All Money is Not Created Equal.
In today’s funding and investment landscape, several models have become the “status quo” of the startup and entrepreneurial community
It can be challenging to determine which investment model is best for your startup and you as a Founder. There are several core models that are at the forefront of the investment community, so what are the differences between each and how are they deemed effective?
Private Equity firms invest money collected on behalf of its investors by acquiring stakes of companies, known as portfolio companies, and work with executives to temporarily take control, restructure, and resell companies for profit.
The approach of a private equity firm’s process to restructure a company can result in negative effects such as layoffs or degraded services for its customers, or in some cases weighing down a company’s value with debt resulting from the money borrowed to acquire the company.
Private equity funds are usually backed by large investors and manage the combined contributed and borrowed money. These firms take an extensive research-based approach before making an investment, determining key factors such as the industry, its competitors, the company’s cash flows, profitability, brand positioning, management team, and ability to overcome disruptive obstacles such as change in technology or regulations.
Incubators are effective institutions designed to assist startups with a more hands on approach, helping to solve technical and design issues while building product, teach them how to run a lean company and how to build a successful team. Additionally, incubators guide startups that don’t have experience operating in a venture-backed environment or companies that may be facing legal and operational challenges.
This 1–5-year program is less focused on gaining equity or offering capital to startups. Early-stage startups are targeted by incubators to provide all-around education, office space, partner opportunities and some tactical mentorship to help get them past the idea stage. Because the program could stretch to 5 years max, this gives startups the opportunity to address and solidify the problem their company is solving.
Accelerators are competitive institutions that focus on early startups that already have an MVP, operating through an investment or non-profit business model coupled with intense mentorship for founders.
This 3–6-month model is extremely competitive, with a very low acceptance rate, as there is limited capital, space, and mentorship time available to participants. Capital is offered in exchange for a percentage of equity in the companies that are participating in the program, which can become problematic when investors get involved and equity is diluted further.
The key benefits that are highlighted by accelerators include capital, rare networking opportunities, mentorship from industry veterans, who may also take part in investing in businesses later, and the opportunity to partner and collaborate with some of the most innovative startups.
Venture Capital (VC) is a type of financing in which investors provide capital to startups and small businesses with the potential for long-term growth. Venture Capitalists can provide cash but can also provide technical or managerial expertise to businesses, in addition to achieving a piece of equity from companies. This leads to high payoffs in return.
The stages of VC investment are Pre-Seed, Seed funding and Early-Stage funding. Pre-Seed funding is the earliest stage of funding in which founders begin to turn ideas into a business model. Seed funding occurs at the point in time in which a business is seeking to launch product, and do not yet have revenue streams, so it is dependent on capital to fund its operations. Finally, Early-Stage funding occurs when a business has developed a product and needs additional capital to assist with production and sales, leading to final funding rounds: Series A, Series B and so on.
VC benefits include delivering capital, mentoring services, and networking opportunities. On the other hand, a business that accepts VC support can lose creative control over its direction due to the equity that has been given up, or a company may be pressured to exit their investment later down the line.
A Venture Lab works to shape the mindset and skills of young entrepreneurs. Several programs span across the nation, and many live on college campuses to provide education and resources to students looking to pursue an idea or solve a problem.
Many colleges that invest in a Venture Lab are working campus-wide to accelerate startups, take their innovations to market, and transform its students into entrepreneurs and business growers. Thereafter, these Venture Labs can continue to support companies as they grow.
Venture Studios, being the newest approach to investment and startup building, are different from Accelerators, Venture Capital, and PE firms in which they take an active approach to supporting ideas in-house at the earliest phases, acting as true co-founders, in addition to capital. In some cases, resources and guidance is offered to early-stage companies in exchange for equity.
With less than 800 existing in the world, Venture Studios present a new opportunity for founders to achieve hyper-growth with the assistance and guidance of a core, cross functional team of industry veterans. Venture Studios are known for their high success rates due to its selective approach and ensure that the companies and ideas that they invest in have a true market need and potential to grow.
Overall, each of these incubation models fit the different needs of founders and startups as they tackle each stage of the business life cycle. There are several options to navigate funding, in addition to receiving guidance along the way from the industry experts themselves.
Although this model is new, Venture Studios have become a unique model with surprisingly high success rates that challenge the traditional approach to funding and startup building. Outliers such as economic uncertainty may lead to a need for founders to explore a new opportunity that accelerates business growth while establishing a strong foundational business model, making a Venture Studio a better choice for founders to explore.