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Incubator Fund & Private Enterprise: A Guide

November 30, 2021

by Sydney Wess

An incubator fund can accelerate business growth in industries that mirror private or public enterprises. This article will go over the key information entrepreneurs need to know about private enterprises and incubator funds. 

Updated July 26, 2022

It can be daunting for businesses looking to launch their new company. It is important for businesses of all sizes to learn the ways their company can be supported and the industries it could operate in. 

It’s time to learn two key phrases in the business landscape: incubator fund and private enterprise. 

Business incubator funds are designed to give entrepreneurs the chance to fully research, experiment, and understand a developing funding structure in the early stages before taking it public. 

This guide will provide a full breakdown of incubator funds, covering an incubator fund definition, an explanation of how these funds work, and some additional details on why businesses and investors may be interested in working with fund managers and setting up incubator funds of their own.

Insights into Incubator Funds

A private enterprise is an industry that operates within the private sector outside of the government. It's important to understand the difference between the public sector and the private sector when discussing public and private companies.

This guide will also go over the definition of a private enterprise, explain how they work, and cover some of their advantages and disadvantages in the world of business development. 

Insights into Private Enterprises

What Is an Incubator Fund?

So what exactly is an incubator fund? 

Well, it's important to note that these funds can also be known as business incubator funds, incubated funds or limited distribution funds, and these names tell you a lot about what the funds actually are and how they work.

An incubator fund is one that is operated in incubation, with limited distribution. This basically means that the fund is initially kept private, with investment opportunities only offered to a limited number and range of people.

Incubators differ from startup accelerators that focus on speeding up the growth and mentoring of existing companies that already have a developed product or service. 

“Incubator fund” is a term that often comes up in investment and entrepreneurial circles during fund formation stages, and the use of incubator funds can be highly beneficial, particularly when it comes to testing out different investment strategies to see what works and what doesn't work as well before a full public launch of the fund.

Financial institutions, venture capital firms, and other financial service providers can assist companies with their introduction into incubation. 

The incubation phase of this process differentiates incubator funds from similar investment funding structures, such as a traditional hedge fund. 

Often, it's the case that the only investors in incubator funds are employees connected with the fund in some way or friends and family members associated with those who are setting up the fund. The “limited distribution” part of the definition refers to the fact that incubator funds only have a finite number of investment opportunities.

What Is the Purpose of Incubator Funds?

The main purpose of an incubator fund is experimentation; fund companies often want to experiment with different investment strategies but don't necessarily want to run the risk of testing those strategies with a full-fledged hedge fund. So, many of them often make use of incubator funds instead. 

These smaller and more tightly controlled funds allow the fund companies to test out different strategies, assess their performance, and create a track record of the fund's performance over a period of time, which could be as short as one year or as long as 20 years, depending on the objectives of the company in question. 

Therefore, any incubator fund's ultimate goal is essential to test if a particular investment strategy can be successful. They're particularly useful for testing out fund strategies that companies believe are risky, giving the company a chance to see those risks play out.

The Process of Incubator Funds

The creation and launch process of incubator funds tends to be quite simple and follows the same basic formula, with two main phases: incubation and public launch.

The process of creation and launch of incubator funds tends to be quite simple and follows the same basic formula, with two main phases: 

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The Incubation Phase 

The incubation phase is basically the "trial period" in which the fund company can test out the new fund and experiment with their investment strategy. During this trial or incubation phase, the fund itself will only be offered to a specific and limited group of investors. 

As mentioned above, these investors are usually people who are affiliated or associated with the fund in some way, such as employees of the fund company and their families. It's a similar method to what is used for hedge funds, with employees and family members typically being offered the first investment opportunities.

The incubation phase can last for varying amounts of time, with some ending in just a year and others lasting for several years. During this time, fund management companies may test out a range of different strategies and find the most effective way to take forward to the public launch.

Alternatively, they might only focus on one main strategy to see how it would perform over a set period of time.

Public Launch

The second phase of an incubator fund is the public launch and offering of the fund. This is the main aim of any incubator fund, but it's important to note that some funds will not reach this stage. It all depends on how they perform during incubation.

At the end of the incubation phase, the fund company will need to look at the fund's track record so far, assess its performance, and then decide on whether or not the fund should be made available to the public.

If the incubation phase has been a success, the fund can have a public launch. The company will be able to build up to this by partnering with distributors and intermediaries to gauge the level of public interest the fund could have and then preparing for a full launch.

This may involve providing additional capital, signing a waiver, discount agreements, offering documents, etc.

