The VentureCode

As innovation grows, expands and evolves, terminology follows suit. In the field of entrepreneurship and startup opportunities, the understanding of ever-changing terms is crucially important. Full understanding of incubators and accelerators is vitally important to any innovative startup trying to stake their claim in this world.

Incubators and accelerators serve similar roles with helping start-up companies and entrepreneurs; however, their approaches differ.

Incubators, like the largely successful Idealab, create tech ideas and start-up companies based on them in-house. Once the incubator is satisfied with the potential profit and success of a new tech invention, strategy, or business innovation, they will launch the “incubated” project with an external company or team. The benefitof incubators is two-fold. First, because Incubators generally have extensive R&D departments, they can usually launch programs/companies for a fraction of the cost of traditional start-ups. And second, incubators usually stay in a close business relationship with their start-up, insuring its success. However, this comes with a trade-off. The incubator takes a higher percent of equity from the start-up, ranging from 15% to 30% (not to say this equity cut is not higher at times. Usually, the incubator does not invest in incubated startups.

These days majority of them are about providing the infrastructure (office space, network connection,
phone answering service, copy machine) and facilitating networking and business connections.

Accelerators act quicker and more intensive in building up start-ups and business ventures. Instead of creating the ideas and business plans for a new start-up in-house like incubators, accelerators, like TechStars, take on external start-ups and developed ideas. Through an intensive program, generally lasting about three months (ex. TechStars, Woman Innovate Mobile and The NewMe), the accelerator will provide a plethora of resources and generally capital to ensure success after completion of the program. There are benefits and drawbacks with working with accelerators.

On the positive, if selected by an accelerator (many apply, but few get into these programs), the start-up or entrepreneur will be asked to attend a training program, wherein, success is nearly guaranteed. This high success rate is insured through the accelerator’s mentorship, business connections (ex. during Y Combinator’s program, a weekly “dinner” allows start-ups to mingle with those successful in their industry) and capital investments. In return, the accelerator will take a small equity stake in that start-up.

The cons of accelerators lie in their exclusivity and short-term interest. Many accelerator programs are extremely difficult to get into. For example, TechStars states that thousands apply, but only ten get in for each of their programs. Additionally, once the program is over, accelerators do not stay as involved in their “graduated” start-ups as incubators do.

Preparation is everything when trying to raise money for a new venture. Entrepreneurs need to be thorough and anticipate the questions and requests that will be thrown at them – if they even get as far as a meeting with an investor.

The first step is to submit an Executive Summary that is no more than two pages long. The purpose of this document is to gain a meeting with an investor. Because of the brevity of this document, every element and every word counts. It must convince the investor that spending 30 minutes is worth his/her time. Miss this one, and the game is over!

The second step is to present a Pitch Presentation in PowerPoint for use in front of the investor. The entrepreneur must be sensitive to the time element and respect the amount of time the investor is willing to give. It can range from 10 minutes to one hour. This will determine the number of slides to pick, while making every one of them count. The order in which the slides/topics are presented is extremely important so as to not lose the investor’s attention. This presentation must hypnotize!

The third step is to present a Business Plan. If the Pitch Presentation was successful, the investor will ask for it. This document has many elements, and it is important that it considers the investor’s priorities. For example, most entrepreneurs are fixated on their product, while Investors are more interested to know whether there is a market that has a dire need and is ready to buy.

Final point: all three documents must be complete before approaching investors, and they are usually developed in reverse order. If the Executive Summary sizzles, the entrepreneur must be prepared to follow through immediately. It does happen!

There are roughly 1000 Venture Capital firms in the US investing
about $20 billion a year, compared to over 350,000 Angels
investing over $40 billion a year.

More interestingly, SBA estimates FIVE to TEN times investment potential by Angels, given they are presented with attractive opportunities.

Hmm.. what does that say?

Simply put the reason to invest in private equity is to improve return characteristics of an investment portfolio, while it potentially correlate to increased risk.

The long-term returns of private equity represent a premium to the performance of public equities.
This has been the case in the US for over 20 years and also in Europe, following an increase in the number of private equity funds, for over 10 years.

“The Yale Endowment states, ‘Private equity offers extremely attractive long-term risk-adjusted return characteristics…’”

Private equity has arrived as a major component of the alternative investment universe and is now broadly accepted as an established asset class within many institutional portfolios. Many investors with little or no existing allocation to private equity are now considering establishing or significantly expanding their private equity programs.

As nicely presented by EVCA, adding private equity to a balanced portfolio (bond and public securities) can reduce volatility and contribute to an overall improvement in risk profile.