Equity for nothing? Advice ain't free

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.

TOPICS: Start-Ups

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.

Topic: Start-Ups

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  • Hi Mahesh.

    I think that you misunderstood the model.

    I interviewed BlueChilli founder Sebastien Eckersley-Maslin yesterday, for an article we posted on AnthillOnline.com. The model does not just provide advice -- BlueChilli actually builds the technology platform.

    So, while AngelCube or Y-Combinator, for example, might dish up $25k, which can be spent on many things (including $25k on tech to develop the nascent idea), BlueChilli actually builds the company's product/service/business (if it's web-based).

    That's nothing to be sneezed at. Many companies spend $50k to $250k getting their web-startup built, particularly if they are not web-savvy (and usually get it wrong).

    Personally, I think it's a smart model.

    Now, if only someone could set up another service that actually responds to the general lack of MARKETING and SALES skills among our technology startup set.

    Now, that would be a grand.
  • Thanks for the comment James.

    That doesn't change the main thrust of my argument that there are plenty of free resources, where entrepreneurs don't have to give up equity which can range from 5% to 95% (I've heard).

    Again, the value of the incubator is the mentors.

    In regards to equity for tech development, entrepreneurs are wasting their time unless the code being provided is so beautifully elegant and shames Google, Apple or Facebook.

    From my understanding, and own experience, the first version of an application/website is poorly scoped and almost always redeveloped as the business grows. This is where the value of a financial investor comes through, because they're committed for the long term.

    The quickest, easiest and cheapest way to see if an idea works as a technology - and proving its value for customers - is by using outsourcing websites. If people aren't comfortable with this they can also use third-party developers (I did this and learned a lot through the experience).
  • The good thing about the internet is you can be wrong, but you're never wrong for long!

    40% for "advice" is ridiculous and no-one would subscribe to that!  As James Tuckerman stated, I must correct you on that point.  BlueChilli typically invests $40,000 to $100,000 worth of market strategy, branding, graphic design, gamification workshop, business model development... and then we build the entire website and software application.

    We're a software company first, investment second.  For their equity, our invested companies receive ALL this and a fully working software package, not a "poorly scoped" site as you suggest.   If you're questioning the value we add, I'd invite you to contact the CEOs of our investments such as Vumero (which was even featured on ZDNet a little while ago), GiggedIN that has just started or StyleRocks.com that launched last week.

    Whilst being wrong is fun and has invited this open dialog, I do invite you to contact me the next time you write an article that features us. We don't hide who we are - our number is clearly on our website, we have a contact form, my twitter is @sebeckmas and my personal email was on the press release!

    In any regard, I'd be happy to have a coffee with you - I'll even pay for 40% of the bill ;)
  • Thanks Seb.

    The basis of my argument is that the strength of the incubator model is in its mentors, and there can only be a few successful incubators in Australia because of the limited pool of mentor and entrepreneurs.

    Further if an entrepreneur can't make the most of this and other available resources, they should get a job or be a skilled contractor.

    The incubator model has struck a nice balance between the investment structure, which means they have a vested interest in the entrepreneur's long-term success, without having complete control.

    For the investment figures you're proposing, there are established angel investors that would take a much smaller slice of equity, but the entrepreneur must satisfy rigorous due diligence. The angels also have skin in the game, and need to see a return on their investment.

    My argument still stands, despite the details of what is delivered for what amount of equity (which i'm told ranges from between 5 % and 95 %), but I'll add that i'm not really sure how a genuine entrepreneur can add value in the BlueChilli model.

    But I guess time will tell and like you said, on the internet you can't be wrong for long.

    PS I'll gladly discuss this further over coffee and will pay 50% of the bill (my half :)
  • Mahesh great article and I can relate to a lot of what you are saying. As a non tech founder working on my first startup it is insanely difficult to find a tech cofounder, however I don't think I would be willing to give up so much equity. After going to countless networking events, linkedin and twitter approaches I finally found a cofounder. There seems to be a shortage of available, entrepreneurial, technical developers who aren't working on something already so I do see the value in BlueChilli. Undoubtedly they will provide valuable resources so it would be useful to many non technical founders. However, despite not having a cofounding developer for 5 months, I have contracted someone to build the alpha and I guess earnt my way to a cofounding developer & designer.
    I also wonder how this would work out in the long term, not having a technical cofounder directly in the team. Correct me if I am wrong but I think VC's & investors would rather see a direct technical cofounder in the team rather than a software company incubator. Unless Sebastien or James this could potentially act as a springboard to get them kickstarted & find a technical team member later?
    Just trying to gain some clarity.