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Startup Funding: Nontraditional Funding Sources

CJ Cornell

Introduction

These are coined “nontraditional” only because their prominence as viable funding sources has skyrocketed in the past 10 years. They are indeed becoming mainstream, and even the norm, for startup funding:

  • Incubators and Accelerators
  • University Programs and Corporate Programs
  • Economic Development (government) Programs
  • Grants
  • Crowdfunding

[Note: Use the slider to navigate the chart below. This will get better soon!]

Incubators Accelerators University Programs
Distinguishing Features Are usually physical locations with shared office space (and office resources) for new businesses. They charge rent and other fees. Usually incubators are more efficient for “operating” companies (small businesses) as opposed to startups just developing their first products.

Incubators offer individual workspaces (cubicles) or offices with shared use of conference rooms, receptionists, common areas, etc.

Accelerators usually offer a small amount of equity funding and have an intensive program (a few weeks or months) that is designed to prepare the entrepreneurs, their product, and company for seed investment. Accelerators are usually “cohort” programs (a group of entrepreneurs are accepted and participate during the same timeframe).

“Graduates” usually pitch before investors affiliated with the accelerator.

Accelerators don’t necessarily have buildings or facilities.

Almost exclusively for students or for faculty trying to commercialize research.

University programs may offer a combination of incubator facilities and programs similar to accelerators—with the funding being more in the form of small grants.

University programs often offer an extensive network of advisors and mentors.

Funding None. Usually in the $10,000-$50,000 range. Often VCs and prominent Angel investors participate so they can invest in the promising graduates. Varies. Usually in the $5,000-$20,000 range and/or free but with use of other university resources.
Participants Usually businesses that already have a need for an office presence to conduct business, small businesses. Usually (but not always), younger teams of entrepreneurs—who can collectively survive for 3-4 months on the accelerator’s funding, while participating in the program. Students (affiliated with the university) and faculty researchers.
Duration Varies, but in the 1-5 years range 3-6 months Varies but often coinciding with the academic year: 1 semester or 2 semesters
Selection Criteria No specific criteria, other than to be able to afford the monthly rent/charges. Some incubators will take equity in return. Usually highly competitive. Startups/entrepreneurs apply, must go through intensive vetting processes. Usually accelerators also have a preferred type of company they want in the program (e.g., health care ventures only, or mobile app ventures only). Varies. Most students and faculty are permitted to participate in the programs, but may need to apply (or compete) for funding awards.
Education None Varies. Some offer educational programs but don’t require them, while other accelerators have specific startup training programs. Usually has lots of courses, workshops, seminars and other instructional programs for brand-new entrepreneurs.
Mentorship Minimal. Often none—but some incubators affiliate with a list of mentors. Specific and intensive Broad. Varies in quality and in type (from small business mentoring to growth venture advising)

In any geographic region, accelerators and university programs compete for startups and entrepreneurs, so it’s not surprising when they each seem to imply that they offer all of the benefits that the others offer. Yes, there are hybrids—but they still primarily fall into one of the categories above.

Incubators

Incubators don’t offer funding as part of their business model. A rare few (like Plug and Play) have separate funding programs as part of their Incubators. Co-working spaces, incidentally, are like very short-term versions of incubators. A rare few (like HubSpot) have some funding programs along with many other programs for startups. So while there are a few hybrids, as a rule, incubators are not a source of funding for startups. They are only included on the chart because entrepreneurs sometimes mistake incubators for accelerators—based on how many incubators decide to market themselves.

Accelerators

What Are Startup Accelerators?[1]

Susan Cohen[2], a professor of entrepreneurship at the University of Richmond and a leading scholar on startup accelerators, provides a comprehensive definition of the concept:

Broadly speaking, [accelerators] help ventures define and build their initial products, identify promising customer segments, and secure resources, including capital and employees. More specifically, accelerator programs are programs of limited-duration—lasting about three months—that help cohorts of startups with the new venture process. They usually provide a small amount of seed capital, plus working space. They also offer a plethora of networking opportunities, with both peer ventures and mentors, who might be successful entrepreneurs, program graduates, venture capitalists, angel investors, or even corporate executives. Finally, most programs end with a grand event, a “demo day” where ventures pitch to a large audience of qualified investors.

