Ready to scale up? Here are the five top ways to raise capital
Every major brand was once a humble start-up that was expertly scaled. Think you’re ready for rapid growth? This is what you need to know first.
It wasn’t a lightbulb moment. For Anna Ross, the founder of sustainable nail and beauty brand Kester Black, the decision to scale her business was a gradual one, five years in the making.
It took a pandemic to push Ross' hand. In 2020, as worldwide lockdowns created an unprecedented demand for at-home nail care, Ross sold out of six of her best-selling polishes. She hadn’t anticipated the number of sales, and lack of capital meant she didn’t have enough stock to meet the surge in orders.
“I estimate we lost 40 percent of the revenue we could have made because we didn’t have those products in stock. Our $1.2 million in revenue that year could have been $1.8 million,” she says. “Our website already had a good conversion rate, but we needed money to move faster."
"We needed money to move faster.”
It was time to scale, and, after a negative experience with a potential investor, Ross turned to crowdfunding.
Six months of intensive work later – including creating a $17,000 promotional video and an in-depth communications and media plan – Ross launched a two-week fundraising drive on the platform Birchal. Eventually, Kester Black raised a total of $2.2 million, with the first million being raised in under 24 hours.
But crowdfunding isn’t the only way to scale a business. Here, we break down the options – plus how to know when you’re ready to scale.
Scaling vs. growth
There’s a difference. As explained by the Harvard Business Review: “Growth means adding revenue at the same pace you are adding resources; scaling means adding revenue at a much greater rate than cost.”
Small business loan
Best for: Those with good credit ratings
$$: $1,000 to $50,000
Source: Banks, credit unions, Small Business Administration.
Strings? Long approval process, fluctuating interest rates, annual fees
For founders looking for a financial injection, a small business loan is an obvious option, says Kaylene Langford, business expert, founder of Startup Creative and author of How to Start a Side Hustle.
“When applying for a loan, small business owners will need to put together a strong business plan with a sales trajectory and all their numbers to show there will be a return on investment for the bank; that process is always going to be good for business,” explains Langford, adding that loans make most sense for founders looking to invest in a specific product, machine or program that will make a practical improvement to the business.
“If you know a website upgrade, a new printer or a course is going to help return more money into the business, a loan could be the way to go.”
The benefit of scaling with a business loan? “Banks do their due diligence, so if they’re willing to give you a loan, they’re validating your business plan,” says Langford. “If you have a good relationship with your bank manager, they can also act as a mentor in that space because it benefits them for you to grow your business.”
The downside? Taking out a loan involves paying interest, and it can affect future investment options.
Similar to a small business loan, a line of credit involves taking on debt, but has the added benefit of being able to withdraw funds against the loan as needed, making it more appropriate for founders looking for ongoing flexibility instead of one single purchase.
Grants
Best for: Those with time, service businesses, or creative or community-minded industries
$$: $5,000 to $100,000
Source: Government programs, commercial programs
Strings? Restrictions, strict deliverables, highly competitive
Grant money can be the perfect boost for many start-ups or small businesses, but you need to be prepared for the work involved in applying – and reporting back. Many grants also come with conditions that can be restrictive.
Find a full list of grants currently offered in your state by visiting Stateincentives.org. Likewise, the Grants.gov database lists thousands of federal grants.
The downside to grants is that they are highly competitive, and often involve jumping through a number of hoops, which means it could be a while until you see the cash in your bank account.
Investor equity
Best for: Those open to taking on a business partner
$$: $100,000 to $10 million
Source: Venture capital funds, professional investors, angel investment firms
Strings? Loss of control and equity
Finding an investor can be a transformative experience for a business. Just ask Audrey Khaing-Jones, the co-founder and COO of fashion rental business GlamCorner, who successfully obtained investor funding in 2015, then again in 2016, 2017 and 2020. Her most recent capital raise generated $12 million in Series B funding to accelerate operations, expand the business warehouse space and logistic teams, and grow from 28,000 articles of clothing to over 60,000.
"We were looking for business partners with expertise to help us grow.”
“The main reason we chose the investor equity route was because we weren’t just looking for growth capital, we were looking for business partners with expertise to help us grow,” says Khaing-Jones, crediting her ongoing partnership with AirTree Ventures for allowing the business to scale in the increasingly competitive clothing rental market.
