What is Capital Funding? Ways to Funding and Beyond

September 20, 20237 min read
What is Capital Funding? Ways to Funding and Beyond
Share on facebookShare on TwitterShare on Linkedin

Key Takeaways

  • There are two chief avenues a company can take to gain capital funding: raising capital through the issuance of stocks and through debt.
  • Capital funding is money a business gets from equity holders and lenders for day-to-day operations or long-term needs.
  • If a company’s return on invested capital is greater than the weighted average cost of capital, the company will usually proceed with its capital funding plan.

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.

What is Capital Funding? 

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.

How is Capital Different from Money?

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.

What is Capital Funding Used For?

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:

  • Company expansion. As companies grow, they usually must raise funds to acquire properties, land, machinery and more.
  • Mergers and acquisitions. Companies need to secure capital to fund a merger or buyout.
  • Entry into new markets. Companies generally must raise capital to breach whole new markets for their business.
  • Development of new products and services. The process of developing new products and services takes capital.
  • Working capital. This is capital that is used for a company’s everyday operations.

Routes to Raising Capital

There are two chief avenues a company can take to gain capital funding: raise capital through debt or issue stocks.

  1. Issuing stocks. Common stock can be issued through an initial public offering or by issuing additional shares into capital markets. In either case, investors who buy the shares usually get dividends or ultimately benefit from increased share values. Note that the issuance of more funds in public markets dilutes existing shareholders’ holdings, since it will reduce their proportional ownership as well as their voting influence.
  2. Issuing debt. Issuing corporate bonds to institutional and retail investors can also be used to acquire capital funding. Investors are compensated with coupon payments semi-annually until the bond matures. Further, bonds may be able to be bought at discount and the bond’s face value will be repaid upon maturity.

What are Types of Funding?

There are three fundamental types of capital funding, including equity, debt, and venture capital, each with their own benefits and drawbacks.

  1. Equity capital. The value of a company’s assets less its liabilities, this is working capital that a company gets from its owners and shareholders and need not be repaid. Types include private equity, public equity, and real estate equity. Freedom from debt is the primary advantage but note that a company founded exclusively on equity capital could face challenges when cash is scarce. 
  2. Debt capital. With debt capital, which is provided by lenders, the capital owner usually agrees to regular lender payments in exchange for employing the lender’s money. Also, the interest rate is predetermined. While debt capital may be easier to secure than equity financing, the loan must be repaid by a certain deadline. Note that capital structure is the specific blend of equity and debt that a business employs to finance its operations and growth.
  3. Venture capital. This form of financing goes to start-up or early-stage companies with high upside and equally high risk. The overarching goal is to profit from diversified holdings — In other words, if the company succeeds, shares will be sold at some future date. In addition to a consistent revenue stream, venture capitalists frequently have the technical expertise to improve business processes. Note, though, that VCs may seek some oversight of company aspects.

What is the Cost of Raising Capital?

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.

What are Examples of Raising Capital?

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. 

What is the Best Way to Raise Capital?

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.

How to Invest in Venture Capital

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.

Start Investing Today

Diversify your portfolio with private market investment offerings.

Alternative Investments and Diversification    

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.

Learn more about the ways Yieldstreet can help diversify and grow portfolios.

Summary

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.

We believe our 10 alternative asset classes, track record across 470+ investments, third party reviews, and history of innovation makes Yieldstreet “The leading platform for private market investing,” as compared to other private market investment platforms.

1 Past performance is no guarantee of future results. Any historical returns, expected returns, or probability projections may not reflect actual future performance. All securities involve risk and may result in significant losses.

3 "Annual interest," "Annualized Return" or "Target Returns" represents a projected annual target rate of interest or annualized target return, and not returns or interest actually obtained by fund investors. “Term" represents the estimated term of the investment; the term of the fund is generally at the discretion of the fund’s manager, and may exceed the estimated term by a significant amount of time. Unless otherwise specified on the fund's offering page, target interest or returns are based on an analysis performed by Yieldstreet of the potential inflows and outflows related to the transactions in which the strategy or fund has engaged and/or is anticipated to engage in over the estimated term of the fund. There is no guarantee that targeted interest or returns will be realized or achieved or that an investment will be successful. Actual performance may deviate from these expectations materially, including due to market or economic factors, portfolio management decisions, modelling error, or other reasons.

4 Reflects the annualized distribution rate that is calculated by taking the most recent quarterly distribution approved by the Fund's Board of Directors and dividing it by prior quarter-end NAV and annualizing it. The Fund’s distribution may exceed its earnings. Therefore, a portion of the Fund’s distribution may be a return of the money you originally invested and represent a return of capital to you for tax purposes.

5 Represents the sum of the interest accrued in the statement period plus the interest paid in the statement period.

6 The internal rate of return ("IRR") represents an average net realized IRR with respect to all matured investments, excluding our Short Term Notes program, weighted by the investment size of each individual investment, made by private investment vehicles managed by YieldStreet Management, LLC from July 1, 2015 through and including July 18th, 2022, after deduction of management fees and all other expenses charged to investments.

7 Investors should carefully consider the investment objectives, risks, charges and expenses of the Yieldstreet Alternative Income Fund before investing. The prospectus for the Yieldstreet Alternative Income Fund contains this and other information about the Fund and can be obtained by emailing [email protected] or by referring to www.yieldstreetalternativeincomefund.com. The prospectus should be read carefully before investing in the Fund. Investments in the Fund are not bank deposits (and thus not insured by the FDIC or by any other federal governmental agency) and are not guaranteed by Yieldstreet or any other party.