Brad Feld, a co-founder of TechStars, a global accelerator program, likened the accelerator experience to immersive education, where a period of intense, focused attention provides company founders an opportunity to learn at a rapid pace.[3]

Learning by doing is something that all company founders eventually go through, but it’s a highly inefficient process that drags out over time. The point of accelerators, suggest Feld and others, is to accelerate that process—speeding up the learning cycle in a time-constrained format. In this way, founders compress years’ worth of learning into a period of a few months.[4]

Startup Accelerators in the United States

Y Combinator[5] launched the first accelerator program in 2005, followed closely by TechStars[6], founded in 2006. Both programs have evolved over the years—Y Combinator consolidated its bicoastal programs to a single Silicon Valley location in 2009 (and in fact as of recently[7], has transformed into a later-stage investor), and TechStars has grown to 21 programs[8] worldwide since first launching in Boulder, Colorado. Still, they remain arguably the two premier accelerator programs[9]—or at least among the very best[10].

Growth in U.S.-based accelerators took off after 2008. They grew from 16 programs that year to 27 in 2009 and to 49 in 2010, before eventually reaching 170 programs in 2014 and holding mostly steady. All told, the number of American accelerators increased an average of 50 percent each year between 2008 and 2014.[11]

During the 2005 to 2015 period, these 172 U.S.-based accelerators invested in more than 5,000 U.S.-based startups with a median investment of $100,000.

These companies raised a total of $19.5 billion in funding during this period—or $3.7 million per company on average—reflecting both the relatively small investments made in these early stage companies by accelerators, and the fact that many go on to raise substantial amounts of capital later on.[12]

Where Are the Accelerators?

In terms of their geography, accelerator programs are unsurprisingly concentrated in the well-known technology startup hubs and major cities of San Francisco—Silicon Valley, Boston—Cambridge, and New York. These three regions account for about 40 percent of all accelerators in the United States, and almost two-thirds of accelerator-funded deals between 2005 and 2015.[13]

However, a good amount of activity is occurring outside of these prime tech hubs. In fact, fully 54 metropolitan statistical areas and four nonmetropolitan regions spread across 35 states and the District of Columbia have accelerator programs today. A number of surprises show up in terms of cities with more than two accelerators, including Chattanooga, Nashville, Cincinnati, Milwaukee, and Honolulu.

Exercise

Look up some successful ventures that were graduates from accelerators and incubators.

The Down Side to Accelerators

Accelerator funding can be very attractive for young companies (or founders with a new idea)—but it can take a lot of work to prepare and apply—and most of them are extremely competitive. Not only do they take a lot of work (and even more work, if you get accepted)—the funding from the accelerator is designed only to last as long as the program (the bootcamp). Be prepared to drop everything for the next three to six months to participate. When it is over you will be much better positioned to attract traditional angel or venture funding, but there are no guarantees.

University Programs

For most students, university funding programs are the best (if not, only) option for funding their startup ideas, projects and companies. Most larger universities (and many smaller ones) have specific programs for educating and funding student entrepreneurs. They vary widely—from grants and competitions, to accelerator-like programs just for students. Usually the funding is relatively low ($5,000-$10,000 or so), plus other resources—just enough for students to develop their idea, business model, maybe a prototype, and a pitch.

For students, this remains, by far, the most efficient and effective option for funding early stage ideas.

Corporate Programs Economic Development Grants
Distinguishing Features Larger companies (usually established leaders in their industries)—who have formal programs to encourage new ideas for using their technologies, or improving their business State, city, or regional governments who want to encourage job-creating companies to move to the area, or to foster new high-growth startups in the region Awards (gives) money to people or companies who will advance the organization’s mission
Funding A very wide range. From $5K—to $25K in grant-style funding to $100K or more in equity (investment funding)

Corporate Venture Funding is a separate department that invests in companies just like a venture capital firm.

