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Sweat Equity: Leveraging Human Capital In Business
Sweat Equity: Leveraging Human Capital In Business
Download Audio: Sweat Equity: Leveraging Human Capital In Business
A lot of people with great business ideas do not get their business off the ground, due to the lack of capital or funding. In some cases, this lack can be crippling, but if the owner of the business is creative and practical enough, they can leverage human capital and build sweat equity.
Capital is an essential component of every successful business. Capital in business refers to the total financial assets required to produce goods or services. These funds can be used to initiate and run operations, meet daily expenses, or grow and expand the business.
It is important to make the distinction between capital and equity. Equity represents the value that would be returned to a company’s shareholders, if all of the assets were liquidated, and all of the company’s debts were paid off. Equity can also be thought of as a degree of residual ownership in a company, or asset after subtracting all debts associated with it.
Put in other words, equity represents the total amount of money a business owner or shareholder would receive, if they liquidated all business assets and paid off the company’s debt. Whilst capital refers only to a company’s financial assets that are available for expenditure.
The Importance of Capital In A Startup Business
If a business is young, and is in the developmental phase, it is called a startup. In every case, the objective is to develop products or services, which will result in positive returns as the business grows.
Capital is needed in order to fund the operations of the business. Business operations attract expenses, which have to be covered, in order for the business to continue making enough money, to stay afloat for the foreseeable future. Without capital, a business will not be able to run its daily operations, such as purchasing inventory or raw materials, or in order to be able to pay its employees.
In the process of developing products and services, and successfully bringing them to market, a business must find a source of funds. The funding might come from one or more people, who pool their resources as capital for the business. When people put money into a business as capital, they in turn get equity in the business, which is a claim on the business.
The first task in building a business is to raise funds for seed or startup capital. There are several ways this can be done.
Types and Sources of Funding
Banks are a common source of capital for many businesses. This is the traditional approach. It has the downside that the bank would require the funds to be repaid by a certain date, with interest. The problem with this, is that a business may require a longer time to become profitable, than the period stipulated by the bank.
An alternative to bank loans are professional investors that provide venture capital, from a single investor or a group of investors. The investors provide funding for a startup, in exchange for shares within the company. The entrepreneur and the investors then agree on a number of scenarios, from which the investor will benefit, such as an IPO (Initial Public Offering) or a buyout by a larger company.
It should be noted that Angel investors are venture capitalists, with a hands-on approach as advisers to the business. These are often themselves successful entrepreneurs, who use some of their profits to get involved in building companies, and serving as mentors to its management team.
Funding business ventures comes with big risks, and the people or groups offering funding have to weigh these risks against the potential upside.This is why investors often require a solid business plan before they give their money to the entrepreneur. A great distinction between banks and venture capitalists is, they do not expect to be repaid until and unless the company becomes profitable.
In recent times crowdfunding through websites like Indiegogo and Kickstarter have become prominent sources of funding for businesses of all sizes. With this practice, a project or venture is funded by raising money from a large number of people, typically via the internet, and is a form of crowdsourcing and alternative finance. Typically crowdfunding offers reward based incentives to investors.
Also note that the term startup capital is often erroneously used interchangeably with seed capital. Although seemingly the same, startup capital usually comes from professional investors whilst seed capital, on the other hand, is often provided by close, personal contacts of a founder or founders, such as friends, family members, and other acquaintances.
Understanding Sweat Equity
Having looked at the available types and sources of funding for building a business, some of these may not be available to you as an entrepreneur, for various reasons, depending on your circumstances.
When it comes to venture capital, I do not know where to find options accessible to me either. I often hear Americans saying there is too much venture capital money floating around, with investors lining up for entrepreneurs to take their money. Maybe this is an American thing- I have no idea, really, and as such venture capital, is simply not an option for me.
I have however been privileged to have a family that pitches in with some seed funding and I put in a bit of seed funding myself, to get business going and keep it running and literally build a runway on the way down from jumping off a cliff.
Webmobyle is not a capital intensive operation. The bulk of our expenses goes into paying for services we use to run the business, as well as marketing. So our startup capital requirements are not substantial. But the most significant thing that initially kept us alive is sweat equity.
Investopedia defines sweat equity as follows: “The term sweat equity refers to a person or company’s contribution toward a business venture or other project. Sweat equity is generally not monetary and, in most cases, comes in the form of physical labor, mental effort, and time. Sweat equity is commonly found in real estate and the construction industry, as well as in the corporate world- especially for startups.”.
Leveraging Human Capital and Building Sweat Equity
If you cannot find the funding you need to supercharge your entrepreneurial aspirations, then make use of sweat equity. The sweat equity concept is based on building value for your business from scratch, using human capital, through sheer will and effort.
If you have strong enough will and dedication, you can pull this off. By working on the business, you are building it up in the process, and increasing its value. Sweat equity is no different from monetary equity, when you look at it from a value perspective.
You might even extend this opportunity to your employees, by asking them to help build the business, where you offer them lower pay than is typical for their class, but grant them part ownership in the business.
This will encourage them to have a true sense of ownership in the business, and give it their all. Even if employees are paid a standard rate or beyond, sweat equity can also be built up through giving them the incentive, by granting them part ownership regardless.
In building a business with sweat equity, I have discovered a priceless advantage, in that you gain valuable knowledge and expertise. When you are doing most things yourself, instead of paying someone else to do it, you gain knowledge about the business that you would not possess otherwise, and this helps develop a workflow and culture that is distinct for your business. And that is pure gold. Wouldn’t you agree?
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