Capital is a broad term used to describe a startup's net worth or total assets. To be more specific, "capital" refers to any money used to produce the startup's product or services. As a result, cash that is just sitting around and not being put to productive use for the startup cannot be considered capital. At the end of the day, capital is critical to the success of any startup.
Capital is generally classified into three types for budgeting purposes: working capital, equity capital, and debt capital. Working capital denotes a startup's current liquidity. It is calculated by subtracting the startup's current liabilities from the startup's current assets. Equity capital is the measure of money that was collected from investors in exchange for stocks. Debt capital refers to the assets or funds collected by borrowing from various lenders (the best example of this would be conventional bank loans).
While this broad definition can be applied to businesses of all sizes and scales, capital in the context of startups may be defined differently.
Startup capital is the money that a new company raises in order to get off the ground. It is a measure of the funds that startups raise to cover their initial expenses. Fundraising is widely regarded as one of the most important tasks that early-stage founders must undertake, and the funds raised in this manner are referred to as capital.
Capital is frequently associated with large sums of money in the context of startups. This, combined with the fact that early-stage startups are inherently risky investments, means that the individuals and institutions who will invest in your startup must be convinced that your business plan makes sense.
As a result, founders seeking this capital are generally able to do so after developing a solid business model (or strategic roadmap) that allows them to persuade investors to believe in their vision. Their chances of success in fundraising are also increased by developing a compelling MVP (minimum viable product) or even a basic prototype that represents the startup's concept.
But who exactly invests in startups?
Startup capital is provided by financial institutions such as:
This capital investment is critical in covering the startup's initial expenses, which include real estate, administrative paperwork, operational costs, recruiting the founding team, obtaining permission, marketing research, testing, building the product, and/or marketing and selling it.It allows the startup to bear such costs before becoming profitable and to cover some costs on its own.
While there are numerous factors and alternatives to consider, many founders choose venture capital funding because VCs must be repaid if – and only if – the startup makes a profit.
Typically, multiple rounds of funding are required before an early-stage startup is considered to be established. These successive rounds of funding correspond to the startup's growth as the product/service is delivered to an increasing number of customers. Investors typically receive equity in the startup in exchange for their capital. The final round of funding could be an IPO. During an IPO, the founders raise funds sufficient to provide monetary awards to its investors as well as spend on further developing the startup.
Startup capital is classified into several categories based on your current financial situation or the source(s) of your capital.
Based on the startup's current financial situation, its capital could be classified as follows:
There are a few ways that founders can raise capital to start -- and run -- their ventures. The following is a brief overview of some of these options:
Self-funding or bootstrapping your startup could be an effective way to fund its launch. The capital in a bootstrapped startup is the money that you, the founder, have saved over time. When it comes to securing early investors, startup founders are generally well aware of the uphill battle and dangers. It becomes even more difficult if the product or service you are offering is a new concept in an emerging sector or an early-stage, unproven technology.
Self-funding may not be able to bring in as much money as an angel investor, but it will help lay the groundwork for momentum. This type of funding will help you get off to a good start and establish yourself as a serious startup, which will help you attract more critical and larger investments in the future.
Bootstrapping is best suited for small projects and ventures due to the (generally) limited amount of money that founders can put in on their own.
Crowdfunding is a relatively new method of raising capital for startups, but it has piqued the interest of many entrepreneurs. Startups use this method to raise capital by reaching out to people (usually online) and asking them to contribute. Crowdfunding contributors are promised early access to the products and services that the founders intend to develop in exchange for their contributions.
Just like when applying for a bank loan, you must make an honest pitch to the people about what your startup is all about when crowdfunding. However, unlike a bank loan, you do not need to go into detail about your business model. The consumers themselves are your target investors in crowdfunding. You are primarily asking your prospective customers to fund the product that they wish to use. This allows you to build a following even before your startup takes off.
Crowdfunding takes time because it is dependent on how much demand there is for your products or services. Social media development in recent years has paved the way for applications such as Kickstarter and GoFundMe, where founders can post about their startups and capital goals. It is a fun way to raise capital as well as gain customer validation while engaging potential customers early on.
Angel investors are individuals who have excess cash set aside for investment and are looking to diversify their portfolios by investing in promising startups. Though many of them work alone, there are groups and networks of angel investors who work together to invest in startups and growing businesses. AbstractOps' Syndicate is an example of this.
Many startups have been launched and become extremely successful thanks to the assistance of angel investors. Companies like Google, Yahoo, and Alibaba owe their success to the early angel investors who believed in them. Angels are generally well-versed in the field of business (particularly in the field of startups); therefore, you must make a genuine, thoughtful, and strong pitch to them in order to gain their investment. Many angels will not be put off by a startup that has not yet nailed product-market fit and will proceed with the investment if they see future business potential (and, by extension, PMF). The terms you agree on with your investor may vary, but typically, angels prefer to invest between 20 and 50 percent of their capital. They are known to prefer taking large risks if the returns are expected to be relatively higher.
Although angels may make what appear to be large investments, they frequently fall short when compared to other options such as venture capitalists.
Venture capitalists are professional investors whose sole purpose is to fund startups and invest in existing companies with great future potential. They are known to maintain their investment in a startup against equity until the company goes public or is acquired.
Most venture capitalist groups are made up of veteran business leaders with many years of experience. Many venture capitalists have prior experience in fields such as investment banking and management consulting. As a result, in addition to capital, they provide expertise and mentorship to founders, which is a much-needed resource in today's expanding startup market. VCs also assist in evaluating a startup's future and determining a profitable path for them.
Venture capitalists are a good fit for startups that have progressed past the early stages (including pre-seed and even seed) and have generated some revenue prior to the involvement of venture capital fundings. Companies like Uber, which already have an exit strategy in place, will most likely be able to secure funding in the millions of dollars.
Venture capitalists prefer to be "hands-on" with their support, which can be a little claustrophobic for founders at times. Given the size of their investment, it's no surprise that they like to keep a close eye on their money and anticipate returns in the next 3-to-5 years. They prefer to invest in "stable" startups with a few years of experience and that have figured out product-market fit, as opposed to angels, for whom the lack of PMF is not a deal breaker. In general, VCs will expect some level of control and flexibility in your management of the startup and its operations.
Source: www.abstractops.com