Often, a single investor does not provide the full amount of investment money needed for the start-up.
Start-up capital is money that is invested in a project or business that is in the process of being launched or is in the early stages of active operation. Sometimes referred to as seed capital, seed capital is used to cover all expenses associated with the project until it has begun to generate income. Once the business or project becomes self-sustaining, investors typically get back the principal and an agreed amount of interest, an arrangement that allows everyone involved to benefit from the business.
Start-up financing is a common approach to starting a new business. Often, a single investor does not provide the full amount of investment money needed for the start-up. Instead, the seed capital is generated by the participation of a series of individuals or other entities that contribute small portions of the total capital required. This approach helps minimize risk for each investor and gives the company more time to get established and start generating income.
Initial principal repayment may involve a simple arrangement in which the borrower pays the lender over time, including a certain amount of interest along with the principal. In other situations, the new company may offer shares to investors once the business has reached the point where it is possible to issue shares. Depending on the deal structure governing the receipt of seed capital, investors may have the option to be partially compensated by cash payments and receiving a limited number of shares.
As with many types of investment, seed funding carries some risk. In the event that the new company does not reach a stage where it generates income and eventually becomes profitable, investors in the project may lose some or even all of their initial capital. For this reason, it is important for investors to look carefully at various aspects of the proposed transaction. This includes the way the business is organized, the level of efficiency associated with the overall operation, and the viability of the business plan that serves as a blueprint for the business.
At the same time, investors must take a close look at the goods or services being offered to consumers and determine whether demand is sufficient to generate a steady stream of income once the business is established. Investors may also want to take a close look at the markets where the company will seek customers and determine whether the company has a reasonable chance of competing with companies that are already established and meeting consumer demands. If investors feel that the overall chances of success are not sufficient to warrant the degree of risk they must take, they should refrain from providing seed capital and seek a more promising investment.