When your company leaves the incubation phase, it is time to start thinking big picture. Is your company a private or public enterprise?

What Is a Private Enterprise?

Let's begin with a simple private enterprise definition to understand what private entities are and how private and public organizations differ. In simple terms, a private enterprise is one that has private ownership rather than public ownership.

These companies can issue their own stocks and have shareholders too, but they aren't able to sell shares via public exchanges or IPOs. They run independently, not associated with the government or public services. Examples include clothing stores, legal firms, or credit unions in the corporate sector.

It's also important to note that, in most locations, private entities are subject to external regulatory rules and restrictions to enforce certain standards of ethics, legality in labor, and so on. So, these enterprises still need to adhere to public laws and standards despite being privately owned and operated.

Private enterprises are a big part of any free market, empowering individuals to start their own businesses, bring their ideas and innovations to the market, and create their own wealth in the process.

4 Key Features of Private Enterprises

The main distinguishing feature of private businesses compared to public companies is that they are managed privately, without any influence or involvement from the government. 

Here are some additional features that help the private sector and private enterprises stand out:

  1. Motive: The main motive of private enterprises is to make a profit. This isn't the case with the public sector, which is more focused on providing essential services or infrastructure for the public.
  2. Financing: Private enterprises can obtain financing in a range of ways. Often, private business owners need to raise their own capital to start their businesses, seek out the assistance of investors and shareholders, or take loans. Private enterprises will usually not receive much governmental support unless they are of a certain level of status and influence, so they must focus on gaining private investments.
  3. Private Control: Private business owners and management teams are the people who make the decisions for these businesses. There can be one decision-maker or several, but the key feature is that there is no state or governmental participation in the decision-making process.
  4. Competitive Culture: There's a lot of competition in the world of private enterprises, which does not exist in the same way in the public space, as private businesses are often vying to be leaders in their respective industries, with the most profits and customer attention. This competitive nature can result in different working conditions and environments for private-sector workers.

How Do Private Companies Work?

Private enterprises or privately-held companies can work in a number of different ways and fall into different categories, depending on their structure and ownership style. Some main private enterprise varieties include S-corps, C-corps, and LLCs.

They can have very different sizes and scales, too. A small independent bakery, for example, can be classed as a private enterprise, and so too can a globally-known smartphone brand or technology company.

Private companies can therefore work in various ways, depending on the industry they're operating in and the scale of their operations.

They have access to bank loans and other financial services too, but many larger private companies eventually choose to go public in order to raise more money as they evolve and expand.

5 Private Enterprise Structure Types

As explained above, the structure of a private enterprise can vary, with several different types of private companies, each with its own unique features and aspects. 

Here are some brief breakdowns of the main structures:

  1. Sole proprietorship 
  2. Partnerships 
  3. LLC
  4. S-Corp
  5. C-Corp

1. Sole Proprietorship

A sole proprietorship is a private company that has one single owner. All of the assets and liabilities for the company rest on that individual's shoulders, and they also have full decision-making powers for the enterprise too.

2. Partnerships

A partnership is another structure variant for a private enterprise in which there are at least two co-owners of the company, sharing liabilities, responsibilities, and profits. The partners also share the rights to make decisions for the company, even if it becomes a limited partnership in the future.

3. LLC

An LLC, or limited liability company, is a type of private enterprise that typically has several owners, with the owners sharing responsibilities, much like a partnership. However, the big difference between an LLC compared to a partnership is that the owners have some protections for the business’s debts and liabilities and can't be personally pursued for company debts.

4. S-Corp

An S-corp, or S-corporation, is a private company with 100 shareholders or fewer and can pass income on to those shareholders without having to pay federal tax, combining the tax-free benefits of partnerships with the advantages of incorporation.

5. C-Corp

A C-corp, or C-corporation, is another type of private enterprise entity that is also the most common kind of corporation. C-corps are run a lot like S-corps, but they have no limit on the number of shareholders. However, they are subject to income taxation.

Businesses Should Think Critically About Their Investment Vehicles

Incubator funds provide proven testing grounds for businesses looking to test an investment strategy's waters without the full risk of a full-fledged hedge fund launch.

Incubator periods can be very effective for experimentation and give companies a valuable opportunity to test and monitor trading mechanisms, costs, and results.

Private enterprise is essential for the free market. Private enterprises and the private sector at large play a pivotal role in many countries and are an essential part of the free market. 

Hopefully, this guide has provided a clear and informative explanation of how they work and why private enterprises are so important in today's world, along with a detailed explanation of how incubator funds can impact your dreams for your company. 

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