What is 'Startup Capital'

Startup capital (also known as seed money) 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.

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 capitalists. If a startup takes out a bank loan, the business will be expected to make monthly payments to pay down the debt plus any interest and/or fees. If an investor funds the startup, he or she will negotiate to provide 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 attempts 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 can cover the initial startup capital and also pay higher returns through an exit.

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 expected to provide investors with a substantial return on investment. 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 stand to lose money on the deal.

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