How raising capital works

Here you will learn everything you need to know about raising capital, such as what raising capital is and how a capital raise works.

What is raising capital?

Raising capital is a process in which companies seek and obtain new capital to finance the needs of the business. This can include making investments, expanding into new markets, or strengthening growth in an existing market. Capital can be raised through different methods, such as a new share issue, loans, an initial public offering and crowdfunding.

Here we describe some of the most common methods of raising capital.

Bring in venture capital

By bringing in venture capital from, for example, business angels or venture capital firms, companies can gain access not only to capital but also to networks and expertise. This is particularly common among technology companies and startups that need external financing to grow.

Advantages: Access to both capital and valuable contacts.

Disadvantages: Venture capitalists often demand influence in the company, which can reduce the existing owners' control.

How do you bring in venture capital?

To attract venture capital, companies must present a clear business idea and a well-developed business plan. If the investors are interested, negotiations take place on ownership stakes and the company's valuation.

Bringing in venture capital is particularly common among startups that have a well-thought-out business plan but need more money to be able to achieve their goals.

Carry out a new share issue

A new share issue means that the company issues new shares to bring in more capital. It is a common method of raising capital, for both unlisted and listed companies.

Advantages: Capital is raised without the company needing to take out loans. The new shareholders can also contribute knowledge and networks.
Disadvantages: Dilution of existing shareholders' ownership stakes. If the market interprets the new share issue as an emergency solution, the share price can be negatively affected.

How do you carry out a new share issue?

The process begins with the company setting the terms of the issue, such as the number of shares and the price per share. Once completed, the new capital is reported to the Swedish Companies Registration Office (Bolagsverket).

Borrow money

Companies can also bring in capital through loans, which often give quick access to money. Loans do, however, require the company to pay interest and repayments, which can strain cash flow.

Advantages: Ownership stakes are not diluted, which means existing owners retain control of the company.
Disadvantages: Interest and repayments can reduce the company's financial flexibility.

How do you take out a business loan?

For a company to be granted a business loan, it normally needs good profitability and good prospects. If the company has not yet been able to prove its profitability, it is common for the founders of the company to pledge a property as security for the loan. A good alternative to business loans, which larger companies can use, is to issue bonds.

Initial public offering

An initial public offering, or IPO, is a process in which a company goes from being unlisted to being listed on a stock exchange, for example Nasdaq. Through an IPO, companies can sell shares to the general public and thereby gain access to new capital.

IPOs are common for companies that want to grow and broaden their ownership base, but both smaller and larger companies can carry out an IPO, depending on the requirements of the marketplace.

Advantages of an IPO

• Increased visibility and credibility in the market, which can attract more customers and business partners.
• Access to new capital through the sale of shares.
• Increased liquidity, as the shares become easier to buy and sell on a stock exchange.

Disadvantages of an IPO

• The IPO process is often complex, time-consuming and expensive, with high costs for advisers, legal work and prospectuses.
• Increased requirements for reporting and transparency, which lead to ongoing administrative and financial costs.
• The company is exposed to greater scrutiny from the stock exchange, the media and investors, which can mean risks of increased public criticism.

How do you list your company on a stock exchange?

Put very simply, an IPO begins with banks and lawyers producing a prospectus with important information about the company. If the company meets the requirements set by the stock exchange, and an initial share price has been presented, the company can be listed.

Crowdfunding

Crowdfunding means that a company turns to a large group of smaller investors to raise money. As a rule, an online crowdfunding platform such as Indiegogo or Kickstarter is used.

Examples of advantages are that you have the opportunity to bring in a lot of capital without having to rely on players such as banks or venture capitalists. The company also gains a large initial customer base if many people choose to back the project the company has presented.

Potential disadvantages are that crowdfunding takes time, requires major marketing efforts and that there are no guarantees that you will bring in the capital you have asked for. Other disadvantages of crowdfunding are that many serious investors see this method as somewhat “unserious” and think it is only a method companies use if they do not manage to attract serious investors.

How do you use crowdfunding?

Normally the company registers on a crowdfunding platform where it presents its project and explains what the money will be used for. If enough capital is raised the project becomes reality; if not, the money is usually paid back to the investors.

Crowdfunding is particularly popular among small business owners and startups that develop innovative products with a broad target group.

Frequently asked questions

Below we answer common questions on the subject of raising capital.