Capital funding can be used to fund investments and other efforts aimed at producing even more income over time. But what exactly is capital funding and how can one participate in venture capital? Here is that and more.
Capital funding is money a business gets from equity holders and lenders for day-to-day operations and long-term needs. The funding generally comes from stocks and bonds, the holders of which expect a return on their investment via dividends, interest, and stock appreciation.
Rather than plain money, capital funding consists of stocks (equity) as well as bonds (debt). It is true that, at its essence, capital is money. However, capital is used in relationship to current operations and future investments and typically comes with a cost.
Companies use capital for any of a number of reasons, with the ultimate goal of conversion of cash into more valuable assets and increased revenue. Such reasons usually include:
There are two chief avenues a company can take to gain capital funding: raise capital through debt or issue stocks.
There are three fundamental types of capital funding, including equity, debt, and venture capital, each with their own benefits and drawbacks.
A company’s cost of receiving capital through stocks, bonds, venture capital, bank loans, retained earnings, and the sale of assets is generally subject to robust analyses. For example, some companies will use what is called a weighted average cost of capital (WACC), which individually weights each cost of capital funding, to determine its average cost of capital.
If a company’s return on invested capital (ROIC) is greater than the WACC, the company will usually proceed with its capital funding plan. However, if the ROIC is lower, the company is better off reassessing its strategy to lower its WAAC.
Also, when a company borrows money, it must pay interest rates, which is the cost of loan production, as well as the amount of money borrowed.
Some companies exist exclusively to provide businesses with capital funding. They may specialize in a certain sector or specific company type and may also operate to provide short-term or long-term financing only. Such companies, including venture capitalists, may also opt to focus on funding businesses that are just getting started, or are at some other business stage.
There is an abundance of insights that point to venture capital as a viable option for startups or new companies, particularly those that are deemed risky and may not gain funding through other conventional means. Venture capitalists seek out projects and ideas that they believe will be successful and will lead to a favorable return on investment. The caveat, though, is that such companies must experience early growth.
The alternative investment platform Yieldstreet aims to generate steady secondary income through investments in private-market offerings such as art and real estate. Alternatives are increasingly popular among investors looking to decrease portfolio volatility, due to their low correlation with ever-changing public markets, and to shield against inflation.
Yieldstreet’s platform, which renders alternative investments more accessible, and on which $4 billion has been invested to date, also offers opportunities in venture capital. That program exposes retail investors to private organizations that are creating new sectors or disrupting existing ones. During the venture capital stage, companies usually undergo fast growth as commercialization is boosted and permits scale.
Investing in the private market also allows investors to diversify their holdings, which is crucial to long-term investing success. Building a portfolio of varying asset types can mitigate overall risks and even improve returns. Alternative investments is a good way to help accomplish this.
Alternative investments can be a good way to help accomplish this. Traditional portfolio asset allocation envisages a 60% public stock and 40% fixed income allocation. However, a more balanced 60/20/20 or 50/30/20 split, incorporating alternative assets, may make a portfolio less sensitive to public market short-term swings.
Real estate, private equity, venture capital, digital assets, precious metals and collectibles are among the asset classes deemed “alternative investments.” Broadly speaking, such investments tend to be less connected to public equity, and thus offer potential for diversification. Of course, like traditional investments, it is important to remember that alternatives also entail a degree of risk.
In some cases, this risk can be greater than that of traditional investments.
This is why these asset classes were traditionally accessible only to an exclusive base of wealthy individuals and institutional investors buying in at very high minimums — often between $500,000 and $1 million. These people were considered to be more capable of weathering losses of that magnitude, should the investments underperform.
However, Yieldstreet has opened a number of carefully curated alternative investment strategies to all investors. While the risk is still there, the company offers help in capitalizing on areas such as real estate, legal finance, art finance and structured notes — as well as a wide range of other unique alternative investments.
Moreover, investors can get started with a relatively small amount of capital. Yieldstreet has opportunities across a broad range of asset classes, offering a variety of yields and durations, with minimum investments as low as $10,000.
Businesses often seek capital funding from shareholders and lenders to grow or fund its operations. The two main ways a company can take to secure such funding are through debt and stock issuances.
Note that other types of funding include venture capital, which can also serve to diversify portfolios.
Yieldstreet provides access to alternative investments previously reserved only for institutions and the ultra-wealthy. Our mission is to help millions of people generate $3 billion of income outside the traditional public markets by 2025. We are committed to making financial products more inclusive by creating a modern investment portfolio.