Question

Describe, explain, and give an appropriate example of the three sources of capital in new venture creation. (source of capital-exp: personal, friends and relatives, venture capitalists and bank).

Answer 1

Following are some of the sources which can be used by the potential startup:

1. Crowdfunding: It is that method of raising capital that leverages highly from the social networking sites and therefore gives impetus to entrepreneurs to post their business and startup idea or pitch and the required investment and raise money from unknown people who invest as much and as little as they can. Example: Kiva and Accion are the leading sites that connect startups with people.

2. Private investors: Private investors or what are also referred to as angels are those wealthy individuals who often are acting as entrepreneurs, invest in new ventures in exchange for equity stakes or the representation in the share capital of the company. Angel investors have in the recent years become the primary source of start-up capital during their start-up or introductory stage all the way when the company reaches to the growth stage, and their role has been huge in financing the startups. Example Ratan Tata investing in startups like Snapdeal or UrbanClap.

3. Venture Capitalists: These are the companies or organisation that are private in nature having a profit motive. What they do is simple wherein they purchase equity positions in startups that they deem fit or believe carries the potential for high- growth. For example, Xirrus recently raised six rounds of venture capital funding amounting to $105.9 million. Venture capitalists who participated in the investment process include August Capital, Ca-naan Partners, InterWest, U.S. Venture Partners, and QuestMark Partners.