What is Fundraising?

Fundraising is a term often heard in the context of entrepreneurship and business creation. It’s an important step that usually occurs after the launch phase, when a company is looking to grow and expand its reach. But what exactly does this fundraising process involve? How does it work ? What are the benefits for the company?

Are you looking to raise funds for your company?
Click here to launch your crowdfunding campaign.

What is fundraising ? Definition

What’s the definition of fundraising ? It can have several meanings. It’s used in two different contexts:

• Fundraising in business, also called equity fundraising, refers to a financial operation allowing a company to attract investors to finance its development. This practice is common among young companies, especially startups, that need capital to support their growth.
• Fundraising for nonprofits, it’s a collection of funds organized by a non-profit organization (NPO) to support a specific cause.

Although these two uses differ, they share one key goal: raising funds! In this article, we will focus on fundraising in an entrepreneurial context.

The role of investors in fundraising

Investors play a crucial role in a fundraising round. They provide the financial resources a company needs to fund its growth and expansion. In exchange for their investment, they receive shares in the company, which gives them a say in how the business is managed.

Investors can include individuals or institutions, such as:

• Investment funds,
• Banks,
• Companies specializing in startup financing.

They typically invest in the hope of making a significant return when the company grows and becomes profitable.

How does dundraising work?

The 4 Key Steps

The fundraising process generally consists of several stages:

Fundraising follows a structured process with 4 essential steps, helping a business attract investors and secure the necessary capital for development.

STEP 1: Preparing the pitch deck

The company must prepare a solid presentation, detailing its project, business model, market, and growth outlook. This document must demonstrate the viability and potential of the company to attract investors.

STEP 2: Identifying and prospecting investors

It’s essential to target the right investors (business angels, venture capitalists, institutional investors…) and adopt a strategic approach to win them over. Knowing the market and investors’ expectations is a major asset.

STEP 3: Analysis and due diligence

Once investors are interested, they conduct in-depth due diligence. This phase evaluates the risks and opportunities before committing financially. The company must be ready to provide accurate and transparent information about its finances, strategy, and organization.

STEP 4: Negotiation and closing

If investors are convinced, they make an offer specifying the amount invested and related terms (company valuation, governance, investor rights…). Discussions lead to the signing of a shareholder agreement formalizing the entry of new investors.

How to raise funds ?

Fundraising is not just about finding money; it’s a real strategic milestone. Proper preparation and execution maximize success and ensure a beneficial partnership with investors.

1. Develop a strong Business Plan : Before seeking investors, the company must write a detailed business plan. This document highlights the vision, positioning, growth strategy, and financial projections. It must be clear, well-structured, and compelling to capture investor interest.
2. Define an investor outreach strategy : Each type of investor has specific expectations. It’s essential to identify those matching the company’s needs and maturity (seed capital, venture capital, growth capital…). Effective communication and a strong pitch are crucial to attract them.
3. Anticipate negotiations : Fundraising means giving up some equity in exchange for capital. It’s important to prepare for discussions on valuation, equity dilution, investor rights, and reporting obligations. Getting help from a fundraising expert or lawyer helps avoid pitfalls and optimize deal terms.

Legal and financial implications of fundraising

Raising funds is much more than just securing financing — it has major implications for the company and its founders. It changes governance and entails long-term commitments. It’s essential to plan accordingly and structure the deal to protect the interests of both the company and its founders.

• Capital dilution : In exchange for their investment, investors receive company shares. This means they become shareholders and may influence key decisions, depending on the equity they hold. The more capital is given away, the less autonomy the founders retain.
• Rights and duties of investors : Depending on the agreement, new shareholders may receive special rights, such as a board seat, veto rights on major decisions, or priority rights in case of a sale. These must be carefully negotiated to balance interests between investors and leadership.
• Transparency and reporting obligations : Fundraising usually involves increased reporting and communication duties. The company must regularly update its investors on performance, financials, and strategic milestones. This transparency is essential to maintain trust and ensure proper follow-up.

What are the benefits of fundraising?

Fundraising offers several key benefits to companies looking to grow:

1. Funding for growth acceleration : It provides the financial means to support the company’s growth – hiring talent, investing in R&D, boosting production, or scaling marketing efforts.
2. Access to new markets and innovation : With more capital, a company can expand internationally, diversify its offerings, or develop new products and services-key to staying competitive.
3. Strategic support from investors : Beyond capital, investors often bring valuable expertise and a professional network. They can help refine the company strategy, open doors to new partnerships, and facilitate future fundraising.

Types of fundraising

Seed Funding

This is the initial financing stage, often provided by the founders, their family and friends, or business angels. It helps fund the company launch, first product development, and initial operations.

Venture Capital

Venture capital comes next. These are larger investments from specialized funds that take risks by investing in early-stage companies. They finance growth, new product development, or market expansion.

Growth Capital

Growth capital is for more mature companies that already generate revenue. It helps fund accelerated growth-through acquisitions or international development.

Crowdfunding

Crowdfunding is an increasingly popular fundraising option for startups.  Here, a crowd of individuals supports the project by contributing money. This can be done out of goodwill or in exchange for rewards or equity.

Fundraising or  fund raising ?

The correct form is fundraising — written as one word.

• Fundraising (noun) refers to the process of collecting money for a cause, project, or organization.
  
• Fund raising (two words) is sometimes seen, but it’s considered outdated or less common today. Most modern style guides recommend the one-word form: fundraising.

To conclude, Fundraising is much more than just a cash injection: it’s a strategic turning point that can propel a company to new heights – if done right. While it opens doors to growth, innovation, and expansion, it also involves financial and legal obligations, and sometimes a shift in power within the company. Each fundraising round is unique and must align with the founders’ vision and goals. The key to success? Surround yourself with the right partners, anticipate challenges, and never lose sight of the balance between financing and independence.