Raising capital is one of the most important jobs an entrepreneur must do to turn an idea into a company. Based on my experience investing and conducting interviews with over 500 CEOs and nearly 100 venture capitalists, raising capital can take years, or never even happen.

The most successful leaders raise capital quickly because they understand and can act on important ideas. First the entrepreneur must look at their startup through the eyes of their investors. Then once they hear from an investor, they must follow a five-step process.

1. Estimate the amount of capital you need.

The first step in raising capital is to estimate how much money the startup needs. The amount required will vary depending on the startup's industry, business model, and scaling stage. The estimate should be based on a detailed analysis of all the costs the startup will incur to achieve its objectives for that stage - and typically it makes sense to consider doubling that bottoms-up estimate to provide a cushion for unexpected outcomes

2. Identify potential sources of capital.

The sources of capital vary by scaling stage. If you've made money for venture capitalists before, they will probably invest at the earliest stages of your new venture. Otherwise you should rely on your own funds or money from friends and family.

  1. Winning the first customers. A first-time entrepreneur will need to approach friends and family, seek grants, angel investors or crowdfunding. Indeed, depending on the amount of time it takes to generate initial revenues from first customers, startups may end up seeking capital from seed stage, Series A and possibly Series B venture capital providers. 
  2. Getting your costs in line. At this stage, companies should make their operations efficient, so the company can grow quickly. To do this, startups seek funds from venture capital firms that are comfortable with later stage investing. 
  3. Growing to go public. If your startup has a scalable business model and a large untapped market opportunity, it will have an easier time raising capital from venture capitalists and institutional investors who envision a relatively risk-free path to high returns from an IPO within the next year or two.
  4. Getting big in public. Following a company's initial public offering, CEOs usually have a much easier time raising new capital -- either by selling stock, borrowing from banks, or selling bonds.

3. Understand investor decision criteria.

Investors decide whether to invest depending on specific factors that vary by stage, but knowing how they make their decisions can help you gear up for your next funding round.

Before your company has generated any revenue, investors will ask whether the startup is targeting a market that has the potential to get big quickly and whether its founder has the potential to be a great CEO. As a startup gains a handful of early customers, investors ask early customers how satisfied they are with the company and its product, how likely they are to buy more from the company, and whether they see the company's solution as broadly useful for many potential customers.

Once investors have seen the current success of your business they will seek signs that the company has a scalable business model, so it can grow quickly while its costs for marketing, selling, and servicing customers drop and the profit generated by each customer relationship grows -- because those customers buy more of the startup's product and keep buying over time.     

Next investors will provide funds based on the size of the market opportunity, the demonstrated ability of the company to scale efficiently -- as measured by a declining cost of customer acquisition, a high customer retention rate, the startup's ability to sell more to existing customers; and its previous record of setting and exceeding quarterly business objectives

Finally investors will buy the company's stock if it persistently exceeds revenue and earnings expectations while raising its forecast and investing successfully in future growth trajectories to sustain rapid revenue growth.

4. Develop and deliver an investor presentation.

CEOs generally communicate with potential investors using a structured presentation which should be refined until it efficiently communicates what investors need to know.

5. Negotiate and finalize deal structure and valuation.

The founder and pre-IPO investors will tussle over specific deal terms including the structure of the investment; the valuation of the company prior to the investment; liquidation preferences which specify how the proceeds of a sale of the company will be divided, and how many board seats the investor will receive.

If you can master these five steps for raising startup capital, and view them from an investor point of view, you will be well on your way to turning your idea into a large company.