When is the Right Time for a Company to Raise Equity?

When should a company raise equity? Learn about equity funding from angel investors, venture capital firms or corporate investors and how it can help promote rapid growth.

When is the Right Time for a Company to Raise Equity?

When a company remains private, equity funding can be obtained from angel investors, crowdfunding platforms, venture capital firms or corporate investors. Ultimately, the shares can be sold to the public in the form of an initial public offering (IPO). Even in a falling market, it is important to keep trying to raise capital. However, it is essential to keep in mind that the process may take longer and you may not get your desired assessment.

The key is to focus on the ultimate long-term objective: an IPO or an acquisition. It is important to always focus on positioning your company for the next round or liquidity event. It is recommended to use several scenarios, especially in the worst-case scenario. You should know the minimum amount of funding you need to keep your doors open and continue to grow your business.

You must decide which research and development (R&D) projects can be delayed or cut, which hires can be delayed, which staff can be laid off and costs reduced. Investors will also want to know this information. Any investor you talk to in a declining market usually has a realistic period of 24 months before the next funding round or liquidity event. They want to know what milestones you can achieve within 24 months to increase the value of the company.

As you successfully obtain equity funding, you sell a stake in your company by issuing new shares, reducing your stake in your company. Corporate investors are large companies that invest in private companies to provide them with the necessary funding. While both types of financing have different advantages, most companies use a combination of equity and debt financing. The COVID-19 pandemic of recent years, rising inflation and interruptions in the supply chain have created an economic situation that puts increasing pressure on companies.

Equity funding can raise the substantial capital you may need to promote rapid and greater growth, making your company attractive to buyers and enabling sales. Industry giants, such as Google and Meta (formerly Facebook), raised billions in capital through IPOs. Capital can also provide a basis for supporting debt and increasing a company's ability to raise additional funds. Such regulation is primarily designed to protect the investing public from unscrupulous operators who may raise funds from unsuspecting investors and disappear with the income of funding.

Companies that choose to raise capital by selling shares to investors must share their profits and consult with these investors when making decisions affecting the entire company. There are several terms, conditions and pacts that companies must consider when using debt financing. For example, angel investors and venture capitalists, who are the first investors in a startup, prefer convertible preferred shares over common stock in exchange for funding new companies, because the former have more significant upside potential and some downward protection. Corporate finance advisors can help you prepare to raise capital, negotiate the transaction, and introduce you to potential investors interested in your business sector.

An initial public offering is a process that private companies undergo to offer shares in their businesses to the public in a new share issue. For example, traditional lenders, such as banks, often don't grant loans to companies that they consider too significant a risk because of the owner's lack of business experience or an unproven business concept. After going through the time when Volker raised rates to 19% overnight, an increase of 0.75% is not nothing.