Investors into a new venture will want to know that there is an acceptable risk/reward threshold for their capital. Therefore, it is important that the entrepreneur alleviate investor anxiety about the riskiness of the venture. There are several ways of an entrepreneur can portray the investment so that it is perceived to have less risk to the investor’s capital: an entrepreneur can stake his/her own capital in the venture to show the investor that he has a “horse in the race” as well, he/she may promise to pay back the money invested at an earlier stage in business growth rather than a later stage where the business’ financial status is less certain, or he/she may give investors some form of control in the company through specified terms, loan covenants, or participation in management.
There are many entrepreneurs, however, who receive no outside funding for their start-up businesses. “Bootstrapping,” as it’s called, is when an entrepreneur uses his/her own savings, credit, personal loans, or equity available from a home or car mortgage. This is ideal if the entrepreneur has enough capital to start the business, as they retain 100% of ownership and control.
Unfortunately, not all entrepreneurs can fund their new venture without outside help. When starting a new venture, it can be problematic to be burdened with too many liabilities that must be repaid, instead of reinvesting the funds back into the business to stimulate growth. For this reason, equity financing may be a more prudent path.
There is a sector of specialized firms that will provide “seed capital” for a new venture, when the entrepreneur does not have enough capital to begin the new venture on their own. This capital is meant to get an idea off the...