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What Is 'Capital'?

Capital is the purchase of an ownership stake in a business. If you have resources to allocate, you can provide capital to business owners to help them expand their business.

By taking on investors, business owners can gather enough funds to expand quickly.

By acquiring a certain percentage of the business, investors benefit from the business' activities without active involvement. Investors hope to receive a higher rate of return than other methods, like leaving the money in the bank.

Josh Kaufman Explains 'Capital'

Capital is the purchase of an ownership stake in a business. For parties that have resources to allocate, providing capital is a way to help owners of new or existing businesses expand or enter new markets.

Angel investing, venture capital, and purchasing stock in publicly traded companies are all examples of providing value via capital, which are part of the Hierarchy of Funding.

In order to provide value via Capital, you must:

1. Have a pool of resources available to invest.
2. Find a promising business in which you’d be willing to invest.
3. Estimate how much that business is currently worth, how much it may be worth in the future, and the probability that the business will go under, which would result in the loss of your capital.
4. Negotiate the amount of ownership you’d receive in exchange for the amount of capital you’re investing.

Businesses benefit from capital investment because it enables them to gather the resources necessary to expand or enter new industries. Some industries, like manufacturing and financial services, require huge amounts of funding to start or expand. By taking on investors, business owners can accumulate enough funds to move forward quickly.

Investors benefit by acquiring a certain percentage of that company’s ownership, which allows them to benefit from the business’s activities without active involvement. Instead of leaving their money in a bank account, investors can allocate it to companies that are involved in promising ventures, which may provide a higher rate of return.

If the business brings in a lot of cash, the investor may benefit from a regular dividend. If it’s acquired by another company or is listed on a public stock exchange, the investor may receive a percentage of the purchase price as a lump sum payment or sell their shares of the company on the open market for a profit.

Questions About 'Capital'

• Does delivering value via providing capital make sense for your business idea?
• If so, what do you need to plan for to make it successful?

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"Capital is that part of wealth which is devoted to obtaining further wealth."

Alfred Marshall, economist and author of Principles of Economics

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