The Sources of Investment Funds
Starting a successful business requires more than a good idea and the expertise to push it forward: Companies need cash to research, develop and launch new products and services. Although businesses often secure financing through loans, attracting funding from investors is a way to bring in a large amount of cash quickly without incurring interest expenses.
Investment of personal resources is the most common source of funding for startups. Some entrepreneurs rely entirely on their own wealth for funding. Putting your own cash into your business means you'll reap 100 percent of the reward from its activities, but it also means you take on 100 percent of the risk. Businesses that start with personal investments often end up turning to other sources of financing as they expand and financing requirements increase.
Friends and relatives are another common source of funding for small companies. Friends and family many be willing to invest in companies that can't get loans or attract capital from big investors. In addition, they are less likely than larger investors like angels and venture capitalists to try to place conditions on funding.
Angles are wealthy individuals who seek out investment opportunities that have the potential to provide returns that beat traditional investments like the stock market. According to "Forbes," angels typically invest sums of $25,000 to $250,000. They are usually affluent acquaintances, such as neighbors and business contacts. An angel investor may demand some input in business decisions in exchange for funding, but she can also provide critical advice, expertise and resources.
Venture capitalists are large investors who seek to purchase ownership in thriving businesses that are expected to grow rapidly in the near future. Venture capital can provide a large influx of investment funding, but VCs typically demand a say in management decisions. Because venture capital firms seek companies with rapid growth potential, businesses in the tech sector are especially attractive. Companies operating in traditional sectors -- such as brick and mortar retail stores and restaurants -- may have difficulty attracting venture capital.
Well-established companies that need a major shot of investment funding can sell stock to the public by becoming a public corporation through an initial public offering. In a public company, the shareholders collectively make decisions about how the company should operate. In practice, large shareholders, which typically include the founder and early investors, hold the real decision-making power.