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

Three sources of capital in new venture creation are:

1. Personal investment

When starting a new business, the first investor should be the individual itself, either with own cash or with collateral on the assets. This demonstrates to the investors and bankers that one has a long-term commitment to the project and risk-taking capability.

For example, using proceeds and savings from the last business can be used as the investment/capital in the current business.

2. Love money

This type of capital comes from relatives, parents, and friends. the money can be taken directly or b any other means. An important thing that must be considered in such capital is that there is limited availability of capital/ funds.

For example, any relative or family member can be equity in the business.

3. Government grants and subsidies

Government institutions provide financing such as grants and subsidies that helps in the business. Generally, most grants require one to match the fund required and available.

For example, a research grant may require one to find only 40% of the total cost and not all of it.

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