The Essential Guide to Capital Raising

The global economy has been showing resilience through all the economic and political swings during the last several years. And despite potential risks of geopolitical shocks or unexpected policy moves in 2026, experts are still cautiously optimistic about this year. More than 80% of US CEOs expect the US economy to continue expanding, and 63% of them even expect higher margins. So there might be room for founders who seek investments.

However, the bar is rising. Deal makers and founders looking for ways to raise capital are going to face challenges: from AI-accelerated competition to persistent volatility. 

“The strongest founders aren’t just showing what they’ve built so far — they’re helping investors understand where the business is going next,” says Allen Taylor, Managing Partner at Endeavor Catalyst.

While industry professionals expect positive shifts in the economic environment, let’s get to the basics and explore how capital raising works so that you’ll be ready to grab the opportunity.

So, what does raising capital mean? This article defines a capital raising process, its types, and basics, and explains how to raise capital with the help of a virtual data room (VDR).

What Is Capital Raising?

When a business needs money to grow or keep things running, it goes through a process called capital raising. 

Capital raising is about finding money from outside sources, rather than just what the company earns itself. The funds can be used for everyday needs, creating new products, expanding into new areas, or for big, long-term projects.

Capital can come from different funding sources, such as financial institutions, venture capital funds, private equity firms, and individual equity investors. Depending on the size and stage of the company, founders may also work with institutional investors or accredited investors.

Raising capital is not only about getting cash into the company. It is a financial strategy that might affect ownership, control, and risk. The decisions made during capital raising influence how the company grows, who is involved in decision-making, and how well the business is positioned for long-term success.

Objectives of Capital Raising

Here are the main reasons why a business might want to initiate a capital raising process:

Growth initiatives

Scale with intention

Funding supports market expansion, hiring, product build, and operational scale.

Useful when you need to grow fast without compromising control or quality.

Long-term plans

Invest ahead of returns

Capital enables projects that take time to pay off and strengthen sustainability.

Best for multi-year roadmaps, infrastructure, R&D, or staged launches.

Cash flow stability

Reduce short-term pressure

Additional funds can smooth gaps and protect operations during slower periods.

Helps maintain delivery timelines, payroll reliability, and supplier commitments.

Strategic goals

Execute bigger moves

Capital supports acquisitions, partnerships, and major technology upgrades.

Ideal when a strategic opportunity requires speed and financial flexibility.

External capital

Move faster than earnings

External funding reduces reliance on retained earnings and internal cash.

Useful when growth timing matters more than waiting for cash generation.

Why Capital Raising Fails

While sounding like an excellent option for business growth, capital raising sometimes might not bring the expected results. Here’s why:

• Unclear growth story. Investors struggle to commit when the business cannot clearly explain its growth potential or long-term direction.
  
• Weak financial preparation. Incomplete or inconsistent financial statements make it hard for investors to assess risk and expected returns.
  
• Low investor interest. A mismatch between the deal and current investor appetite often leads to slow or unsuccessful fundraising.
  
• Poor understanding of the target investor. Approaching the wrong potential investors wastes time and reduces credibility.
  
• Valuation expectations that feel unrealistic. When pricing is not aligned with comparable companies, investors are less likely to engage.
  
• Legal or regulatory gaps. Ignoring securities laws or disclosure rules can delay the process or stop it entirely.
  
• Lack of trust and transparency. If founders fail to protect investors through clear data and open communication, confidence drops quickly.
  
• Weak execution during outreach. Poor timing, unfocused pitching, or slow follow-ups can derail an otherwise solid raise.

Types of Capital Raising

There are two primary methods of capital raising: equity financing and debt financing. But sometimes there’s also hybrid or alternative funding. Let’s briefly review how each of these types works.

Category	What to verify	Owner	Weight	Score	Notes
Access controls	Folder/file permissions, role groups, view-only mode, expiry dates, IP restrictions	Legal + IT	15%	/5	Demo: two bidder groups with different access rights
Audit trail & reporting	Exportable logs (views/downloads/permission changes), filters by user/group, real-time reports	Legal + IT	15%	/5	Confirm log retention and export formats (CSV/PDF)
Secure viewing & watermarking	Dynamic watermarking, print controls, secure viewer, download restrictions	Legal	10%	/5	Verify watermark shows user identity on-screen
Verification & SSO	MFA enforcement, SSO (SAML/OIDC), session timeouts, optional conditional access	IT	10%	/5	Require MFA for all external users by policy
Q&A workflow	Role-based Q&A, approvals, routing, exportable Q&A history	Finance + Legal	10%	/5	Validate bidder-side experience and admin oversight
Onboarding & usability	Setup speed, permission templates, bulk upload, navigation clarity, mobile access	Finance	10%	/5	Time a full “room setup” using a real folder tree
Data residency & compliance	Hosting regions, subprocessor transparency, security documentation, incident response process	IT + Legal	10%	/5	Confirm cross-border access controls and admin visibility
Pricing predictability	Pricing model, overage triggers, guest rules, admin seats, export/archiving fees	Procurement + Finance	10%	/5	Request a written price schedule with overage examples
Support & SLAs	Availability, response times, escalation paths, live-deal support options	Procurement	10%	/5	Align support hours with HK deal timelines and global bidders

