Capital-intensive projects require significant investment in cash or tangible assets, making them riskier. Tangible goods businesses require more capital than service companies, with oil drilling being an example. Economies of scale apply, with the initial investment being the most significant. The amount of capital required is an important factor to consider when starting a business.
Capital intensive refers to an undertaking or project that requires a large amount of capital to carry out. A capital-intensive project or business often comes with much more risk, as a larger investment in cash or tangible assets is required. Generally, many companies or projects that produce tangible goods require more capital than service companies; although certain ventures, even within these businesses, are more capital intensive than others.
An example of a particularly capital-intensive business is a business involving oil drilling. Huge amounts of money have to be spent to undergo this product. Rights to land or oil must be purchased and drills, rigs and other expensive equipment must be purchased. This requires a large expenditure of money.
Contrast this, for example, with an individual starting a business as a project management consultant or as a freelance writer. In this business, the individual providing the service needs little equipment and little start-up capital. He may, for example, need to buy a computer or business cards or create a website. This usually adds up to a few hundred dollars; nowhere near what it would cost a company to get involved in an oil drilling venture.
Often in a capital intensive business there are economies of scale. This means that the vast majority or most of the large capital investment is required simply to get the first unit of goods or to start the business. The actual cost of the project generally decreases the more a product or units are produced.
In the oil drilling example, the big investment is the initial purchase of land and drilling equipment. This large investment was made before the start of the first drilling. Once the oil is hit on the piece of land, it will cost very little additional money to continue extracting the oil; the same drilling rig and the same terrain are used for this. Thus, the more good produced by the initial capital investment, the lower the real cost of the investment.
Generally, a new business that consumes more capital is much riskier. As it can be difficult to know how much good original heavy investment will result in production, there is a chance that the large initial investment could be lost. So, when investing in a start-up business or starting your own, the amount of capital needed to get started is an important factor to consider.
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