Early stage capital is funding given to a business before sales revenue can be generated. It is considered high risk but offers a considerable rate of return if successful. Family and friends are common sources of first-stage capital. The amount required depends on factors such as estimated time to bring the product to market. Many early stage efforts fall short of profitability, and investors may cut their losses and walk away.
Early stage capital is money given to a business effort for the purpose of developing a product, method, or process at the startup stage, before sales revenue can be generated. Those providing this capital may include angel investors or venture capitalists. Family and friends are common sources of first-stage capital. This type of investment is generally considered high risk, but it also offers a considerable rate of return if the venture is successful. Some start-ups can reap bonanzas for investors, however it is common for a large percentage of early stage companies to fail, thus negating any return for those who provided the early stage capital.
New business ventures often require a significant period of time before enough revenue is generated from sales to compensate workers or pay capital costs for the fledgling business. The time required to break even, where the income generated equals or exceeds the level of spending required to continue the effort, often spans several years. As a result, some method of first stage capital raising is generally required for any business venture.
Family members and close associates are a typical source of first-stage capital. Both family and close friends may be more willing to invest in a new venture due to the expectations of support and trust generally established in these relationships. Extensive knowledge of the entrepreneur’s character is also a common factor in the decision to provide start-up capital. Entrepreneurs who have previously demonstrated trustworthiness to family members or associates may find such individuals more willing to support the endeavor. The willingness to risk some money in the hope of a great return should the venture succeed is almost always a factor in an investor’s decision.
The amount of first stage capital required depends on several factors. One consideration is the estimated amount of time to bring the product or process to market, or to a point in development where other funding may be available. Two examples of other funds include selling stock or obtaining business loans.
If the first stage capital is insufficient to meet the start-up period monetary requirements, the effort may be halted. In that case, those who provided the capital will likely lose their investments. Venture capitalists will generally expect a successful startup to produce a high enough return to compensate for companies that fail. Usually, the chance of failure far outweighs the chances of a successful venture.
Many early stage efforts fall short of profitability. For investors, there usually comes a turning point when the investor cuts his losses and walks out of the company. Sometimes new investors can be successfully recruited to further develop the company. At other times, the venture ends, with the original investors suffering a loss.
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