Startup Lawyer | Mentorship over Money (and Office Space)
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Mentorship over Money (and Office Space)

Posted 09 Oct 2010

With the success of Y Combinator and TechStars, several incubators (sometimes referred to as “accelerators”) have popped up everywhere.

Some have done quite well. Here in Dallas,Tech Wildcatters had a strong class and is opening up applications for the Spring 2011 class later this month.

But this morning I read a Dallas Business Journal article that I found amusing: A new accelerator is planning to invest $200,000 and provide up to 45,000 square feet of office space to about 10 mobile app startups in exchange for 15-20% equity in each startup.

(a) That’s $20,000 per startup for a 15%-20% equity stake. Pretty expensive seed capital. Good luck trying to convince even the most nascent of startups to take your investment at around a $100k post-money valuation. Furthermore, the $20k is more like a living stipend than something the mobile startup deploys for development, etc.

(b) Office space is a nice kicker, but no entrepreneur is going to give up equity in their mobile app startup company for office space. Let me put this another way: No entrepreneur worth investing $20,000 in is going to take up an office space-for-equity offer. How much office space does a 2-3 person mobile app startup really need? Not much and they’ll likely office at a coffee shop, their own residence(s), or a local coworking facility. And more than likely all 3 places. The article mentions:

The accelerator’s space-for-equity approach is similar to the tactics some North Texas building owners used during the tech/telecom boom and bust of the late 1990s and early 2000s.

Partying like it’s 1999 is one thing — running a 2010 accelerator like it’s 1999 is probably not a great idea.

(c) Mentorship is key. And it is missing, at least for now, from the model. One of the 2 partners plans to provide personal mentorship. Regardless of how well the partner can provide mentorship, it falls way short of the roster of mentors provided by typical accelerators.

Whenever a client discusses with me whether they should join an accelerator, the decision always comes down to the quality of the mentorship. Startups don’t evaluate their participation in an accelerator by asking “Is the $20k worth the equity given up to the accelerator?” Rather, startups ask “Is the mentorship worth the equity given up to the accelerator?”

In the case of the planned accelerator, mobile app startups will be deciding “Is the mentorship from this one person worth 15%-20% of my startup?” That’s a tall order for the accelerator.

I wish the accelerator the best of luck — I just doubt they understand what mobile app startups desire and value from an accelerator.

20 Comments
  • bradleyjoyce
    Posted at 16:38h, 09 October Reply

    Wow… that might just be the worst deal ever!

  • Brandon Wiley
    Posted at 21:30h, 09 October Reply

    In general I wish that incubators would use convertible notes instead of straight equity. That way you avoid locking in an early (and low) valuation. Also, one of the main benefits that Y Combinator has which is missing from some other incubators is deal flow. When they’re done incubating a new company they pass them on to angels for seed financing or VCs for Series A.

  • Roger Toennis
    Posted at 16:49h, 10 October Reply

    This is outright immoral, IMO. Another symptom of the entire startup ecosystem, even with y combinator and techstars, that is still too much a private, invitation only club run by a bunch of “priests” who want to retain the status quo model of excluding everyone who doesn’t fit their mold of the ideal entrepreneur “acolyte”.

    Too hard to screw the entrepreneur otherwise.

  • Benjamin Yoskovitz
    Posted at 02:01h, 12 October Reply

    Ryan – I think the debate over accelerator vs. incubator vs. something else? will continue for some time, and the value that folks like Y Combinator / TechStars, etc. bring will be misconstrued.

    At Year One Labs we focus entirely on mentorship – a small amount of funding, but up to 12 months of hands-on assistance. This is the key piece of value that accelerators need to bring (along with access to follow-on mentorship, capital, opportunities.)

  • Anonymous
    Posted at 02:46h, 12 October Reply

    Great post. How many of the upstart “accelerators” / “incubators” can provide the level of mentorship that you get from TechStars or Y-Combinator though?

    As an entrepreneur I am constantly approached by people who want to be a mentor for my business… almost as often as service providers who want my business.

    I think all startups should be wary of trading equity for services (as opposed to customers). If interested, I’d learn about the service’s deal flow (yes, thats what it is) and track record as mentors… not solely as past-entrepreneurs (hopefully they have at least that too).

  • Anonymous
    Posted at 12:16h, 12 October Reply

    Yes, it’s not very ‘market’ considering other reputable programs take much less equity.

  • Peter_A
    Posted at 20:56h, 12 October Reply

    I agree but any group that is willing to look at such a deal not only needs another leader they need to have strong ties to that mentor relation.

  • Peter_A
    Posted at 20:56h, 12 October Reply

    I agree but any group that is willing to look at such a deal not only needs another leader they need to have strong ties to that mentor relation.

  • mrbusinessgolf
    Posted at 19:47h, 13 October Reply

    Wish more businesses would see the value of mentoring. Lots of experience out here going for near dirt cheap.

  • Joshua J. Jones
    Posted at 06:32h, 19 October Reply

    Interesting article – my first time at your site. I look forward to reading and learning more in the future. Thanks!

  • Chuks Onwuneme
    Posted at 23:16h, 19 October Reply

    Not a good idea. Is this based in DFW?

  • Anonymous
    Posted at 18:15h, 20 October Reply

    “Partying like it’s 1999 is one thing — running an 2010 accelerator like it’s 1999 is probably not a great idea.” haha – I can’t imagine any mobile startup needing office space at all with all the virtual office deals out there with mtg room access by the hour.

  • Anonymous
    Posted at 18:29h, 20 October Reply

    Yes.

  • Anonymous
    Posted at 18:30h, 20 October Reply

    They might need an office or two if they can’t work out of their house or other coworking facility. But it’s not like they need room for a particle accelerator.

  • Vitalsol
    Posted at 00:43h, 27 October Reply

    This accelerator has a long list of mentors and very deep pockets. They expect to bring real customers in addition to mentorship and money. Getting accepted by them will be the challenge.

  • Anonymous
    Posted at 02:56h, 27 October Reply

    Are you the guy who came up from Austin for an event about 2 years ago? Just wondering.

    Even with a convertible note, the investor could lock in a low valuation with a (low) price cap. But I understand where you are coming from.

  • Brandon Wiley
    Posted at 03:49h, 27 October Reply

    Yes, that’s me. I came up for the pitch camp and I’ve been following your blog ever since. Always great advice on here. It’s such a minefield out there for the tech entrepreneur that’s just starting out in the industry.

    That’s a good point about the price cap as I recall another post you had about such price cap trickery. Although with straight equity at the rates incubators are using now it seems to me that it’s always a bad valuation. I guess it comes back to deal flow. If the incubator gets you to an A round then you can get a new more fair valuation. If they don’t then you’re stuck with this ridiculously low valuation and are kind of hung out to dry.

    I suppose you could estimate your risk by looking at the percentage of incubated companies that have moved on to additional funding and how much they raised. Unfortunately, for many of these new incubators that are popping up everywhere this percentage is 0 so far.

    It’s great to consider immeasurable benefits like mentorship. I really believe in the importance of such things. However, at the end of the day the point of incubation is to raise the value of your business. So a predetermined low valuation isn’t worth it unless it ultimately gets you to a higher valuation than you could have achieved on your own.

  • John R. Sedivy
    Posted at 17:01h, 27 November Reply

    You make a great point about mentoring being much more important than having an office. I wonder how such an arrangement might fare – exchanging a percentage of equity for access to a relevant mentor without offering money or office space?

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