Since the recession hit (and yes we are now climbing out) there was a flurry of articles on how the VC model is broken. I believe it’s true.
For entrepreneurs, the road to equity investment is challenging at best, and at times, less and less desirable as much is given away in return for immediate cash. The concept of smaller early exits, debt financing, and organic growth are becoming increasingly popular with entrepreneurs. Why? I see a few good reasons.
First of all IT based businesses are not as capital intensive as they used to be. The cloud is a cost effective way to deal with most infrastructure needs and let’s you scale when you perform.
Secondly, the recession has made entrepreneurs more Darwinian. I believe that tough times force us to become better partners and better planners. As better planners, we craft our exit strategy BEFORE determining our funding needs [READ BASIL PETERS: EARLY EXITS]. Part of that process is identifying the most optimal moments to fund your company. Perhaps your business model does not call for any funding whatsoever. Like many things in life, sometimes it’s just better to wait.
There has also been much talk of incubators and their role in our economic ecosystem. After all, they are credited with providing the first critical services and some capital to get a business going. Like VCs, the incubator model is one to be considered.
The classic approach is to raise capital through government, institutions or private investors and then use that capital to setup infrastructure, such as office space, provide business mentorship, and make smaller investments. Local incubators Bootup Labs and Wavefront are two examples.
The goal is to help nascent businesses develop to a stage where they are eligible for their first angel round (or not). Some challenges with this model are that it takes a very long time to realize any returns for the investors. Furthermore, unless the approach is to continue to participate in equity rounds the ownership level for an incubator decreases sharply as blossoming companies go on to additional rounds of fundraising.
The point of this article is not to poke holes at traditional forms of financing, be it VC or incubator. We all know of many successful examples – and as a local Vancouver entrepreneur, I look forward to the results that Bootup Labs and Wavefront will bring. However, if the incubator model was to organically grow, prove business models before they need cash, well, then one could expect that the risk for investors is somewhat mitigated. What we are looking at is the Organic Incubator.read more