Varies depending on the level of government. Often in the form or small equity investments, tax breaks or grants Varies widely from small grants of a few thousand dollars for those who apply online, to special one-time million-dollar grants
Participants Often early stage startups, or founders about to become a startup company

 

Usually new, but established businesses, or small businesses already making revenues

Recently, many are offering funding for startups.

Varies, but usually for social entrepreneurs (individuals) or small very early stage companies
Duration Usually very short, 3-6 months, often part-time or “virtual”

 

Funding is awarded (or invested) and often with a specific “use of proceeds” mandated over the course of 1 or 2 years. Funding is awarded (or invested) and often with a specific “use of proceeds” mandated over the course of 1 or 2 years.
Selection Criteria Usually they have an application process and participants are chosen by a committee.

(For Corporate Venture Funding—see Venture Capital.)

Usually they have an application process—but for a contest or competition—where the winners are chosen by a panel of judges. Usually they have an application process and participants are chosen by a special advisory board or similar committee.
Education Some—specific to the corporation’s field Usually none, unless they partner with a university or experts to offer workshops and seminars None
Mentorship Varies Often will match entrepreneurs will local mentors or SCORE. Quality varies. None

Corporate Programs

Corporate programs often resemble accelerators—but often in a highly focused domain, industry, or market. For instance, AT&T Aspire Accelerator specifically focuses on educational ventures (usually in technology) and they initially provide grant funding, and a virtual acceleration/development program with mentors. As one example, the Walt Disney Company accelerator states[14], “The Disney Accelerator is looking for technology—powered startups from around the world with innovative ideas for products and services in the consumer entertainment and media space.”

Economic Development (Government)

Economic development programs usually focus on attracting growing companies to the region via tax incentives. But more and more states and cities are instituting programs to educate, incubate, accelerate, and grow new venture with funding incentives, and funding programs.

Grants

Grants are (from Wikipedia):[15]

Grants are nonrepayable funds or products disbursed by one party (grant makers), often a government department, corporation, foundation or trust, to a recipient, often (but not always) a nonprofit entity, educational institution, business, or an individual. In order to receive a grant, some form of “grant writing,” often referred to as either a proposal or an application is required.

Most grants are made to fund a specific project and require some level of compliance and reporting. The grant writing process involves an applicant submitting a proposal (or submission) to a potential funder, either on the applicant’s own initiative or in response to a Request for Proposal from the funder. Other grants can be given to individuals, such as victims of natural disasters or individuals who seek to open a small business. Sometimes grant makers require grant seekers to have some form of tax-exempt status, or be a registered nonprofit organization or a local government.

More and more, grants are becoming a viable source for startup funding. A few grant-giving entities are specifically devoted to entrepreneurship and funding startup companies. Usually their ultimate goal is economic development for a region or for a specific demographic: e.g., funding startups in underdeveloped nations in Africa, or funding inner-city small businesses, or funding startups founded by minorities. Others provide grants because they have a mission to support an industry or a cause, and believe that supporting innovative startup ventures is the best way to advance that cause—as is the cause with the Knight Foundation grants for journalism and technology.

Journalism’s Foundations

(Adapted from The Age of Metapreneurship)[16]

Right now, thousands of independent entrepreneurial projects are helping to rebuild journalism’s future. Some are experiments in new techniques and products, meant to replace outdated methods. Other projects are addressing brand new issues, like “fake news” which are byproducts of our times.

All around the world, entrepreneurs are working on components of new journalism, in areas such as:

  • New payment models like advertising, syndication, paywalls
  • Tools for easier, more accurate and higher quality investigative reporting
  • Richer election reporting, polling, and prediction technology
  • Richer data journalism tools
  • Advanced fact checking
  • “Drone journalism,” machine learning, artificial intelligence
  • Better tools for citizen journalists, and for integrating with professional journalists
  • And of course, social media tools for better reporting, distribution, and reader engagement

Knight Foundation

The Knight Foundation, as you might expect from its name, traces its lineage to the founders of the Knight-Ridder news empire. Today, it is the nation’s leading funder of journalism and media innovation. In fact, many of the university programs in journalism innovation and entrepreneurship owe their existence (and their names) to the Knight Foundation.

