SmallBiz Essentials: How Do I Know When My Business Is Ready to Raise Capital?

Welcome to the SEC Small Business Advocacy Office’s blog where we share some fundamental capital-raising concepts.

At a certain point in your entrepreneurial journey, you may ask yourself whether you are ready to raise capital from investors. Perhaps you got started with personal funds, a loan, a grant, or some combination of these, which allowed your business to get off the ground. But you want your business to grow, and you are considering whether a next step should be to raise capital from investors. Don’t worry, you’re not in this alone. We at the SEC’s Small Business Advocacy Office have put together some resources to help.

Several factors go into being ready to raise capital from investors. Most sophisticated investors will expect a company to have taken certain steps and prepared certain documents before they enter the room to pitch for funding.

Before you embark on raising capital, we encourage you to consider some key fundamentals, which you can remember using the acronym CAPITAL.

Cap Tables and Financials: Update your financials for disclosure

Investors will expect you to have a capitalization table (sometimes called a cap table) that clearly reflects the ownership interests in the company. This means that the table should name the holders of the company’s equity securities, such as common stock, preferred stock, stock options, and convertible notes and warrants, and include other related information, such as class of securities, number of shares or units held, purchase price, and date of purchase or disposition. 

In addition, companies should have their financial statements ready to convey the current financial position of the company. Financial statements consist of a balance sheet, an income statement (or profit and loss statement), a statement of cash flows, and a statement of shareholders’ equity (which is different than a cap table because it shows changes over time).

Amount Needed: Calculate your runway needs

One of the first questions a company may hear from investors is “how much money are you looking to raise?” The answer to that question should reflect a thoughtfully calculated “runway”—or the amount of time your company can survive at its current cash burn rate without raising additional capital based on projected expenses. Estimating the runway helps you figure out how much money you want to raise based on how many months of operations you want to cover before needing to raise again.

Plan for Proceeds: Describe how you'll use the money

Investors expect to hear not only how much money the company needs but also a plan for how the company will spend that money to further its goals. 

Investor Strategy: Focus on experts who bring value

Many investors are focused on particular sectors or stages of a company’s life cycle, and early-stage investors in particular often become involved as advisors to the company. Target investors who know your industry, bring value beyond financing, and have a vision for the company that is consistent with your own goals.

Time and Resources: Prepare to invest yourself in the process

Raising capital takes time and resources, often from the senior leadership team. Prepare to spend significant time and resources throughout the capital-raising process outside of the day-to-day operations of the business.

Advisors: Line up your attorneys and accountants

The right professional advisors with experience in raising capital are critical to navigating a smooth capital raise in compliance with laws. Trustworthy attorneys and accountants are crucial for the short-term success of your raise and the long-term success of your company.

Long-term Vision: Pitch with the investors' exit in mind

Be able to explain your long-term vision for the company and how it will return capital to the investors. Investors want to know what your plan is for the company to make a profit and be in a position to provide liquidity options for those who would like to cash their money out.

This resource represents the views of the staff of the Office of the Advocate for Small Business Capital Formation. It is not a rule, regulation, or statement of the Securities and Exchange Commission (“Commission”).  The Commission has neither approved nor disapproved its content. This resource, like all staff statements, has no legal force or effect: it does not alter or amend applicable law, and it creates no new or additional obligations for any person. This resource does not provide legal advice.

Have suggestions on additional educational resources? Email smallbusiness@sec.gov.