to reach a certain predetermined amount before funds are released, meaning funds can be received much quicker. In return for funding, P2P investors will earn interest on their investments. Interest rates are calculated based on the risk profile of the startup.

Read More: Should You Opt For P2P Lending To Fund Your Business?

Government grants

Growing a business is not exactly easy, even with plenty of funding options. This is why government agencies tend to have their own aid initiatives to help small businesses scale up. These government grants technically refer to a sum of money that does not require repayment. However, those who take these grants are legally bound to the terms of the grant. If these terms are violated, then the grant will need to be reimbursed. These grants can typically be used for a wide variety of things such as R&D, marketing, equipment, and product development. You can find out more about such grants by visiting government websites.

Bank loans

Business loans from the bank are probably the first thing that new business owners seek out when they need funding. While the banks do typically offer business loans to small startups, the amount offered is usually small as well. This is because banks determine loans based on trust. Companies with a good history of paying back their loans will be given more leeway, while new businesses with no track record will face greater scrutiny. While startups may not get the amount of money they want from the banks, at the very least, they won’t be giving up part of their company in exchange for cash.

Family and friends

When it comes to starting a business, family and friends will likely be the most willing to lend their aid and encouragement. Some might offer capital out of the goodness of their hearts, while others might expect some equity in exchange for their cash. However, involving friends and family in your business poses a whole new set of challenges as well. If things are not going well, you could cause irreparable damage to your relationships. 

Choosing the right funding method

Every avenue of raising capital provides its own unique benefits and drawbacks. Choosing the right one depends on a variety of factors. Among the main ones are the stage of the business, the industry landscape, funding requirements, risk tolerance, and the entrepreneur’s preferences.

In order to successfully raise capital, an intricate and well thought out business plan must be crafted. Before you even begin, a business should know where every single dollar they wish to borrow will go. Moreover, building relationships with prospective investors and continuously refining the pitch are constant and ongoing considerations within the fundraising journey.