Startup capital is the amount of money that a business, which is just starting out, needs in order to become operational and to also become profitable. The money is usually provided by a third party or institution like a bank or financing company and in return for providing this startup capital, the third party usually requires some form of payment called a return on investment.
How Startup Capital Works
When seeking initial capital investment, the first step is researching the potential market for your product or service. This is generally encapsulated in a business plan that includes a SWOT analysis, your approach to how to start a small business, a marketing plan, business start-up costs, and financial projections. Additionally, you'll need a pitch deck to present to potential investors.
The financials help you understand how much money you need from potential capital investment, how long it will last, and what kinds of returns you can expect on their initial capital investment. Additionally, it forecasts how long it will take before you reach profitability.
Once you have your plan in place, you'll seek out investors that specialize in your niche. The size of investment that you need determines what type of startup capital investment to search for.
The funder will perform due diligence on you, your idea, and the market potential for your product or service. This helps them determine how much to invest and what they'll expect in return. It is wise to hire a lawyer to review the agreement to ensure that you receive fair terms before signing contracts.
What is Startup Capital Used For?
Startup investment money is usually very specific about what it will be spent on:
| Rent | Utility deposits |
| Inventory | Equipment |
| Advertising | Employee wages |
The initial capital investment needs to be adequate enough to carry your business until its revenues are self-sustaining.
Where To Find Startup Capital
- Crowdfunding: Raising small amounts of money from a large group of people. Crowdfunding can provide startup capital through investors or loans. Some crowdfunding platforms allow you to pre-sell your product or service to secure the funding you need to bring it to market without borrowing costs or giving up equity.
- Angel investors: Angel investors focus on startups that require smaller amounts of money. They tend to be industry veterans who retired from their careers and now use their capital and expertise to help entrepreneurs launch their businesses.
- Startup Venture Capital: For companies with larger potential, startup venture capital investors are willing to take on substantial risk for the opportunity of a larger payday in the future. These investors usually seek an exit through a sale or IPO within three to five years to repay their investors and then they move on to the next idea.
- Business Loan: Banks and other lenders provide the cash you need in exchange for monthly payments of principal and interest. Startup business loans typically require a documented source of repayment and a personal guarantee. The maximum loan amount that you qualify for may be less than the full amount that you need.
- Family and friends: Many entrepreneurs reach out to family and friends to fund their initial capital investment since these people know and trust them.
- Personal Savings and Assets: Sometimes referred to as Bootstrapping. Business owners often launch their businesses in stages based on personal savings, home equity, credit cards, and other debt instruments. As revenues grow or other sources of money become available, the business expands when and where it can. This process may be slower, but it preserves your ownership and minimizes debt payments.
How to Raise Startup Capital
Resources
- https://masschallenge.org/articles/startup-capital
- https://www.sba.gov/business-guide/plan-your-business/fund-your-business
- https://www.americanexpress.com/en-us/business/blueprint/resource-center/start/6-ways-to-start-a-business-with-no-money/
- https://hbr.org/1989/11/everything-you-dont-want-to-know-about-raising-capital