Tag Archives: incubator

Of Mice and Mentors

There are a ton of positives that mentors provide startups, as no one person innately has the skill set and/or experience to run a successful company. But if there is an incubator bubble, does that beget a mentor bubble?

Mentors at incubators should be in it strictly to pay it forward and most certainly are. Mentors should not be participating at an incubator to get it immediately paid back. That is, a mentor probably shouldn’t be actively looking for his or her next startup co-founder gig or consulting contract when mentoring at an incubator. Incubator mentorship is neither co-founder dating nor a BNI event.

Incubators should be somewhat proactive about establishing protocols for when their mentors want to escalate involvement with a portfolio company. For example, what happens when a mentor asks for an advisor grant during your program? Some startups may feel as though they have already ‘paid’ for such mentorship by joining the incubator.

Mentors can and will provide value to a startup and I understand that mentorship can naturally lead to ‘advisor’ positions or other business arrangements. But many startups are having to walk this fine line before, during and immediately after demo day.

How to Evaluate an Offer from a Startup Incubator

Great news — your startup just got accepted to an incubator! But before your startup signs up and cashes that $[XX,000] check, your startup’s co-founders should sit down and evaluate the incubator’s offer. The following are some issues to consider and actions to take before accepting an incubator’s offer:

(1) Calculate Valuation and Determine Value.

Pre-money valuations startups receive from incubators are typically low…really low. If an incubator offers your startup $25,000 in exchange for 6% equity, the pre-money valuation is a whopping $391,667.

As you can see, I don’t think any startup has joined an incubator based solely on the pre-money valuation. Thus your startup needs to determine the intangible value offered by the incubator (and yes, a $150,000 convertible note with no cap and no conversion discount qualifies as an intangible).

Rather than assign a monetary value to the intangibles, a startup should instead assign an equity percentage value to intangibles like mentorship. As equity in the company tends to be the currency of early stage startups, the startup should have a good foundation for assigning value in terms of equity.

This advice holds true for even if the incubator’s program provides tangible items free and such items have an assigned monetary value. For example, if your startup get $2,000 worth of massages during the program, don’t add the $2,000 in free services to the $25,000 investment amount. Determine how much of your startup’s equity you’d actually give up for those services if they weren’t provided free — it may be worth $2,000 retail but it can also be worth 0% of your startup.

Thus, if your startup is willing to give a couple points to a few advisory board members, determine how much the incubator’s mentorship (and introductions) equates to an advisory board and assign a percentage. Now subtract that amount (and any additional equity amounts you have assigned to other intangibles at the incubator) from the total equity the incubator is requesting.

Using the previous example, if your startup believes the mentorship is worth 2%, then re-calculate the incubator’s offer of $25,000 for 6% to $25,000 for 4%. The “revised for the cash investment only” pre-money valuation is $600,000.

(2) Scrutinize the Investment Structure.

Incubators aren’t non-profits, therefore in addition to asking for a low pre-money valuation, they may structure their investment in a way that helps to ensure a higher return across their portfolio. Most incubators take common stock and sit “side-by-side” with the founders, but some may want some (weak) preferred stock and/or dilution protection.

Other incubators may want to set up an option pool. If so, the startup’s founders need to know this option pool lowers your pre-money valuation. Using the previous example, if an incubator wants your startup to set up a 15% option pool as part of the $25,000 for 6% of the company, the pre-money valuation gets effectively reduced to $329,167.

Like any issuance of stock or investment, one of the main things a startup should be concerned with is: Is this going to fuck up a future financing? (Technically, your startup should be asking this question for any contemplated transaction.)

If the terms won’t hinder a future financing, then your startup is good to go. If the terms will, then the question becomes: is the incubator going to waive these terms when a VC makes the request — without asking for anything in return for the waiver?

(3) Research the Mentors.

I wrote in a previous post, startups value mentorship over money when it comes to incubators. Research the mentors so you can accurately assign the amount of intangible value (in equity percentage terms as discussed in point 1 above) and justify the shitty pre-money valuation.

