Incubators vs Funds from Private Investor

You’re part of a fast-paced “Garage Days” startup operation ready to pounce the street, deciding whether seed funds should come from a private investor or incubator.

Which is better for a company in its infancy sitting on something amazing?

I was asked this recently and the question caught me by surprise (partly because I was about to order a post-volleyball session workout smoothie.).

Okay, so incubator or private investor. Let’s start with incubators. Here’s a rough definition from Entrepreneur.com’s Business Encyclopedia:

“An organization designed to accelerate the growth and success of entrepreneurial companies through an array of business support resources and services that could include physical space, capital, coaching, common services, and networking connections.”

These programs are awesome, as are accelerators once you’re a bit further progressed. I’ve not only been a part of a couple exciting tech incubators, but helped found a startup school for entrepreneurs in Manilla.

Here are the pros and cons wrapped in bullet-point nutshells:

Pros of Startup Incubators

  • PR & Networks: It’s common for most new entrepreneurs to be sort of lost in their own worlds, lacking a well-connected network, proper marketing budget, or the ability to drum up attention. Rather than being solo, an incubator makes you a part of a larger platform.
  • Perceived Value: Alone, it can be tough to get taken seriously by early investors. As part of an incubator program, you’re able to overcome a certain degree. Incubators are themselves spotlights.
  • Hand-Holding: Maybe you’re just a brilliant engineer, not necessarily a business savant. Incubators hold your hand a bit, get you in the trenches and help build necessary skill-sets to grow, outsource, etc.

Cons of Startup Incubators

  • Application: Incubators tend to be rather competitive, taking only a small portion of their mountains of applicants. You’ll need a detailed business plan, solid valuations/estimations, and clear operational strategy. Screening committees need to watch out for their investments!
  • Accountability: In your garage or in your own rented commercial space, you and your team rule. In an incubator, that’s not the case. You’ll have some folks over your shoulders, helping keep you accountable and meeting goals consistently.
  • Commitment: As Accion puts it quite well, “Many incubators require a time commitment of around one to two years, plus adherence to the schedule set by the incubator, which can include many trainings and workshops. Yes, you will learn a lot, but you’ll also spend a fair amount of time doing it.”

The other issue is complexity.

Maybe you and your partners already have trouble juggling life, family and your new venture. An incubator has the potential to compound your logistical load by a substantial amount. Your plate’s about to get much fuller…

All kinds of stuff will suddenly be on your schedule. This could be a great thing, or, well a real downer. It depends on you and your team, where you are, and what kind of inspiration (resources) you need.

Now let’s chat about this from a private investor perspective.

Private Investor Funds

“Sure, this sounds great, have your lawyer get in touch with my lawyer and we’ll get it figured out.”

It’s true, astounding deals and opportunities can happen with private investors, or commonly called Angel Investors, that just aren’t possible as part of some larger initiative.

I can swoop in, get the gist and make huge impacts without all the muss and fuss over a beer or two (or smoothie). Also, as an individual, I can probably tolerate more risk than a group of investors (only one captain running my ship). However, and this is absolutely true, as StartupGrind notes we also set the bar higher,

“The disadvantage of the [private] angel investor’s higher tolerance for risk is that they usually have higher expectations. They’re in business to earn money, and as there’s a significant quantity of funds on the line, are going to want to witness a payoff just like anyone else.”

What are some of the other common “cons” of working with a private investor like me? Let’s briefly talk about the Top 5 according to IEG from my perspective because I can’t speak for others (4):

#1: Less Money Available

For a good portion of the startups I bump into, NOTHING could be worse than dumping a ton of money on their already fragile operations. They lack structure. It would lead to waste and crushing the organic/authentic momentum they’re building. So while I’m not going to drop as much as big incubator programs might, I’ll also be less of a disruption (tornado). Furthermore, it’s not debt.

#2: Profit-Cuts

Give and take. With incubators, things are typically pretty set in stone – not much wiggle room. With a private investor you can negotiate terms and the amount of ownership you exchange. Some angels will want 25-30%, others are happy with more or less depending on a number of variables…I don’t have the caffeine for all of them presently, so, moving on…

#3: Lack of Synergy

If I believe in what you’re doing and we get along well, that’s great! It’s often the case, but when things go south because of personality friction or disputes or power struggles, yeah it’s not good for anyone and can completely derail your venture. Far less likely with incubators, but it does happen.

#4: We’re Super-Busy

Ain’t that the truth! How about a private investor who’s managing a portfolio of 5 or 10 companies in similar spots to yours? Again, it’s relative. Maybe that’s a great thing. Sort of like a one-man incubator program where you can start working with the other companies in their portfolio. However, the investor in this scenario isn’t going to be super-focused or as passionate.

#5: Looking for Gems

Many of the private investors I rub shoulders with are pretty picky. It’s no different with incubator programs who only admit a tiny percentage of their applicants. Tis the nature of the beast!

It really comes down to your specific circumstances and how many hoops you have time for. Remember, being passionate isn’t enough. You’ve got to have something, be willing to pass muster and then take on the responsibilities/demands of investors. Seek smart capital.

Cheers,

Matt

 

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