Raising capital as a startup: How to prepare financially

Key takeaways

• Raising capital starts with understanding your goals, timeline, and funding needs.

• Founders should weigh bootstrapping, debt financing, grants, angel investors, and venture capital.

• Each capital type (SAFE notes, convertible debt, priced equity) has trade-offs around control, dilution, and repayment.

• Financial preparation matters: clean financial statements, strong unit economics, and a clear capital plan signal credibility.

• Your cost of capital should guide funding decisions across short-term needs and long-term goals.

• Rho gives startups tools to track runway, model capital usage, and support investor conversations.

Raising capital is a fundamental step for startups seeking growth, stability, and competitive advantage. Access to external funds can mean the difference between mere survival and meaningful growth. It allows you to build your team, reach new markets, improve infrastructure, and navigate periods of uncertainty. Without it, even promising startups risk stagnation or collapse.

For entrepreneurs and business owners, the capital raising process is all about having the resources and flexibility to execute your business plan at the right time. Whether you’re building a high-growth technology startup or scaling an early-stage consumer brand, understanding the fundamentals of how to raise money and the types of capital available can dictate your success.

This guide covers when and how to raise capital, what options exist, how to model trade-offs, and how platforms like Rho can help you present a strong case to potential investors.

How to know when it's time to raise capital

Knowing when to raise capital is just as important as knowing how. The decision should be grounded in your startup’s growth stage, performance metrics, and upcoming goals.

Raising capital involves a strategic exchange (either equity or debt) to fund specific growth objectives. Many early-stage companies start with bootstrapping or friends and family, but eventually require more formal fundraising through angel investors or financial institutions.

Signs it might be time to raise

Not all startups require external funding immediately, but many do when scaling operations, hiring talent, or extending runway becomes necessary. Clear signs you may be ready include:

• Having strong customer demand.

• Achieving product-market fit.

• If you're consistently missing opportunities due to limited resources, that’s a strong case for raising capital.

Your cash runway is one of the most critical signals.

• If you’re operating with fewer than 12 months of runway and need to hit key milestones to unlock the next stage of growth, it may be time to raise.

• Likewise, if customer demand is increasing but you lack the team, infrastructure, or capital to meet that demand, the delay may cost you competitive advantage or market share.

Other leading indicators include:

• Struggle in product development.

• Missed revenue targets due to resourcing gaps.

• A mapped-out growth opportunity that requires up-front investment, like geographic expansion or a new product launch.

A balance sheet that lacks liquidity to support expansion is a clear signal to start evaluating types of capital that align with both short-term cash flow needs and long-term goals.

Timing matters in fundraising

Timing also plays a role. In bull markets, investor competition for strong deals can lead to favorable terms. But in tighter markets, traction and discipline matter more. Raising when you’re strong, not desperate, puts you in a better negotiating position.

For instance, cybersecurity startup Wiz raised a significant $300 million Series D round in 2023, bringing their valuation to $10 billion. Wiz recognized a perfect moment to capitalize on their product-market fit and booming demand for cloud security, opening the door to rapid global expansion. 

Rather than waiting until the runway was tight, they struck while momentum and investor interest were high.

Define your funding objective

As you consider whether it's the right moment for your startup, clearly define your funding objectives: survival, steady growth, or rapid acceleration, as this clarity shapes your investor story compellingly.

This process is also important when preparing to speak with venture capitalists or institutional investors who expect clarity on your use of proceeds.

Six funding types and their trade-offs

With the need to raise capital established, the next step is understanding your options and their implications. Different types of funding come with varying expectations, control structures, and costs.

Capital markets offer a wide range of options for private companies, from traditional equity financing to debt instruments like business loans or private placements.

Bootstrapping

Bootstrapping involves funding your startup independently through revenue or personal capital. This method retains full ownership and control but can restrict the speed and scale of growth, especially in competitive or capital-intensive markets.

Many startups bootstrap during early development, reinvesting profits back into operations until they're ready for outside investment. This path can build discipline and efficient operations, but it also limits the resources available for hiring, R&D, and marketing.

Friends and family

Turning to friends and family for early funding can offer quick access to capital but brings emotional and legal complexities. You may hear some founders giving up 5–15% equity in these initial stages—but there is no consistent market range here. 

Many founders now use SAFEs (Simple Agreements for Future Equity) or convertible notes to formalize these rounds. These tools delay setting a valuation and help reduce ambiguity around ownership until a later priced round.

Regardless of structure, it’s important to treat these relationships professionally:

• Use proper documentation

• Clarify terms upfront

• Prepare a pitch just as you would for institutional investors

Informal handling can lead to confusion or strain later. In some cases, investors from this circle stay involved as informal advisors, supporting your growth long before venture capital enters the picture.

Grants

Grants from governmental, academic, or corporate entities offer valuable funding without equity dilution. However, securing these grants typically involves detailed application processes and stringent compliance requirements.