Analyze the mentors not just in what those mentors currently do or did when you were in middle school — but also how they fit with your team and your startup’s product. Do they know your space? Will you get to select your mentor or mentor group? How often will mentors drop in or otherwise be available?

(4) Inspect the Office Space.

Some incubators offer free office space. If so, check out the lay of the land to determine if your startup can be productive in the office space. Does your startup get a private office or will it share space coworking-style? How is the conference room and how hard is it to schedule time in the conference room? Can you break away for a confidential call from your girlfriend or potential VC investor? Do the chairs make your butt hurt after sitting in them for more than one hour? How is the technology?

(5) Figure Out Your Incubator’s Class End Date.

When does the mentorship and other benefits end? Can you continue to work out of the incubator’s office after your class ends? While most incubators’ class end dates fall around the respective incubator’s demo day, what type of support will you receive post-demo day from the incubator and/or the mentors? The best incubators are going to have no true “end date” and will be a forever-resource with respect to mentorship…although the incubator can likely only offer office space until the next class of companies move in.

(6) Search For the Incubator’s PR and Marketing Efforts.

If the incubator doesn’t take its class “stealth,” take a look at what the incubator does to market itself and its incubated startups. Take a look at pictures and videos from previous demo days, if any, and see if they’ll help get your startup’s name out there. It’s not really a demo day if only friends and family show up. Of course, joining some incubators give startups an instant “I’m Awesome, Fund Me Now” virtual-badge. Nonetheless, if an incubator can’t promote itself, how is it going to help promote your startup or the crucial demo day event?

(7) Reach Out To Prior Incubated Companies.

If you contact a startup that was part of an incubator’s past class know that you are accepted to and contemplating the same incubator, you should not have a difficult time getting a few minutes from one or more of that startup’s co-founders. Ask them about points 1-6 above but go further — ask them which mentors they perceived as being the most helpful or even which office to snag if you move in to the incubator’s office space. If a startup doesn’t get back to you, then that may tell you something, but don’t automatically assume that startup had a bad experience with the incubator.

(8) Determine the Opportunity Costs.

A startup that is accepted by an incubator may have an alternative funding offer from an angel investor. This can add complexity to a startup’s decision, because maybe the angel doesn’t want your startup to join the incubator. If the angel investor is offering an investment amount (greater than the incubator) that would “guarantee” your startup will reach a certain goal, it may difficult to accept the incubator’s offer. Regardless if your startup has an angel investor lined up, your startup will need to have a tangible goal in accepting the incubator’s offer that can be realized by completion of the program (or shortly thereafter). If not, the incubator is just a bridge financing to potentially nowhere for your startup.


Getting into an incubator is an exciting experience for any startup, but before signing up take a look at the incubator and how (much) it will help your startup. With the explosion of startup incubators, I hope the list above is helpful in determining whether your startup should accept such an offer. The more intangible value you can assign to the incubator, the more appealing the incubator’s offer will appear.

Tech Wildcatters Applications Due January 16th

Dallas-based Tech Wildcatters is set to launch their 2nd class and will stop accepting applications January 16th. Their inaugural class of 5 companies raised over $4,000,000 in funding through two venture and two angel rounds.

Tech Wildcatters is a startup accelerator that offers up to $25,000 and 12 weeks of hands on mentorship. Here’s what they look for in a startup:

-2 or more founders (there’s way too much work for just one person)

-Web, mobile, software, SaaS, tech enabled services, or any other kind of highly scalable tech

-B2B focus (i.e. the majority of your revenue needs to come from businesses)

-Ability for all founders to attend the 12 week program in Dallas

Semifinalists will be invited to Quick Pitch day in January where you will have the opportunity to learn more about the program and pitch to the entire mentor group. A community happy hour with Brad Feld will follow where he will be signing his book “Do More Faster”. Quick Pitch is a closed event.

Tech Wildcatters is looking to work with 7-10 companies in this class. And they plan to start having 2 classes per year.
Start here to apply.

Mentorship over Money (and Office Space)

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.