Equity Financing

Equity financing means raising money by selling a share of the company in the form of equity investments. In return for equity capital, investors expect returns tied to the company’s future profits, not fixed payments. 

This approach is common among startups and growing teams that might benefit from equity funding without taking on debt. For example, founders may bring in venture capitalists who provide funding in exchange for ownership and a long-term upside.

Debt Financing

Debt financing involves borrowing money that will require repayment over time, usually with added costs based on interest rates. 

Businesses often access loans, bonds, or credit facilities through banks or other lenders. 

This option is popular with established companies and mature companies that have predictable revenue and strong financial records. For instance, a firm may use debt to expand operations while keeping full ownership intact.

Hybrid and Alternative Funding

Hybrid and alternative funding combine elements of debt and equity or use less traditional structures. 

Examples include convertible notes, revenue-based financing, or funding tied to performance milestones. 

These models allow investors to start by providing capital as debt and later convert it into equity under agreed terms. Some public companies also use structured instruments that must follow rules set by the governing bodies, such as the U.S. Securities and Exchange Commission (SEC).

Capital Raising Process Explained

Now, let’s briefly review the main stages of the capital raising process and what happens during them.

Preparation and Investor Readiness

This stage is about getting the business ready before talking to investors. To overcome this stage successfully, founders need a clear picture of where the company stands and where it is going.

Key preparation steps usually include:

• Reviewing core financial documents, such as the income statement and balance sheet
• Making sure numbers are accurate, consistent, and easy to explain
• Defining the funding goal and how the money will be used
• Aligning the raise with the company’s long-term direction

Good preparation increases credibility and sets a strong base for investor conversations.

Pitching and Investor Outreach

Once the business is ready, founders begin reaching out to investors and presenting the opportunity. This step is about the pitch deck, and the story should be told clearly.

Effective outreach often focuses on:

• Explaining the problem and solution in plain language
• Showing how the business makes money and scales
• Matching the pitch to the right investor profile
• Building early investor confidence through clear answers and realistic expectations

Strong communication is essential at this stage. It helps move interested investors into deeper discussions.

Due Diligence and Data Sharing

After initial interest, investors review the business in detail during the due diligence phase.

At this stage, companies looking for funding usually:

• Share financial, legal, and operational documents
• Answer follow-up questions from investors
• Provide structured access to sensitive data
• Keep information updated and consistent

What Investors Look for During Due Diligence

Now, let’s focus on what investors look at during due diligence. We define the three main areas of business operations and documentation that a potential investor is especially interested in.

Financial Transparency

Investors want a clear and honest view of the company’s financial health. They look at whether the numbers tell a consistent story and support the growth plans presented earlier.

Common areas of review include:

• Revenue trends and cash flow stability
• Historical and projected performance
• Accuracy of financial records and assumptions
• Clarity on how new funding will be used

Legal and Compliance Readiness

This area focuses on whether the business is legally structured and compliant with relevant laws and regulations. Gaps here can delay or stop deals.

Investors often review:

• Company formation and ownership documents
• Contracts with customers, partners, and suppliers
• Intellectual property ownership
• Compliance with local and international regulations

Operational and Market Risks

Investors also examine how the business operates and how exposed it is to external risks. This helps them understand whether the company can handle growth and market changes.

Key points of interest usually include:

• Reliance on key customers, suppliers, or staff
• Scalability of processes and systems
• Competitive position and market dynamics
• Potential risks that could impact performance

The Role of Investor Data Rooms in Capital Raising

A virtual data room for investors (or an investor data room) is a secure cloud-based repository where all the documentation an investor needs to review during due diligence is saved. 

While being a cloud file sharing solution by its nature, a virtual data room offers more than that, especially in terms of security. And this is something that business owners appreciate, considering that the global average cost of a data breach reaches $4.4 million.

Let’s see what an investor data room brings to the capital raising process and how to set one up.

Benefits of Using an Investor Data Room

• Secure document access. Investor data rooms use encryption, secure logins, and controlled access to protect sensitive files. Only approved users can view or download documents, which lowers the risk of leaks.
  
