CapEx for Startups?

There are circumstances in which startups need to make relevant capital expenditures early on.

Usually, such startups require considerable efforts of Research and Development (R&D) before the product is ready to be launched into the markets. Some examples are projects in biotech, pharmaceuticals or robotics.

One notorious and mysterious startup is Magic Leap. They have already raised over US$ 1.8 billion for an undisclosed project that is expected to revolutionize the Mixed Reality segment. Cannot wait to see!

Uses of Equity Proceeds for Different Growth Stages

I am an economist, so I enjoy generalizing and creating simple frameworks for the better understanding — please excuse me if the following hand-drawn info-graph is too much of a simplification. But, it should help gain perspective on the needs of proceeds according to each stage of a startup’s development.

Capital Expenditures (CapEx)

As a company becomes more mature, it will use equity to finance Capital Expenditures. E.g., the company will need to buy more machines, real estate, or other fixed assets.

Operating Expenditures (OpEx)

As the startup matures, it will stop using equity to finance it’s Operating Expenses, which should be funded with cash flow. E.g., salaries will start being paid with sales and not with the proceeds of equity investments.

Working Capital (WK)

Working capital is a particular matter. Depending on the business, it requires more extensive or smaller funding. In general, it should be funded with debt. However, as the startup grows and access to debt is still restricted, it may face the need to fund its growth with equity. Hence, the curve often increases in the middle.

Money is Fungible

The peculiarities of financing can seem daunting and often even experienced investors get caught discussing details.

What should equity, debt or cash-flow be used for? Should equity investment be deployed for Capex, Opex or Working Capital?

In fact, the beauty is there is no clear rule because money is fungible. Even more so, if you’re a startup that needs to grow fast to survive.

Derek L. Bittar is the co-founder and managing partner of IndicatorCapital. He writes and travels with the mission to help entrepreneurs thrive in emerging startup ecosystems.

Important Disclaimer
This story (or article) has been prepared for informational / entertainment purposes only, and is not intended to provide investment advice or any offer or sale of any investments. This story is the author’s opinion and is for information purposes only.