I’m not against accelerators and incubators in general. Many have founders best interests at heart Still others are wolves in sheep’s clothing, making money off the back end I have seen some very deplorable practices from these institutions that in the end are very bad for founders. Here are some behaviors to look out for.
- Equity Many accelerators will take equity in your startup. This is, after all, how they will make their money. To justify the equity they are taking, they will assign a pre-money valuation of your company, and then rationalize all of the services they are providing. These include rent, advisors, infrastructure. While I go into detail on a few below, pay attention to what you are really paying for these services. Since you are buying these services in equity, and not cash, giving up 30% of your company for office space, Internet and a few hours of advice can turn out to be very expensive.
- Real Estate Office space is very much a necessity for start ups. I know that some people advocate working from home or working remotely, but I firmly believe in having the team together. All incubators and accelerators will offer office space as part of the deal. Sometimes though the accelerator is providing this space at well over the market rates, and they make a tidy profit pocketing the difference. As a founder, know what office space leases for in your area and make sure you are not paying more than the market rate. In Ottawa, I can find a 200 sq. ft. Office that comfortable seats 2-3 people for $500 / month. Some incubators in Ottawa charge $600 per desk. That’s nearly 4 times the market rate for a team of 3 people.
- Advisors All incubators offer advisor services. This is often the biggest draw, the chance to learn from someone that done it before. This service should be free, just like it is free from venture capitalists who will invest in your company. If you are being charged for advice, either explicitly as a fee or implicitly as a line item in the equity calculation, be vey wary.
So look carefully at the terms of the incubator or accelerator, just as you would any other contract. Be wary of methods these organizations can use to take more from you than is warranted. Know what market rates are for services and, most importantly, what those services are worth to you.
Have you gone through an accelerator program or been part of an incubator? What was your experience like? Please share with others in the comments.