From Accelerators to Venture Capital: What is best for your startup?
With startup growth up 61% since 2014 and more investment programs emerging, it can be overwhelming for founders to know just where to jump in. As the most startup-friendly accelerator on the planet, MassChallenge has helped 835 startup companies around the world, who have raised over $1.1 billion in funding and created over 6,500 jobs. We have seen startups at all stages of growth and know whether the current need is an investment, support, or both, there is an option out there for you.
Coworking has really taken off recently, with the growth of WeWork being one of the prime examples. Coworking spaces are not funding options for your startup, in fact, most charge a few hundred dollars a month. They are office spaces “on-demand,” or “space-as-a-service,” where you can rent space to house your startup.
The concept of community is one of the coworking space’s key attributes. Founders work alongside like-minded entrepreneurs and are often given direct access to legal, accounting, and HR services. Many coworking spaces also provide benefits like event space, weekly informal networking parties, and demo or pitch nights.
Famous coworking spaces like WeWork and AlleyNYC are often heralded as the stars of the sharing economy. With companies now recognizing the benefits of coworking, entrepreneurs at all stages can adopt this model from hot-desking as a sole-trader, to engaging with the community as a larger company.
Think of an incubator just as the name suggests: a place to incubate your idea, develop your business plan, and prep your startup for growth. Incubators typically work with young startups for an indefinite period of time, and startups work alongside each other in a shared, collaborative environment.
While many programs are government-funded, some incubators do take equity for incubation services. Incubators usually offer mentorship, access to legal, accounting and/or HR services, and connect their portfolio companies to large investor-networks.
Accelerators offer a very focused, time-windowed curriculum where startups receive mentorship, education, and networking resources. Acceleration programs are typically more competitive than incubators and like to work with early-stage startups that have already shown significant traction or product-market fit.
Accelerators will boost your startup to new heights. In the case of MassChallenge, we take no equity and offer the chance to win a share of several million dollars in equity-free cash awards. Although MassChallenge is one of the few that do not take equity, many accelerators do in exchange for their investment.
Accelerators usually culminate in an exciting Demo Day where program graduates have a chance to pitch to investors.
Startup competitions work for almost any stage company and are a great way to gain exposure and support. For very early-stage companies, hackathons are a way to validate your product or idea in front of seasoned judges. As an innovative means to generate new creative ideas, global companies such as MasterCard and Barclays have been organizing hackathons and business plan competitions to incubate new startups that align with their strategic interests. The winners usually win cash prizes, mentorship opportunities, and even direct access to their other startup programs.
For startups in later stages of development, you might wish to check out other types of competitions. Two of the most popular ones are TechCrunch Disrupt and DEMO. These well-known competitions provide startups with prize money, international recognition, and most importantly, access and exposure to key industry investors.
As the name suggests, crowdfunding taps into the collective power of the crowd. There are two types of crowdfunding: reward-based (like Kickstarter) and equity-based (like Crowdcube). With reward-based crowdfunding, monetary contributions are exchanged for products or services. In equity crowdfunding, non-accredited investors can invest in an early-stage company in exchange for equity. Equity crowdfunding has often been used to great effect, already seeing its first couple of public exits. While this one can be used at pretty much any stage, we wouldn’t recommend using it too early—the crowd needs proof of traction too.
Startups seeking angel investments are usually in their earlier stages of development, compared to those seeking venture capital. According to the Angel Capital Association, the median angel funding round size in Q3 2015 was $725k for the pre-seed or seed funding rounds. The “pre-seed” or “seed” stages are usually for building a proof of concept business and getting your company off the ground. This may also involve ramping up users and showing traction for your product by generating revenue. This is a critical stage where you could benefit from an experienced mentor and advisor making introductions and delivering synergies. There are some great sites that can connect you with angel investors. Gust.com is a platform for founders to find and connect with the largest global network of early-stage investors worldwide. And never underestimate the power of networking when trying to meet potential angel investors.
Many angel investors are entrepreneurs or ex-entrepreneurs themselves, so angel investing is a way for them to contribute to society, apart from the financial returns. As they are investing out of their own pocket, they normally look for entrepreneurs who are receptive to mentorship and are willing to be coached. A relationship with an angel investor is not merely a business relationship for financial gains, but a relationship where both sides should benefit. Many angel investors usually form angel groups to invest in deals together in order to benefit from group due diligence and combine their expertise.
Venture capital funding is generally only available to companies in later stages of development. This is what many founders aim for, but shouldn’t be the end goal. While angel investors invest out of their own pockets, venture capitalists manage the funds for limited partners who expect exceptionally high returns on their investment. Therefore, VC funding is highly competitive and selective, and the median VC funding round size is usually at least $1 million.
In exchange for funding, venture capitalists generally receive a seat on the Board of Directors and have a significant say in the strategic direction of the company. They provide their portfolio companies with exposure, connections to customers, and even help to establish partnerships. Work first on building a good business, and then the venture capitalists will be coming to you.
This article is intended for informational purposes only, and doesn't constitute tax, accounting, or legal advice. Everyone's situation is different! For advice in light of your unique circumstances, consult a tax advisor, accountant, or lawyer.