Sources of Capital
Before we talk about what are the main sources of investments and how we can acquire them, it is worth reflecting so that we can understand that financial capital investment is a means and not an end.
Money is the currency of trade relations and the main means by which we acquire products, services or experiences. Therefore, the search for a source of investment is a two-way street. We seek capital to invest in something to generate a return, that is, capital will provide the development of some activity to generate some result.
But how can we know if the return generated by the acquired investment is good or bad? And does it pay to receive that capital investment? We suggest that the entrepreneur make a careful analysis of the points that we will address below, before looking for a source of capital investment.
THE MAIN SOURCES OF CAPITAL INVESTMENTS CAN BE DIVIDED INTO 4 GROUPS:
- Sources for the initial phase of business (idea), usually startups;
- Sources of equity ( Bootstrapping ) or subsidized (by third parties or by the company’s operation);
- Sources with corporate participation, usually funds or strategic;
- And the sources with onerous capital, which are normally loans and financing with banks.
MAIN INVESTMENT SOURCES FOR THE INITIAL PHASE OF A BUSINESS:
1. SEED CAPITAL
Seed capital is based on an idea at an early stage that plants a seed to allow the small business to grow. This is the first round of capital for a startup business. In this case, the entrepreneur must be committed and enthusiastic in the search for seed money, since it has little more to attract investors.
Because it is almost impossible to predict the success of the project, the only investors likely to invest in the new business are those who respect the entrepreneur’s judgment and skills, and these people are the ones who know the entrepreneur best.
Seed investors hope to participate in the entrepreneur’s success and achieve a healthy return, as their investment is valued over time. However, seed capital is a risky investment and most investors know this, or at least they should.
The accelerators recruit and select companies at an early stage and geared to growth. In addition to financial resources, they also offer education and mentoring.
MAIN SOURCES OF INVESTMENT WITH EQUITY (BOOTSTRAPPING) OR SUBSIDIZED (BY THIRD PARTIES OR BY THE COMPANY’S OPERATION)
3. EQUITY (BOOTSTRAPPING)
Bootstrapping comes from the English expression “tighten the buckle of the boots”. Equity consists of a set of actions and strategies to start a business without using onerous capital, that is, without external financial assistance.
Ex .: Personal finance, subsidies or even from the company’s own operating income.
4. FFF OR 3 F’S (FAMILY, FRIENDS, AND FOOLS)
When launching an idea, family, friends, and fools are the people to talk to first. Less than 1% of startups increase their risk capital so that the 3 F’s are important.
Trusting friends who are willing to invest in you and your family, and who feel compelled to invest in you is a great way to start. That’s why entrepreneurs spend a lot of time cultivating their social network, after all, you never know who might be a potential financier for your idea.
Many entrepreneurs approach their family, friends, and colleagues to earn money after exhausting their finances. Once these investors know the entrepreneur, they are more likely to take the risk of financing a new venture than traditional sources of finance, such as banks or venture capital firms.
5. SUBSIDIZED CAPITAL (SUBSIDY)
They are sources of funds that make capital available to the entrepreneur and that he does not commit to returning in the future, offering something in return to society. The entrepreneur is committed to carrying out the project and achieving previously agreed objectives.
Main capital sources with subsidy:
- Foundations of great specific causes;
- Sovereign wealth funds;
- Federal or state agencies;
6. STRATEGIC PARTNERSHIPS
Commercial actions with companies that relate to your business.
The first step in creating strategic partnerships is to identify complementary (who else can benefit from your product?) And propose a difference for both companies.
To identify potential companies for strategic partnerships, just design your business network, identify the target segments and seek partnerships.
MAIN SOURCES OF CAPITAL INVESTMENT WITH EQUITY INTEREST OR ONEROUS CAPITAL:
First, we will deal with investment capital sources with corporate participation, which are processes of negotiations between organizations or individuals (quota holders), aiming to transfer social shares from one company to another company or another individual.
For a better understanding, we can divide these investors into two large groups:
7. FINANCIAL INVESTOR
When the buyer has an interest focused on maximizing the return through the withdrawal of dividends and capital gain on the sale of the asset in the short and medium-term.
For financial investors, there is a dynamic that feeds the system and keeps it perennial.
THE MAIN ATTRACTIVE IN A BUSINESS FOR INVESTMENT CAPITALS:
- People: Entrepreneur and team (with purpose and energy);
- Solution with a consistent value proposition;
- Fill the gap in the market;
- Great and rapid growth potential;
- Innovative business model;
- Good financial results (recurring revenue, ROI, profit and cash);
- Reduce the risk (Ex .: there are no in-formalities/fragility to the regulation);
- Good and attractive exit alternatives.
WHAT INVESTMENT FUNDS CAN BENEFIT FOR THE INVESTED COMPANY:
- Financial resource;
- Business strategy;
- Contact network (Ex .: capturing new business with add-ons).
THE MAIN CAPITAL SOURCES AVAILABLE ON THE MARKET:
8. LOANS AND FINANCING
They are conventional sources of costly capital, where the company goes through an approval process to determine the value, conditions, and costs of capital. They are formed mainly by public and private commercial banks and development banks.
The important thing for using this type of capital is to have the conviction that the ROI of investing that capital in the operation will be greater than the cost of capital (interest).
9. PEER-TO-PEER LENDING (LENDING MONEY)
Also known as a social loan, P2P Lending is a financial modality made possible by technology, where it allows a group of individuals with capital (investors) to lend to individuals who need capital (borrowers), without the use of an official financial institution such as intermediate.
The Peer-to-Peer Lending concession removes the middleman from the process but involves more time, effort and risk than general conventional lending scenarios.