Equity for nothing? Advice ain't free

Summary:The incubator buzz has grown into a fully fledged bubble with the launch of a new type of company that takes a "significant minority stake" in a start-up, but doesn't give any cash in return.

The incubator buzz has grown into a fully fledged bubble with the launch of a new type of company that takes a "significant minority stake" in a start-up, but doesn't give any cash in return.

It seems as though there's a new incubator and seed accelerator being launched every week, and they have helped to solve a very big problem in the market by providing a combination of funding, expertise and contacts.

In the sparse Australian start-up landscape, incubators have served as a beacon for entrepreneurs that are unsure about how to take the first step. It's also a way for successful entrepreneurs to give back to the community, but the investment model means they also have a vested interest in ensuring that the start-ups succeed.

However, an incubator is only as good as its mentors, and the reality of Australia's small population means that there is only a limited amount of suitably qualified and experienced mentors that can truly add value.

It would be best described as an 80/20 rule, where 20 per cent of the mentors deliver 80 per cent of the value.

In my opinion, a bit part of that 20 per cent is largely concentrated on the likes of Startmate, PushStart, York Butter Factory and AngelCube. These models were validated when we revealed that the Startmate alum and digital receipts start-up Grabble was recently acquired by retail giant Walmart, in a deal understood to be around the $10 million mark, which would have provided a nice return on investment for the Startmate investors.

As the mentor pool dries up and the incubator hype grows, it's only a matter of time before the limits of the model are tested. I think it's already being tested, after seeing earlier that BlueChilli, a new incubator brand, would launch two hubs for tech start-ups in Australia — one in Melbourne next month, followed by a Sydney roll-out in January.

More interesting is the fact BlueChilli was actually founded as an SMS service in 2006, according to reports, and only became an incubator a year ago, after being acquired by Domenic Carosa, also an investor in start-up DriveMyCarRentals.

Reports said that the scheme will take a "significant minority stake" in the start-ups, typically around 40 per cent, and will not provide cash in return for the investment, instead providing experts and technical help.

I don't see the value in this program, considering the amount of resources are available for those brave enough to ask.

In my travels, I've found that there are plenty of experienced mentors that are generous with their time, and always keen to meet and advise enthusiastic, skilled individuals.

Similarly, start-ups and entrepreneurs understand the value of freely helping out their own, because it helps the overall community.

If you lack technical skills, the best way of testing an idea is to use an outsourcing website to employ a cheap developer to quickly hack together a prototype. Customers can engage with it, and qualified developers know that you're serious.

There are plenty of events in the community for newcomers to cut their teeth and make useful contacts, and the recent start-up building event Startup Weekend Melbourne even offered a $5000 cash prize from Optus, and a $10,000 seed investment from Singapore-based incubator JFDI.

Optus didn't demand any equity, and, in exchange for taking a small stake, JFDI also provides the expertise and contacts of the wildly successful US incubator, Techstars.

Ultimately, if an entrepreneur leverages these types of resources, and still can't bootstrap their idea or start-up to a sustainable point, especially in the early stages, then I think they should probably get a full-time job.

My concern is that by taking part in programs like BlueChilli, entrepreneurs miss out on all-important lessons that are learned in the normal course of building a start-up from scratch, such as failing fast and expending "sweat equity". Entrepreneurs take on all the risk, and will have a relatively small return, while the BlueChilli and associated entities enjoy most of the fruits of their success.

It was only natural that these sorts of models would emerge in a small market like Australia, and from now on, the start-up generation should proceed with caution.

Topics: Start-Ups

About

Mahesh Sharma earned his pen licence in his homeland, where he covered the technology industry for ZDNet, SMH, Sky Business News, and The Australian--first as an FTE, and later as a freelancer. The latter fueled his passion for startups and empowered a unique perspective on entrepreneurs' passion to solve problems using technology. Armed... Full Bio

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