When a business is starting, unless you are among those endowed with financial riches, then startup capital would not be a problem for you. There are banks or angel investors that would invest on your business. Ever wondered how banks and venture capital firms benefit from startup capital and how it exactly works? Let’s try to answer that.
When starting a business, an entrepreneur is faced with different issues. There is need for business space, furniture and equipment, supplies, and other things necessary for starting a business. Aside from the equipments and material things that an entrepreneur would need, there is also a need to hire people and pay them.
There are different kinds of capital investments and startup capital is just one of them. They are the seed capital, startup capital, mezzanine capital and bridge capital. Seed capital is used for research and planning, startup capital for the procurement of necessary materials needed for the start of the operation, mezzanine would be for expansion of the business and finally, bridge capital to resolve financing problems when starting the next level of financing.
If you would enumerate all the things where you startup capital would go, then it would cover basic expenses for the entire first year. The money would normally go to employees paycheck, logistics or utilites, rent for the business space, maintenance, insurance, marketing and promotion, and finally taxes.
Startup capital has two types, the debt and the equity capital. The debt capital refers to a loan which is required to be paid over a specific period of time with interest and other fees. Normally, this is what you acquire from bank loans. Equity capital on the other hand, would be about funding a business and in turn allow the funding organization to earn part of the business which is how venture capital firms operate.
Most entrepreneurs make a mistake when they borrow funds that would suit their needs during the best conditions of their business. Unfortunately, entrepreneurs fail to forsee the worse scenarios and prepare for them. This is why there are some business ventures that close down because of lack of funds. So, when applying for startup capital or funding, it is important to foresee these situations to be prepared for it.
Startup capital can come from venture capitals (VC) firms. There are also angel investors which are different from VC firms because they do not operate as a firm. Angel investors can give bigger funds but the transactions are more private and more informal compared with firms. These firms would help businesses get the startup money that they need, but it would entail hard work and patience. VCs would normally offer nothing less than $250,000.
How would angel investors and VC firms earn from this system? The business which received the startup capital would give the VC firm or the angel investor stocks giving them ability to control the direction of the company. In this case, VCs do not only get back their earnings, they get more than their money’s worth.
The business may buy the stocks owned by the VCs. Sometimes it would about three to seven years before businesses would be able buy the VC stocks. On the other hand, going for this kind of startup capital option also has some downside. If ever you would like to sell your business, there are tendencies when the VCs would block the sale. Especially if they are not going to get about 10 to 30 times their investment.
Startup capital from different organizations could totally help us boost our business venture. Understanding its process would certainly help us understand entrepreneurship as a whole and improve our businesses.