8 This tool is for informational purposes only. You should not construe any information provided here as investment advice or a recommendation, endorsement or solicitation to buy any securities offered on Yieldstreet. Yieldstreet is not a fiduciary by virtue of any person's use of or access to this tool. The information provided here is of a general nature and does not address the circumstances of any particular individual or entity. You alone assume the sole responsibility of evaluating the merits and risks associated with the use of this information before making any decisions based on such information.

9 Statistics as of the most recent month end.

300 Park Avenue 15th Floor, New York, NY 10022

844-943-5378

No communication by YieldStreet Inc. or any of its affiliates (collectively, “Yieldstreet™”), through this website or any other medium, should be construed or is intended to be a recommendation to purchase, sell or hold any security or otherwise to be investment, tax, financial, accounting, legal, regulatory or compliance advice, except for specific investment advice that may be provided by YieldStreet Management, LLC pursuant to a written advisory agreement between such entity and the recipient. Nothing on this website is intended as an offer to extend credit, an offer to purchase or sell securities or a solicitation of any securities transaction.

Any financial projections or returns shown on the website are estimated predictions of performance only, are hypothetical, are not based on actual investment results and are not guarantees of future results. Estimated projections do not represent or guarantee the actual results of any transaction, and no representation is made that any transaction will, or is likely to, achieve results or profits similar to those shown. In addition, other financial metrics and calculations shown on the website (including amounts of principal and interest repaid) have not been independently verified or audited and may differ from the actual financial metrics and calculations for any investment, which are contained in the investors’ portfolios. Any investment information contained herein has been secured from sources that Yieldstreet believes are reliable, but we make no representations or warranties as to the accuracy of such information and accept no liability therefore.

Private placement investments are NOT bank deposits (and thus NOT insured by the FDIC or by any other federal governmental agency), are NOT guaranteed by Yieldstreet or any other party, and MAY lose value. Neither the Securities and Exchange Commission nor any federal or state securities commission or regulatory authority has recommended or approved any investment or the accuracy or completeness of any of the information or materials provided by or through the website. Investors must be able to afford the loss of their entire investment.

Investments in private placements are speculative and involve a high degree of risk and those investors who cannot afford to lose their entire investment should not invest. Additionally, investors may receive illiquid and/or restricted securities that may be subject to holding period requirements and/or liquidity concerns. Investments in private placements are highly illiquid and those investors who cannot hold an investment for the long term (at least 5-7 years) should not invest.

Alternative investments should only be part of your overall investment portfolio. Further, the alternative investment portion of your portfolio should include a balanced portfolio of different alternative investments.

Articles or information from third-party media outside of this domain may discuss Yieldstreet or relate to information contained herein, but Yieldstreet does not approve and is not responsible for such content. Hyperlinks to third-party sites, or reproduction of third-party articles, do not constitute an approval or endorsement by Yieldstreet of the linked or reproduced content.

Investing in securities (the "Securities") listed on Yieldstreet™ pose risks, including but not limited to credit risk, interest rate risk, and the risk of losing some or all of the money you invest. Before investing you should: (1) conduct your own investigation and analysis; (2) carefully consider the investment and all related charges, expenses, uncertainties and risks, including all uncertainties and risks described in offering materials; and (3) consult with your own investment, tax, financial and legal advisors. Such Securities are only suitable for accredited investors who understand and are willing and able to accept the high risks associated with private investments.

Investing in private placements requires long-term commitments, the ability to afford to lose the entire investment, and low liquidity needs. This website provides preliminary and general information about the Securities and is intended for initial reference purposes only. It does not summarize or compile all the applicable information. This website does not constitute an offer to sell or buy any securities. No offer or sale of any Securities will occur without the delivery of confidential offering materials and related documents. This information contained herein is qualified by and subject to more detailed information in the applicable offering materials. Yieldstreet™ is not registered as a broker-dealer. Yieldstreet™ does not make any representation or warranty to any prospective investor regarding the legality of an investment in any Yieldstreet Securities.

YieldStreet Inc. is the direct owner of Yieldstreet Management, LLC, which is an SEC-registered investment adviser that manages the Yieldstreet funds and provides investment advice to the Yieldstreet funds, and in certain cases, to retail investors. RealCadre LLC is also indirectly owned by Yieldstreet Inc. RealCadre LLC is a broker-dealer registered with the Securities and Exchange Commission (“SEC”) and a member of the Financial Industry Regulatory Authority (“FINRA”) and the Securities Investor Protection Corporation (“SIPC”). Information on all FINRA registered broker-dealers can be found on FINRA’s BrokerCheck. Despite its affiliation with Yieldstreet Management, LLC, RealCadre LLC has no role in the investment advisory services received by YieldStreet clients or the management or distribution of the Yieldstreet funds or other securities offered on our through Yieldstreet and its personnel. RealCadre LLC does not solicit, sell, recommend, or place interests in the Yieldstreet funds.

Yieldstreet is not a bank. Certain services are offered through Plaid, Orum.io and Footprint and none of such entities is affiliated with Yieldstreet. By using the services offered by any of these entities you acknowledge and accept their respective disclosures and agreements, as applicable.

Investment advisory services are only provided to clients of YieldStreet Management, LLC, an investment advisor registered with the Securities and Exchange Commission, pursuant to a written advisory agreement.

Our site uses a third party service to match browser cookies to your mailing address. We then use another company to send special offers through the mail on our behalf. Our company never receives or stores any of this information and our third parties do not provide or sell this information to any other company or service.

Read full disclosure