The Knight Foundation is not working on some kind of “moonshot” to save journalism. Instead, they are placing many small bets on vital experiments—any one of which could start a chain reaction.

Each year, it sponsors The Knight News Challenge[17], which awards several million dollars in small grants to promising projects in different areas of journalism, or that impact communities. This is not merely a contest with a prize. The News Challenge is a transparent, collaborative process of vetting great ideas, funding them—and then sharing the results with the industry. Some winners become companies, while others are one-off projects or products. All results—including technology and code—are made available for use and reuse by anyone.

Since 2007 Knight Foundation has reviewed more than 10,000 News Challenge applications and provided more than $37 million in funding to 111 projects. Winners include leading Internet entrepreneurs, emerging media innovators, and traditional newsrooms. Their projects have been adopted by large media organizations and are having an impact on the future of journalism.[18]

Here’s just one example of a recent grant opportunity from Knight Foundation, the Knight Prototype Fund,[19] to address the spread of misinformation and increase trust in journalism.

Knight Foundation is not alone in offering funding for journalism endeavors. Other foundations that fund journalism projects include Ford Foundation, MacArthur Foundation, Scripps Howard Foundation, and the Democracy Fund, among others. Some foundations with similar missions are included in this spreadsheet[20] of national grants and competitions for journalism ventures.

Programs like New Voices and New Media Women Entrepreneurs, funded by the McCormick Foundation, as well as professional programs like NewU offered through UNITY, Journalists of Color and with funding from the Ford Foundation, offered startup funding and coaching for media founders from underrepresented and diverse communities. These programs, now defunct, were the precursors to the growing accelerator programs in corporations, in regional spaces and pitch competitions that help get visibility to new media innovations and founders.

Foundations support ventures, individuals, and ideas that align with their mission. If you’re going to seek funding from a foundation, it pays to do the deep dive into a foundation’s recent awards and see what has been funded. Is collaboration a feature of all of the grants? Do they focus on technological innovation? What are upcoming deadlines? Who is the program officer? Have a conversation with the program officer well in advance of the deadline expressing your interest and asking of any additional thoughts they have on what is of particular interest to reviewers who will be rating the grant. You might ask what they learned from their last round of funding and whether you can get access to it. All this intelligence will help you open the door to a dialogue with the foundation officers and offer you a better understanding of whether your idea aligns with the foundation’s goals.

Resources

CJ Cornell is a serial entrepreneur, investor, advisor, mentor, author, speaker, and educator. He is the author of the best-selling book: The Age of Metapreneurship—A Journey into the Future of Entrepreneurship[35] and the upcoming book: The Startup Brain Trust—A Guidebook for Startups, Entrepreneurs, and the Experts that Help them Become Great. Reach him on Twitter at @cjcornell