For mission-driven or research-intensive startups, grants can be a critical lifeline. Agencies like the National Science Foundation (NSF) or National Institutes of Health (NIH) regularly fund biotech, cleantech, and deep tech companies that require long R&D timelines.

The trade-off is time since:

• Grant cycles can be long and unpredictable.

• Grant cycles don’t always align with startup urgency.

Still, non-dilutive funding represents a powerful supplement for founders aiming to lessen dilution and stretch their equity stake further.

Debt financing

Debt financing includes bank loans, venture debt, and non-dilutive financing from specialized lenders. It preserves your equity but imposes financial obligations through repayments and interest, impacting cash flow and operational flexibility.

• Venture debt offered by lenders who specialize in startups can be a smart tool when paired with equity, giving you working capital without additional dilution.

• But lenders will expect to see financial controls and predictable revenue.

• Poor planning or high-interest debt can cripple a business if cash flow falls short.

Understanding interest rates and repayment structures is very important here, as they affect both your short-term burn and long-term valuation.

Angel investors

Angel investors provide capital, mentorship, and networking opportunities. Their investments are typically less structured than venture capital but still result in equity dilution and investor influence.

• Angels are often former founders or executives who bring experience to the table and are willing to take early-stage risks.

• A strong angel investor can open doors to partnerships and future funding rounds.

• But they’ll also expect regular updates and influence over company direction.

Venture capital

Venture capital firms invest substantial sums in exchange for equity, suitable for scalable startups. They provide structured support, mentorship, and industry connections but demand aggressive growth targets and oversight.

VC funding is best suited to startups with large addressable markets, defensible IP or product differentiation, and the potential for outsized returns.

The diligence process is rigorous, and you’ll be expected to commit to a growth-at-all-costs path that may or may not align with your values.

In many cases, working with venture capitalists also means preparing for future rounds and possibly an initial public offering (IPO) down the line.

Private equity

Private equity is primarily suited for later-stage startups aiming for rapid expansion, profitability, or buyouts. This funding usually comes with significant strategic or operational control.

• PE investors often bring in experienced operators to drive performance, implement systems, and prepare the company for a liquidity event.

• While rare for early-stage companies, PE becomes an option as growth stabilizes and the focus shifts toward optimization and scale.

In corporate finance, knowing the difference between types of capital and how each affects your equity stake is as important as raising the funds themselves.

Planning your capital raise through funding rounds

Once you’ve selected a funding path, the next step is to map your journey through the typical startup fundraising lifecycle. Each funding round signals a different growth milestone, with specific investor expectations and strategic objectives.

Startups typically progress through several stages of funding, each with increasing levels of rigor, expectations, and capital requirements. 

A snapshot of typical funding stages and expectations

Round-by-round detail

1. Pre-seed and Seed

The earliest rounds focus on product validation, early prototypes, and assembling a core team. At this stage, investors are betting primarily on the founder, the market potential, and the vision—not on traction.

Funding often comes from friends and family, angel investors, or pre-seed funds. Capital is typically used to build an MVP, run initial experiments, and generate early customer feedback.

Pre-seed and seed rounds are also where instruments like SAFEs and convertible notes are most common, since they allow founders to raise without setting a valuation too early.

2. Series A

Series A represents a significant milestone. Startups at this stage are expected to demonstrate market fit, early revenue traction, and a go-to-market strategy that’s ready to scale. Investors will want to see data user growth, retention, and signs of scalable operations. This round is often used to expand sales and marketing efforts and to build out infrastructure to support growth.

3. Series B and Series C

Series B and C rounds are about scaling efficiently. Investors expect to see systems in place, strong financial controls, and a clear path to profitability or significant market capture.You’ll need to show that your unit economics work, your acquisition channels are sustainable, and your customer base is expanding with minimal churn.

4. Series D and later

Later rounds (Series D, E, and beyond) tend to be about optimizing operations, entering new markets, or preparing for IPO or acquisition. These rounds may attract strategic investors or PE firms, depending on whether the company is expanding, extending runway, or preparing for an exit. The capital raised here is usually deployed toward large-scale expansion, international growth, or M&A.

Flexible fundraising instruments

Between or in place of traditional rounds, some startups opt for flexible instruments like SAFE notes, convertible debt, or revenue-based financing. 

These vehicles allow founders to raise capital quickly without setting a valuation immediately, making them especially useful during times of volatility or when rapid action is needed.

Here’s a quick recap of what these concepts mean:

• SAFE notes give investors the right to equity in a future round, often with a discount or valuation cap, but without debt or repayment terms.

• Convertible debt starts as a loan and converts to equity later—usually at the next priced round—combining short-term funding with delayed dilution.

• Revenue-based financing offers capital in exchange for a percentage of future revenue, with no equity involved, making it a useful option for startups with early revenue but limited access to equity markets.

These tools can help bridge funding gaps without locking in terms too early—and are often faster to execute than traditional priced rounds.

