0

I have been doing research on types of investing and funding for a startup, but I'm still pretty clueless, so please disregard this question if it's ridiculous. I also apologize if this is the wrong place for it.

It seems like most investments in startups eventually result in the company paying the investors a return out of its income. Wouldn't that mean the company needs to raise its prices to afford the return? If so, is there any version of startup investing where the return does not come from the company itself (like reselling shares that have grown in value or something)?

2

In general, the value of a company is determined by the "expectation of future dividends".

If someone sets up a company that sells $2 widgets, that cost $1 to make and they sell 1,000 of them per month, the company is receiving a revenue of $2,000 per month, with expenses of $1,000 per month.

The $1,000 that is left is profit, which could be given to shareholders (the owner(s) and investors) as a dividend, or reinvested (e.g. to buy tools and staff so they can make and sell another 1,000 widgets per month).

The investors can either keep their stake in the company or sell it to someone else. What someone is willing to pay is based on the potential future profits, and the likelihood that the company would succeed in making such a profit.

While investors may buy shares in a company to sell on further down the line, it all has to come back to whether the company will eventually make a profit. Early startup investors may find that the value grows much more initially when the company is risky, so want to get the capital back to invest in another high risk high growth venture, while other investors may prefer to invest in a company that has actually made profit and are less risky, but at the end of the day, it comes down to the question "will this company pay its investors a dividend in the future?"

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.