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  1. Ian Hathaway, “Accelerating Growth: Startup Accelerator Programs in the United States,” Brookings, February 17, 2016, https://www.brookings.edu/research/accelerating-growth-startup-accelerator-programs-in-the-united-states/.
  2. “Susan Cohen,” University of Richmond, http://robins.richmond.edu/faculty-staff/scohen2/.
  3. Ian Hathaway, “Accelerating Growth: Startup Accelerator Programs in the United States,” Brookings, February 17, 2016, https://www.brookings.edu/research/accelerating-growth-startup-accelerator-programs-in-the-united-states/.
  4. Ian Hathaway, “Accelerating Growth: Startup Accelerator Programs in the United States,” Brookings, February 17, 2016. https://www.brookings.edu/research/accelerating-growth-startup-accelerator-programs-in-the-united-states/.
  5. Y Combinator, https://www.ycombinator.com/.
  6. TechStars, http://www.techstars.com/.
  7. Douglas MacMillan, “Tech Incubator Y Combinator Takes New Tack With Venture Capital Fund,” Wall Street Journal, October 23, 2015, https://www.wsj.com/articles/tech-incubator-y-combinator-takes-new-tack-with-venture-capital-fund-1444938590.
  8. “TechStars Accelerator Programs,” TechStars, http://www.techstars.com/programs/.
  9. Jonathan Shieber, “These are the 15 Best Accelerator Programs in the U.S.,” TechCrunch, March 10, 2014, http://techcrunch.com/2014/03/10/these-are-the-15-best-accelerators-in-the-u-s/.
  10. “These are the Top Accelerators in the U.S.,” Seed Accelerator Rankings Project 2017, http://www.seedrankings.com/
  11. Ian Hathaway, “Accelerating Growth: Startup Accelerator Programs in the United States,” February 17, 2016, Brookings, https://www.brookings.edu/research/accelerating-growth-startup-accelerator-programs-in-the-united-states/.
  12. Ian Hathaway, “Accelerating Growth: Startup Accelerator Programs in the United States,” Brookings, February 17, 2016, https://www.brookings.edu/research/accelerating-growth-startup-accelerator-programs-in-the-united-states/.
  13. Ian Hathaway, “Accelerating Growth: Startup Accelerator Programs in the United States,” Brookings, February 17, 2016, https://www.brookings.edu/research/accelerating-growth-startup-accelerator-programs-in-the-united-states/
  14. Disney Accelerator, https://disneyaccelerator.com/.
  15. “Grant (money),” Wikipedia, https://en.m.wikipedia.org/wiki/Grant_(money).
  16. CJ Cornell, The Age of Metapreneurship (Phoenix: Venture Point Press, 2017), 278—279.
  17. Knight News Challenge, http://www.knightfoundation.org/challenges/knight-news-challenge.
  18. Knight Foundation, http:www.knightfoundation.org.
  19. Chris Barr, “20 Projects Will Address the Spread of Misinformation through Knight Prototype Fund,” Knight Foundation, https://knightfoundation.org/articles/20-projects-will-address-the-spread-of-misinformation-through-knight-prototype-fund.
  20. "National Grants and Competitions for Journalism Ventures," https://docs.google.com/a/rebus.foundation/spreadsheets/d/1-1h8aAHIcERKjzBFLSyBxrsXcPchGT2i7LQD7S7rqVs/edit?usp=drive_web.
  21. “Information for Entrepreneurs,” NBIA, http://www2.nbia.org/for_entrepreneurs/.
  22. “U.S. State Incubation Associations,” NBIA, http://www2.nbia.org/links_to_member_incubators/state.php.
  23. “International Incubator Associations & Organizations,” NBIA, http://www2.nbia.org/links_to_member_incubators/international.php.
  24. Acceleratorinfo.com, http://www.acceleratorinfo.com/see-all.html.
  25. Gan.co, http://gan.co/.
  26. “These Are the Top Accelerators in the U.S.,” Seed Accelerator Rankings Project 2017, http://www.seedrankings.com/.
  27. “Seed Accelerators,” Seed-DB, http://www.seed-db.com/accelerators.
  28. Conor Cawley, "30 Best Startup Accelerators in the U.S., Ranked," Tech.Co, https://tech.co/30-best-startup-accelerators-us-2017-06.
  29. “Database of Corporate Accelerators,” Corporate Accelerator DB, https://www.corporate-accelerators.net/database/.
  30. "Corporate Venture Capital," Plug and Play Tech Center, November 14, 2016, http://plugandplaytechcenter.com/2016/11/14/corporate-venture-capital/.
  31. StartupNY, https://startup.ny.gov/.
  32. Startup Washington, http://startup.choosewashingtonstate.com/.
  33. “Arizona: Startup,” Arizona Commerce Authority, http://www.azcommerce.org/start-up.
  34. “Arizona Innovation Challenge,” Arizona Commerce Authority, http://www.azcommerce.com/programs/arizona-innovation-challenge.
  35. Cornell, CJ, The Age of Metapreneurship, (Phoenix: Venture Point Press, 2017). https://www.amazon.com/dp/069287724X.

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Startup Funding: Nontraditional Funding Sources by CJ Cornell is licensed under a Creative Commons Attribution 4.0 International License, except where otherwise noted.

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