The Essentials of Startup Capital

January 2, 20246 min read
The Essentials of Startup Capital
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  • Startup capital is the money a new company raises to meet its initial costs.
  • As the business develops and is commercialized, startup capital is frequently repeatedly sought in different funding rounds. 
  • Seed capital generally differs from startup capital in terms of investment amount, timing, and growth stage. 

There are a number of ways to fund startups and raise capital, and selecting among them can be confusing and overwhelming. After all, going with the wrong approach can waste time and potentially money. To help, here is startup capital: definition, types, and how to get capital.

What is Startup Capital?

Startup capital is the money a new company raises to meet initial costs. “Startups” are new companies that are just in the development stage. 

These companies are founded by at least one individual who seeks development of a product or service to market.

Usually a relatively large sum, the funds are commonly provided by venture capitalists, angel investors, or lending institutions.

The funds are generally used to cover a company’s initial costs, all or in part. Such costs can include licenses and permits, inventory, product development, or office space. Funding also can go toward research, marketing, manufacturing, or any operational costs.

Note that one way to begin saving startup capital involves identifying unnecessary expenses and lowering them as much as possible.

How Does Startup Capital Work?

One of the first things a startup must do is raise money. How startup capital works can vary, depending on the potential source chosen. Unless they are self-funding the company, the entrepreneur must have a strong business plan or product prototype.

Note that as the business develops and is commercialized, startup capital is frequently repeatedly sought in different funding rounds. 

  • Self-funding. Also called bootstrapping, self-funding means leveraging one’s financial resources to support their company. The capital can come from one’s 401(k), savings, or even family or friends.
  • Investors. Most startup capital is provided to new companies by venture capitalists or angel investors, or both. In exchange for their investment, they usually gain an equity stake in the company.
  • Loans. These are generally business loans or startup business loans. Note that the borrower must still qualify for such loans.

What is one way to begin saving startup capital? Identify one’s target market and potential customers to focus marketing efforts.

What are the Types of Startup Capital?

There are a number of startup capital types, including:

  • Seed investors. Funding used to form a startup is provided by private investors. It is typically in exchange for a share in a product’s profits or an equity stake in the nascent company.
  •  Accelerator/Incubator. Generally, startup accelerators take between 5-10% of equity in exchange for training and a relatively small funding sum. Incubators often provide access to prospective investors to help them raise additional capital.
  • Family and friends. In exchange for company equity, founders often first turn to family and friends for their first capital. 
  • Venture capital. Venture capital investing is a form of private equity used as a type of financing. It is provided to startups and small businesses.

How Does Startup Capital Differ from Seed Capital?

Seed capital is basically the initial amount of funding that is used to begin a business. It is used in the formation of a startup. 

Seed capital generally differs from startup capital in terms of investment amount, timing, and growth stage. Seed capital typically comes from the founder’s own assets. Since the company is still in the conceptual stage, the seed sum is relatively small. It is often used to cover initial operational expenses and research and development.

By contrast, startup capital is provided by investors to companies with long-term growth prospects and requires a business plan.

What are the Advantages of Startup Capital?

Among the key benefits of startup capital are:

  • Mentorship from investors. In addition to providing capital, investors can offer startups mentorship. Such mentorship can offer guidance, support, experience, and networking capabilities.
  • Cash flow. As a key indicator of a company’s viability and health, cash flow is critical to a startup. Without sufficient cash reserves, a company could be unable to meet fundamentals obligations such as taxes or payroll.

What are the Disadvantages of Startup Capital?

There are also drawbacks to startup capital as well, namely:

  • Limited Control. Founders who engage in equity financing relinquish a share of the company. That usually includes some change in voting, board, financial, and ownership control.
  • Due diligence. Venture capital and angel investors conduct due diligence before deciding whether to put capital in a startup. Thus, the practice of due diligence is crucial to a startup ability to raise funds. Sometimes, a company is ill prepared or simply lacks muster.

How to Find Investors

Potential investors abound, but entrepreneurs must know how to find them. Suggestions include:

  • Network with venture capital and angel investment groups.
  • Use social media to attract interest.
  • Attend general networking events.
  • Compete in pitch competitions and startup events.
  • Engage with an accelerator or incubator.
  • Engage with area startup ecosystems.

How to Look for Accelerators

By joining an accelerator, an entrepreneur can significantly accelerate their company’s growth. There are so many options, though, it can be challenging to find the optimal accelerator. Here are some steps:

  • Identify objectives and needs.
  • Research varying accelerators that focus on one’s niche or industry.
  • Gauge the accelerator’s network and mentorship program.
  • Evaluate the accelerator’s program structure and duration.
  • Consider the accelerator’s location and whether it is physical or virtual.
  • Consider the accelerator’s investment terms.
  • Speak with current participants and alumni.

How to Invest in Venture Capital 

There are various ways to invest in venture capital, including through Yieldstreet, the leading alternative investment platform. Yieldstreet seeks to generate secondary income streams through easy, accessible investments.

Its offerings include a venture capital program that exposes retail investors to private entities. Such companies are either shaking up existing sectors or creating new ones altogether. It is during this stage that companies usually have fast growth as they ramp up commercialization and allow for scale.

Note that investing in private markets also enables investors to achieve diversification. Portfolios that contain a mix of asset types and expected performances can mitigate overall risk and even improve returns. In fact, diversification is a fundamental pillar of long-term investing success.

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Alternative Investments and Portfolio 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 $10000.

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

Summary 

When time and needed capital are on the line, the proper form of startup capital should be sought the first time. Note that there are potential drawbacks to gaining capital — primarily limited control. Remember, too, that investing in venture capital can offer high returns as well as diversification.

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.

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