Startup capital simplified; It’s the money you raise in order to start your business and get it to the point where your businesses generate enough cash to be self-funding. Startup capital may be provided by venture capitalists, angel investors, banks, or other financial institutions and is often a large sum of money that covers any or all of the company's major initial costs such as inventory, licenses, office space, and product development.
Another alternative name for startup capital may also be startup funding. Lack of capital and funding for startups is one of the major reasons that inhibits people from trying out and taking the risk of starting a business. It's the fear of running out of cash.
Check out the list of some of the most successful startups in Malaysia here!
Young and budding companies that are just in the development phase are called startups. These companies are founded by one or more people who generally want to develop a product or service and bring it to market. Raising money is one of the first things that a startup needs to do. This financing is what most people refer to as startup capital.
You do not always require funding to begin a startup, the opposite of funding is known as ‘bootstrapping’, that is the process of funding a startup through your own savings. Every time you get funding, you give up a piece of your company. The more funding you get, the more company you give up. That ‘piece of company’ is ‘equity.’ Everyone you give it to becomes a co-owner of your company.
Let’s take a hypothetical scenario to give you an insight into the process that starts from an idea and carries on to the funding stage. Given here is the example of a startup that will get about $15,000 from family and friends, about $200,000 from an angel investor three months later, and about $2 Million from a VC another six months later. If all goes well.
First is the ‘idea stage‘. Out of the many ideas you have had, you finally decide on one. The moment you started working, you started creating value. That value will translate into equity later, but since you own 100% of it now, and you are the only person in your still unregistered company, you are not even thinking about equity yet.
The next stage includes developing a physical prototype of the idea that you are planning. You know you could really use another person’s skills. So you start to look for a co-founder. But you can’t pay them any money (and if you could, they would become an employee, not a co-founder), so you offer equity in exchange for work (sweat equity.) But how much equity should you give? At this point, your startup is worth very less and you also realize that they will do half of the work, they should get the same as you – 50%.
Next stage requires you to understand the fact that your startup won’t go any further unless you have startup capital or funding. So who can you take money from?
Raising start-up capital is an important part of developing your own business as an entrepreneur. Once you are committed to the idea of your company you will need funding to get started. It entirely depends on your starting financial position. In order to rent space, buy equipment, develop new products and market or sell your service, you’ll need some form of capital. Startup capital gives you a way to launch your business and provide for those costs until you start bringing in revenue.
As an entrepreneur, it may be difficult to find the level of financing you need as a startup but there are several options. New businesses most often meet resistance because of the risk involved in their funding. The ability for you to obtain financing is based on your diligence and creativity. Funding comes in many different forms both private and public. Many of the renowned businesses we see today, started with little funding of there own and eventually seek out to potential investors for private or public funding to grow further in the scale of operations.
According to Forbes, there are three important reasons why a new business should seek for startup capital from external sources:
As of lately, there are various ways a startup can raise funding and capital for further growth. These methods either include using your own savings, taking a loan from friends and family if the amount is small or looking out for successful angel investors and venture capitalist if the amount required is more than what friends and family can help into. These sources are discussed in detail below with their benefits and drawbacks.
Employing the tactics in this guide can greatly increase the chance of survival of your startup. Bootstrapping among other funding sources outlined in this guide is the best way to kick off your business campaign.
However, to truly stay competitive in the market, you must always interchange your funding sources. This provides you with some level of flexibility and over-dependence on one source of funding.
Surveys show that a lack of capital is one of the most common reasons why small businesses fail, in fact, the second. On the other hand, Apple, Google and Amazon all started as small startups and grew to business giants thanks to funding, they managed to raise enough startup capital from the correct sources at the correct time. The proof is in some of the testimonials mentioned below.
Pixar heard ”no” 45 times before Apple invested in this company, which today is the owner of the 12 animated films listed among the 50 highest-grossing animated films of all time.
Apple Inc. itself has a startup capital raising success story. Founded by Steve Jobs, Steve Wozniak, and Ronald Wayne on April 1, 1976, to develop and sell personal computers. Wayne sold his share of the company to Jobs and Wozniak for $800 in 1977. The company received initial funding of $250,000 from Mike Markkula, a multimillionaire investor. In the first 5 years, the company saw an average growth rate of 700% with revenues getting doubled every four months. Apple is the first U.S. company that is valued at over $700 billion.
eBay, originally called AuctionWeb was founded by a French-born Iranian American computer programmer Pierre Omidyar in his living room in September 1995. It was meant to be a marketplace for the sale of goods and services for individuals. One of the very first items sold on it was a broken laser printer for $14.83. eBay was simply a side hobby for Omidyar until he was asked to upgrade his account by his ISP due to the high volume of traffic it received. In 1997, the company received $6.7 million in startup capital from the venture capital firm Benchmark Capital. The company went public in 1998. Currently, the company is projecting revenues of around $16.05 billion.
Raising startup capital is an important part of developing your own business as an entrepreneur. Once you are committed to the idea of your company you will need funding to get started. As an entrepreneur, it may be difficult to find the level of financing you need as a startup but there are several options. There are several options available in today’s business world to be able to fund your startup and take it further. All it takes is a strong business idea, commitment and a leap of faith by the entrepreneur!
As a summary, the video below provides summaries of everything you need to know about the process of startup capital.