• Granular permission controls. Administrators can decide who sees what, down to individual folders or files. This allows founders to share early materials first and open more data later as trust grows.
  
• Real-time activity tracking. VDRs record who logs in, which documents are viewed, and how often files are opened. These insights help founders understand investor focus and follow up at the right time.
  
• Faster and smoother due diligence. All documents are stored in one place, with search and version control features. This reduces back-and-forth emails and keeps the review process organized.
  
• Professional investor experience. A clean, well-structured data room signals preparation and discipline. It also reinforces investor confidence during the later stages of the raise.

Also read: The best virtual data rooms for IPO

Best Practices for Data Room Setup

Follow these recommendations to set up an investor data room:

1. Create a clear folder structure. Organize documents by category, such as financials, legal, operations, and strategy. A logical structure helps investors find what they need faster.
   
2. Upload complete and current documents. Make sure files are final, accurate, and consistent across folders. Outdated or conflicting information raises questions and slows reviews.
   
3. Set up permission management early. Assign access rights based on investor stage and role. Limit sensitive documents at first and expand access as discussions progress.
   
4. Enable activity tracking and reporting. Turn on audit logs and user activity reports. These tools show engagement levels and help guide follow-up conversations.
   
5. Keep the data room updated. Add new documents, answers, or updates as the process moves forward. A living data room shows responsiveness and transparency.
   

Also read: Learn how investment banking teams use VDRs to accelerate deal execution

Common Capital Raising Mistakes (and How to Avoid Them)

Even strong businesses can struggle with capital raising if basic issues are overlooked. Here are some of the most common mistakes and practical ways to avoid them.

1. Starting the process too late

Most founders don’t start raising money until they’re almost out of cash. This puts a ton of pressure on them, limits their choices, and, inevitably, makes them rush into decisions. On the other hand, investors can feel desperate as well, which means founders lose much of their negotiating power.

• How to avoid it? Start planning your fundraising way ahead of time. Create a realistic schedule that gives you plenty of time for reaching out to investors, for them to do their research (due diligence), and for those inevitable, unexpected challenges.

2. Being poorly prepared for investor questions

Unclear answers, missing documents, or inconsistent numbers quickly damage credibility. Investors expect founders to know their business in detail and explain it with confidence. If you can’t explain why investing in your business is beneficial for an investor, why would an investor want to fund it? Gaps in preparation often slow the process or even stop it entirely.

• How to avoid it? Prepare key materials early, review them carefully, and store everything in an organized investor data room.

3. Targeting the wrong investors

Reaching out to investors who do not match the company’s stage or model wastes your time and energy. Even a strong business can be rejected if it does not fit an investor’s focus.

• How to avoid it? Research investor profiles, past deals, and expectations before outreach, and tailor communication to the right audience.

4. Underestimating the importance of transparency

Holding back information or sharing it in pieces usually raises concerns during due diligence. Investors may assume there are some hidden issues, even when there are none. And trust is hard to rebuild once it is lost.

• How to avoid it? Be open and consistent with disclosures throughout the entire capital raising process. Do not hide the numbers and facts that you might first consider “negative”.

Capital Raising Tips From Investors

To maximize your chances of getting funded, also follow these investor recommendations:

• Show how the business really works. Investors want a clear picture of how money flows through the company, not just a strong vision. Simple explanations beat complex models every time.
  
• Be realistic about risks. Every business has risks, and investors expect to hear about them. Acknowledging challenges builds trust and shows mature thinking.
  
• Explain how funding creates value. Investors care about how new capital will change the business and help them get returns, not just that it is needed. Be specific about how funding supports growth and improves outcomes.
  
• Keep communication clear and consistent. Mixed messages or changing numbers will definitely raise doubts fast. Show consistency across meetings, documents, and follow-ups to make decisions easier on the investor side.
  
• Respect the investor’s time. Well-structured materials and quick responses matter more than long presentations. A smooth process signals strong execution skills.

Key takeaways

• Capital raising is a structured process that helps businesses fund growth, operations, and long-term plans using external funding.
  
• Clear preparation, realistic expectations, and strong financial and legal readiness are critical to attracting investor interest.
  
• The main types of capital raising are equity, debt, and hybrid funding. These options serve different business stages and goals, each with trade-offs around ownership and risk.
  
• Due diligence in the capital raising process focuses on financial transparency, legal compliance, and operational and market risks.
  
• Using data room software for investors improves security, transparency, and efficiency throughout the capital raising process.

If you want to make the due diligence during capital raising efficient and secure, explore the selection of the top investor data rooms on our main page and choose the one that fits your needs the best.