“The AirTree team was able to add value immediately [in 2015 and the subsequent years] by supporting us to scale our tech stack, our inventory management systems and our performance marketing strategies, and [also] by introducing us with people in the fashion and apparel industry.”
When it comes to taking on investor equity, finding the right fit is everything. While professional investors can offer experience and deep pockets, that can come at the expense of loss or control or equity in your business.
“When you raise capital from private investors you have a responsibility to deliver the ambitions you set out to do,” adds Khaing-Jones. “Some people are excited by such a challenge while others find it inhibiting.”
Interested in exploring private investment? Start by networking or reaching out to your local angel networking network. Alternatively, consider researching (via news sites or websites like PitchBook or Crunchbase) which investors have funded businesses like yours. Often, investors or venture capital funds will specialize in specific industries.
The numbers: from pre-seed to Series B funding.
Pre-seed: For businesses valued at $10,000 to $100,000 looking at an investment of $10,000 to $250,000
Seed: For businesses valued at $3 million to $6 million looking at an investment of $50,000 to $2 million
Series A: For businesses valued at $10 million to $30 million looking at an investment of $1 million to $15 million
Series B: For businesses valued at $30 million to $60 million looking at an investment of $10 million to $30 million
Incubators
Best for: Those looking for connections and capital
$$: $20,000 to $250,000
Source: Academic institutions, development corporations
Strings? Highly selective, rigorous application process
“Accelerators and incubators have emerged as an excellent source for capital and, perhaps more importantly, for advice and connections,” say Rajat Bhargava and Will Herman, experienced entrepreneurs and authors of The Startup Playbook.
Securing funding from an incubator usually means applying to join their program and then undergoing rigorous screening to make sure you’re a fit for them – and they’re a fit for you. If successful, applicants will receive a fixed sum of money in return for equity in the company. They’ll then work with you to start growing the business using the incubator’s strategic connections.
Crowdfunding
Best for: Businesses with a loyal following
$$: $5,000 to $5 million
Source: Crowdfunding platforms
Strings? Maximum effort
There are two forms of crowdfunding, note Bhargava and Herman: “Reward-based crowdfunding (on platforms such as Kickstarter and Indiegogo) involves a large group of customers financing product development by pre-buying the product. And equity-based crowdfunding (à la CircleUp and AngelList) occurs when a large group of people each invest a small amount of money as a seed round for the company.”
Kester Black had success with the latter method. Founder Anna Ross recommends crowdfunding for brands who already have a substantial customer base – especially those in the financial technology, food and beverage, and fashion and beauty spaces – and for founders who still want to be in control.
Ross still owns 86.68 percent of Kester Black. The $2.2 million capital raise came from 1,700 shareholders, who invested sums of money ranging from $250 to $50,000 each, and who have now become a dedicated group of supporters, undertaking internal customer surveys and helping with product development.
"They bought shares in the company because they were loyal customers who wanted to see us grow."
“The majority of our investors wanted to support me as a young businesswoman. They bought shares in the company because they were loyal customers who wanted to see us grow – not because they were looking for 10 times return on an investment in a year,” she says, nodding to the fact that crowdfunding is a more grassroots approach than taking on professional investors.
So far, the Kester Black capital raise has been used to invest in a 3PL (third-party logistics supply chain management), allowing the brand to jump from 2,500 orders a month to 10,000. Ross has also set up a European warehouse and invested heavily in new product development. Investors have already seen a rise in sales – with some months being up 60 percent compared to last year – but Ross says the full benefit of the capital raise will be seen next year.
“Crowdfunding is the preferred capital raising method for mavericks,” says Langford, adding that this option is best for game-changers, innovators and early adopters who have something new, fresh and exciting to offer.
How do you know if you’re ready to scale?
Ask yourself this: what does the business really need to grow?
“Sometimes the answer to that question is a business mentor or coach, a contractor, or a new product. The answer isn’t always money,” advises Langford, who has worked with more than 2,000 entrepreneurs at Startup Creative. “When you’re looking to scale, you have to be really clear about what needs to happen for your business to grow.”
To do that, Langford says founders should follow this checklist:
- Know your numbers inside and out.
- Put together a solid business plan using the aforementioned numbers.
- Work out the sales trajectory for six to 12 months using conservative projections.
- Do your research on the market and get outside advice.
- Pick your moment – timing is everything.
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