Corporate & Securities Law

Mentorship over Money (and Office Space)

By Ryan Roberts

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 an 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.

Full post as published by The Startup Lawyer on October 09, 2010 (boomark / email).