Reserved-for-investors-parking-lot-signThe backing that equity holders or lenders furnish a business is called capital funding. Capital funding itself usually comes from bonds and stocks. The business receiving the backing uses the capital funds as operating capital; usually the holders of the bond and equity receive benefits over time, such as interest and stock appreciation.

Venture Capitalists and Capital Funding

Venture capitalists who fund promising upstarts are one incarnation of a company providing capital funding. There are entire corporations whose sole priority is to provide capital funding to particular industries or provide a certain kind of capital funding, such as short-term loans. The commonality across various industries receiving capital funding is this – capital funding is money earmarked as operating capital or funds intended for the purchase of a fixed asset.

Where Do Capital Funds Come From?

Ironically, the most ubiquitous form of capital funding comes from the business owner’s own pockets in the form of home equity loans, credit card advances and loans from relatives. Borrowing against your home or trawling into your 410(k) are attracting options vis-a-vis startup capital but these routes come with risks, according to Entrepreneur Magazine. The biggest risk, obviously, is personal bankruptcy and dashed business aspirations.

sharp-dressed man with empty pockets

Attracting Investment on Your Terms

The best strategy is to generate excitement and opportunity early on so outside investors will have the confidence to pool capital funds into your venture. The end goal of attracting venture capitalists to a promising startup is typically for the investor to become a part-owner of the startup via equity. The equity agreement will stipulate what the venture capitalist views as the startup’s current value and its projected future value; this negotiation stage underlines the importance of generating interest and competency, as well as a presentable business plan, early on in development.

Factors that Affect Capital Funding

Aside from the current and projected future cost of the startup, venture capitalists are weighing the timeframe in which the future value can be created and the odds of achieving that value on schedule. In effect the venture capitalist owns that percentage of the startup that the equity represents, but the capital funds truly become operating capital for the startup. Business owners should be aware, however, that discounted cash flow and market multiples may impact negotiations, equity and eventual capital funding and operating capital.

Alternative Sources of Startup Funding

Although capital funding from relatives is one of the most prominent methods for accruing startup money, government grants and crowdfunding are other avenues that startups often take. The phenomenon of crowdfunding was effectively the brainchild of the Jumpstart Our Business Startups Act of 2012. This act allows small businesses to fundraise up to one million dollars online; registration is straightforward and contributions can be virtually anonymous. Kickstarter is an increasingly popular crowdfunding website created in the wake of the JOBS Act. Another fundraising option is gofundme.com, which enables entrepreneurs to legally and cheaply locate de facto venture capitalists.

The Logistics of Capital Funding

Business owners should be aware that, depending on the scope of operations and types of equity involved, capital funding can occur in a lump sum or spread out over a longer timeframe. Sometimes future caches of funds are only available when certain contract conditions and business expansions are met in a timely manner. What attracts most investors to startups is future interest, stock appreciation and equity prospects. Good odds for a speedy return on investment work in the startups favor to the degree that the startup conveys a cogent business plan and timetable to the venture capitalist during negotiations for capital funding.

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