Every startup at a certain stage of its development faces the need to expand, and for this purpose it needs investments. And when the founders reach this point in the development of their business, they face the question: “Where to look for investments?” After all, for many companies, money is not the most important thing, they also need mentoring, partnership agreements and other aspects crucial for development. Today we will talk about those venture market players who can give a startup the necessary development boost at the early stages.
When you are ready to develop your business but do not know how to overcome the obstacles to its formation, a business incubator can come to your aid.
A business incubator is a specialized organization that provides support to aspiring entrepreneurs and contributes to the development of your business. The main goal of the incubator is to help the business to get on its feet. We can say that the functions of a business incubator are reduced to the provision of services – this is assistance in the creation and promotion of new companies.
Therefore, when applying to a business incubator, you need to be interested in the conditions under which your startup will be “nurtured”. The terms of cooperation may involve the transfer of a share in the business (in favor of a business incubator, investor), and sometimes we are talking about patent rights (entirely or partially) if a startup involves the development of a new technology. In any case, a private investor will not offer their help for free.
Accelerator is an intensive educational program for startups. It helps to improve the product and bring the business to a qualitatively new level. The concept describes both the institution and the educational program itself. The classic accelerator works with a startup for 3-4 months: it provides training, mentors support, helps get useful contacts (in particular, potential investors) and in some cases gives money for development. The accelerator always has a program with clear goals and deadlines. You can’t come to the accelerator and say, “I’ll sit here for a year, look around, read books, attend workshops and then I’ll think.” In the accelerator, a startup is always set specific goals, which are given specific time to accomplish.
Classic equity accelerators, as a rule, invest in selected companies at the beginning or during the program in exchange for a share (usually 3-10%). There are much more projects in the accelerator portfolio than a venture fund or a venture studio, so you should not expect large investments from accelerators.
A venture studio is a hybrid structure that primarily tests new products and launches new businesses, united in studios according to industry or technological principles. Here project decisions are made on the basis of synthetic skills. Thanks to the internal expertise of the team and cross-financing of partners, such a format of the company can significantly reduce the costs of hypothesis testing and product development, filling the gap in the venture financial market in seed investments and rounds.
If accelerators focus on mentoring external teams, small investments in exchange for a share and providing infrastructure, then studios create products, teams and eventually companies — one by one, ideally. The main difference from traditional funds is that they do not just invest capital. They are actively involved in all processes, from design to strategic management.
If the company’s goal is rapid growth and increasing its value, then a venture fund is the best choice for it.
A venture fund is an investment fund focused on working with innovative enterprises and projects. The amount of funding that funds can provide is much higher than from other sources. Neither the accelerator nor the business angel is able to provide the project with such an amount of funding that the venture fund is ready to give.
Funds invest in projects with money and experience, counting on their “x” in the future. And what if at the moment the fund cannot fully invest the round of the project? Here a wide network of contacts, which these players have, comes to the rescue. Thanks to their partners, the funds are able to find co-investors for the round, simultaneously doing the project a service from the point of view of marketing and PR. The main difficulty of working with funds is related to the lengthy integration procedure and the selection standards of the fund itself, which may not cover all projects. It is also worth noting that not every fund provides the expertise that a startup needs for development, but expects to return the invested funds with a certain level of profitability.
In addition to classic funds, there is a great number of large companies ready to invest in technology projects. In fact, a venture fund whose only limited partner is a large corporation and investments are made in the interests of this company, is called a corporate one (CVC).
Investments from corporate venture funds are often aimed at the subsequent purchase of a startup and the integration of a technological solution into the structure of the corporation. For companies that are aimed at the subsequent sale of their business, the model of attracting investment from corporations is most suitable, however, this path is far from the easiest, because large companies are very sensitive to changing their traditional business processes and introducing new technological solutions.
The venture market is developing from year to year, more and more investors are entering this niche, so that young companies have ample opportunities for development. Therefore, understanding the ecosystem of the venture market for a startup will be necessary to avoid unprofitable deals or prolonged “towing” on the spot.
