Yes, you can start a business with almost no funding – but it’s not recommended. That leaves the common question of how to receive capital for your startup. Traditional options, like small business loans, are still one of the most common means, but many startups also seek funding from venture capitalists. Even within the venture capital industry, there are a few options available, two of the most common being working with an incubator or an accelerator.
Venture Capital: Overview
Venture capital and startups tend to receive a lot of attention. In the tech and business news cycles but venture capitalism is not a new concept. Some of the earliest firms have been around since the mid-1900s. Venture capital (VC) firms are comprised of investors who provide capital to startups or small companies looking to expand their operations. The benefit for the VC-funded business is clear. The business receives much-needed capital to either start or grow their business. On the VC side, the investors are looking for a positive return on their investment. When venture capital firms are considering an investment, they often look for high growth potential (which means less risk associated with seeing a return) and strong management and leadership teams (which also help to hedge their bets on the success of one particular business as opposed to another).
Accelerators and Incubators
The terms “accelerator” and “incubator” are two distinct ways a venture capital firms can provide. There are others, of course, but the focus here is on the difference between accelerators and incubators.
As the name suggests an accelerator’s goal is to fast-track a company’s growth. Firms offering this type of funding often have invest in a very specified and limited number of companies and most firms provide a tight timeline on the accelerator-funded company to hit revenue/positive ROI metrics. For example, Y Combinator – one of the more well-known accelerators – only accepts 2 percent of its applications. Given the timelines and the nature of this type of funding, accelerators aren’t ideal options for startups that have novel or unproven business concepts. They may not also be the right fit for first-time entrepreneurs who may not have “cut their teeth” on the common challenges that go into running a business in general.
Incubator, on the other hand are intended to foster and grow a business – as opposed to simply giving it a shot in the arm to put it on a growth trajectory. According to a recent Entrepreneur.com article, many incubators operate on open-ended timelines and the focus is more on longevity. Given this approach, incubators are good options for brand new startups or entrepreneurs or entrepreneurs looking to start innovative and niche businesses.
Other Factors to Consider
Receiving any funding is a time-consuming process. Many of these decisions should be thought out and explored well in advance of starting your new venture. As with other business decisions, the more you can speak with experts and veterans, the more informed you will be. This difference could be the difference between success and failure. Regardless of your approach, we wish you success in all of your new endeavors.