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Incubator and VC/PE

Incubator, venture capital (VC) and private equity (PE) are structurally very similar to one another, but differ in the level of day-to-day involvement and in the stage of financing. In fact, technically speaking, VC is actually a subset of PE and an incubator is a subset or a variation of VC.

Incubator is designed to help early-stage companies develop their potentials through an array of business supports and resources.  A business incubator plays almost day-to-day role in running and developing the young company toward becoming a fully independent company. In many cases, the incubated companies are not generating revenue at all.

Meanwhile, Venture Capital (VC),  is more like a fund management firm. The funds are provided by investors eager to capitalize on the start-up companies’ long-term growth potentials. Most venture capital comes from high-net worth investors or financial institutions that pool the funds or partnerships.

Private Equity (PE), on the other hand, is an even larger fund management firm that deal with larger deals and at much later investment stage. Capital for private equity comes from retail and institutional investors. Such investments often demand long holding period to allow for liquidity event such as an IPO (Initial Public Offering).

It is important to note that PE rarely or does not invest in early-stage, non-revenue generating companies. But VC does. However, VC rarely or does not usually bother to get involved in daily operations of the start-up companies, unlike typical incubator firm.

Below is an illustration that might help clarify the differences between these firms.