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Incubator seed and venture funds offer a vehicle to provide incubator clients much-needed capital. Operating a fund can help attract strong clients and diversify revenue; however, internal seed funds also incur increased administrative costs of significant capital and time. In this feature, NBIA members discuss the costs and benefits of managing incubator seed investment funds.

Incubator seed and venture funds: NBIA members discuss successful for-profit and nonprofit models

by Bridget Lair

October 2011

Business analysts love to talk about venture capital and equity investment, but the reality is, few start-ups benefit from VC or angel investments. The Kauffman Firm Survey, a longitudinal study tracking approximately 5,000 businesses annually, reports only 2 percent of start-up firms receive VC or angel investments, while 84 percent bootstrap and 14 percent finance their businesses with loans or grants.

Many states and community development organizations, including incubators, are starting seed funds to mitigate the financial gap between bootstrapping a business and the first round of outside investment. Seed funds are pools of private and/or public capital that invest in emerging companies at the earliest stages. These funds can meet capital needs at a time when a company is perceived as too risky for standard bank financing and too small for traditional venture capital investment. According to Jim Jaffe, president and CEO of the National Association of Seed and Venture Funds in Philadelphia, the average fund size of NASVF members who invest in early-stage companies is $10 million to $25 million, and the average investment is $250,000 to $500,000.

Given the high upfront costs of establishing a fund, potential risk of investing in start-up companies and low percentage of incubator clients receiving equity investment, why do some incubators start or manage seed investment funds? When incubators effectively manage the risks and possess the expertise to select investments and help companies succeed, the rewards can warrant a little risk. Managing investment funds can help incubators address the dearth of available seed capital for start-ups and diversify their revenues. Here, NBIA profiles incubation programs managing for-profit and nonprofit pre-seed investment funds.

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This article also is available as a PDF Quick Reference document through the NBIA Bookstore.

Keywords: Funding sources/Fundraising – incubator, economic development, for-profit incubators, venture capital, In-house loan and equity financing program, Angel investors/network, capital access, partnerships–organizational/corporate

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