First stage capital is the money given to an entrepreneurial effort for the purpose of developing a product, method, or process at the startup stage, before income can be generated from sales. Those who provide this capital may include angel investors or venture capitalists. Family members and friends are common sources of first stage capital. This type of investment is usually viewed as high risk, but also as potentially offering a sizable rate of return if the venture succeeds. Some startup ventures may reap bonanzas for investors, yet it is common for a large percentage of first stage ventures to fail, thus negating any return for those who provided the first stage capital.
New entrepreneurial endeavors often require a significant span of time before enough income is generated from sales to compensate workers, or pay capital costs for the budding enterprise. The time required to reach the break-even point, where income generated equals or exceeds the level of expenditures required to continue the effort, frequently spans several years. As a result, some method of raising first stage capital is usually required for any commercial venture.
Family members and close associates are a typical source of first stage capital. Both family and close friends may be more willing to invest in a new venture because of the expectations of support and the trust generally established in these relationships. An extensive knowledge of the entrepreneur’s character is also a common factor in the decision to provide startup capital. Entrepreneurs who have previously demonstrated a trustworthy character to family members or associates may find more willingness on the part of those people to pledge support to the effort. Willingness to venture some money in the hope that a large yield will occur should the venture succeed is almost always a factor in an investor’s decision.
The amount of first stage capital required depends upon several factors. One consideration is the length of time estimated to bring the product or process to the market, or to a point in development where other funding may be available. Two examples of other funding include selling stock, or securing commercial loans.
If first stage capital is insufficient to bridge the monetary requirements of the startup period, the effort may come to a halt. In that case, those who provided the capital will likely lose their investments. Venture capitalists will typically expect a successful startup to yield a sufficiently high return so as to compensate for those ventures that fail. Typically, the chance of failure far exceeds the odds of a successful venture.
Many first stage endeavors fail to reach profitability. For investors, there usually comes a deciding moment when the investor cuts his or her losses, pulling out of the venture. Sometimes new investors can be successfully recruited to continue developing the enterprise. At other times, the venture ends, with original investors taking a loss.