Fundraising is more than the next round

Planning ahead for each stage (not just the next round) allows founders to align their hiring, product development, and go-to-market strategies with the milestones investors expect to see.

A well-planned fundraising roadmap shows that you understand the capital game not just tactically, but strategically. And that confidence can be the difference between a warm intro and a signed term sheet.

Understand your cost of capital and ownership trade-offs

Not all capital is created equal. Once you know how much funding you need, you’ll want to assess the long-term implications of how you raise it. Every funding option comes with a cost, either direct (interest payments) or indirect (equity dilution).

The cost of capital represents the effective price your startup pays to access external funds. With equity financing, the cost is tied to ownership dilution and a potential loss of control.

Giving up 20% of your company today may seem acceptable. But as small businesses grow and eventually go public, that ownership stake can represent millions of dollars in future value. Equity funding helps unlock growth, but it also means sharing in the upside.

Debt financing preserves ownership, which can be attractive for small businesses focused on long-term control. But it comes with repayment terms, interest costs, and potential cash flow pressure—especially if revenue is unpredictable.

Equity vs. debt: A simplified cost trade-off

Let’s say you’re offered $1 million at a $5 million valuation. You’d be giving up 20% equity.If, instead, you borrow $1 million at 10% interest annually, you retain full ownership but must pay back $100,000 each year regardless of your revenue.

If your company’s valuation skyrockets, that debt may look cheap in hindsight. But if revenue lags, the repayment burden can stifle growth or even put your startup at risk.

Why the cost of capital should guide your strategy

That’s why understanding your cost of capital is critical. It’s about how the terms of that money shape your business’s trajectory.

Founders should model multiple capital scenarios:

• You should evaluate what happens to your runway with debt.

• You should understand how much equity you will lose with a priced round.

• You should assess whether you can afford to delay fundraising and bootstrap for another quarter.

Your funding decision should also account for investor expectations and the flexibility each capital type affords. Equity investors may push for aggressive scaling, while lenders may impose covenants that limit strategic moves. The cost of capital is more than financial. It's strategic.

Rho helps you see the trade-offs clearly

Platforms like Rho can help founders model these trade-offs clearly, showing how different fundraising options impact runway, equity stakes, and future raises.

With scenario planning tools and real-time cash visibility, we give you the confidence to choose capital that aligns with both short-term needs and long-term vision.

How Rho supports your capital strategy

Strategic fundraising doesn’t end once capital is in the bank. It continues through how you allocate, track, and report on your use of funds, key areas where Rho delivers serious advantages.

Real-time capital visibility, built for founders

Rho provides founders with a real-time financial operating system built to support investor readiness and capital discipline.You can monitor runway dynamically, track spending against funding milestones, and produce reports tailored to investor needs, all from a single platform.

This level of transparency builds trust with current and prospective investors, especially as you move through successive funding rounds.If you’ve told investors that you’ll spend $500,000 to scale a sales team and hit $1 million ARR, we help you prove you’re actually doing it.

Spend tracking and reporting that builds trust

Spending can be categorized by department or initiative, allowing you to see where capital is deployed and whether it aligns with your growth plan.

• Clean records, automated bookkeeping, and policy controls can dramatically improve diligence outcomes.

• When investors request a snapshot of your burn rate, gross margins, or customer acquisition cost (CAC), it’s already prepared.

By supporting better decision-making and stronger investor communication, our platform helps you protect your raise and turn it into real momentum.

Get investor ready: what founders should prepare when raising capital

Raising capital is just the beginning. What matters next is how you manage it.

When founders show up with clean financials, a clear capital plan, and a sharp story, they raise on their terms—not out of desperation.

Rho helps you get there. Track runway in real time. Map capital usage to investor milestones. Generate reports that build confidence, not questions.

Raising soon? Show you’re ready.Get started with Rho.

FAQs

What is the cost of capital for a startup?

The cost of capital refers to the actual expense incurred when raising funds, either through equity dilution or debt obligations. Understanding this concept helps founders make strategic financing choices.

When should a startup consider debt over equity?

Startups with stable cash flow aiming to retain ownership often opt for debt financing. It is particularly suited for addressing short-term needs or bridging financial gaps.

How much equity should founders give up in early rounds?

Typically, founders might give up between 10–20% equity during early funding rounds, though this depends heavily on specific circumstances, valuation, and the strategic benefits brought by investors.

What are rolling funds, and how do they differ from traditional rounds?

Rolling funds are designed for investors, not startups. They let venture capitalists or angels raise money from limited partners on a recurring basis, investing in startups over time.

Founders don’t raise capital through rolling funds directly—instead, they may receive investment from a rolling fund. If you’re raising for your startup, tools like SAFE notes, convertible debt, or priced equity rounds are more relevant.

What documents should be ready before fundraising?

Essential documents include a compelling pitch deck, a detailed business plan, clean financial statements, an accurate capitalization table, and a clear breakdown of capital usage.