What is 'Startup Capital'

Startup capital refers to the money that is required to start a new business, whether for office space, permits, licenses, inventory, product development and manufacturing, marketing or any other expense.

Startup capital is also referred to as "seed money."

BREAKING DOWN 'Startup Capital'

The money can come from a bank, in the form of a business loan; or from an investor, group of investors, or venture capitalist(s). In the case of a bank loan, the business will be expected to make monthly payments to pay down the debt plus any interest and/or fees. In the case of an investor, he or she will negotiate to provide that startup capital in exchange for a certain stake in the company.

Startup capital from backers such as angel investors and venture capitalists may be done in a series of rounds, beginning with the initial funding to launch the business. As the startup continues to try to grow and develop its product or service, it might not generate enough revenue to sustain its operations or staff. This may lead to subsequent rounds of funding. These rounds may include several investors, typically with at least one lead backer who puts forth the greatest share of funding for that round. While this does dilute control of the company between the founders and the investors, it provides greater liquidity for the startup to push its ideas closer to being market-ready.

How Startup Capital Can Lead to Greater Returns

It is not uncommon for startups to require more than one funding round as they develop. Expenses for research, procurement of necessary hardware, and professional talent all require funds that may not be available to the company on its own initially. Backers of startups typically invest based on the hopes that these companies will develop into lucrative operations that not only will be able to cover the initially funding provided as startup capital, but also pay them higher returns. While the high attrition rate of startups means the majority of these endeavors fail and the startup capital they received will be lost, the few companies that endure and grow to scale may go public or even sell the operation to a larger company. Such exit scenarios are hoped to provide investors with a substantial return on investment, however that is not always the case. Some exit scenarios may see the startup company valued below the level of the funding it raised, which means the investors who injected the company with startup capital will not see a positive return.

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