Entrepreneurs often flock to business incubators in search of advice, visibility and capital, but if pursued incorrectly, the association may do more harm than good.
Take it from the founder of a health IT startup in Minnesota who believes he made the right decision when he backed out of joining a local incubator his company had been selected for after initially being very excited. In a few weeks, Rashaun Sourles, cofounder of Qualtrx will instead join Blueprint Health, a healthcare incubator in New York that is part of the Techstars Network. For those who don’t know,Techstars and YCombinator are two successful incubators that are seen as sort of setting the standard for how incubators should function.
Sourles’ experience of applying to incubators, getting rejected by them, being selected to and then bowing out of Project Skyway tech accelerator in Minneapolis and finally getting accepted to Blueprint makes him a perfect candidate to dispense some advice on engaging with incubators.
Based on his experience, there appears to be three mantras founders must live by:
Scrutinize term sheet endlessly
When Sourles got the news that his company Qualtrx — a healthcare social network that moves sales between vendors and hospital systems completely online — had been accepted to the Project Skyway accelerator, he was elated. So much so that he naively sent out the news via email to business associates and friends alike without seeing the actual terms, although he had previously asked to see them.
Finally, when the organizers provided the term sheets very close to the launch, Sourles hit the pause button. Project Skyway founders were asking entrepreneurs to give up 9 percent of their company in exchange for $6,000 per founder. Initially, they were apparently asking for 6 percent.
Sourles thought 9 percent was too much, especially considering that Techstars only ask for 6 percent in exchange for $6,000 in startup funding per founder for a maximum amount of $18,000. YCombinator asks for between 2 percent and 10 percent, for up to $20,000, but the company has an established reputation.
The amount that founders give up is important because it affects the capital-raising activity of the company once it emerges out of the incubator. Here’s what Sourles advises:
“As soon as you start raising more money, the terms that you sign with the incubator become part of the due diligence with any investor. And when they see something that deviates from the standard, it becomes a criticism of the (entrepreneur) and not the incubator.When you get a term sheet from an incubator that doesn’t look like one from Techstars or YCombinator, it should be a red flag. Once you sign the terms, you are basically marrying the terms.”
Transparency is critical, too, Sourles believes. Look for incubators that readily provide terms up front or posts them on their website.
Also, the type of incubator is important. While Sourles believes that Project Skyway “is a net positive for the Minnesota community,” his interaction underscored the need for entrepreneurs to find the right fit. In Sourles’ case, he realized that what his company needed was a healthcare-focused incubator and not a broad tech accelerator.
How involved are the mentors?
Three months is a very short time and it’s very important to know what the syllabus will be, Sourles said. At Blueprint Health, the syllabus shows that mentors are going to be in the office almost daily speaking to the companies for the first six weeks of the program. That should be the model, Sourles said.
The syllabus should be packed with activities that the mentors are taking part in. If you look at a syllabus, it shouldn’t be ‘Today we talk about fundraising and tomorrow we talk about product.’ It should be ‘Today a mentor who has been there and done that is going to talk about product. Tomorrow another mentor who has been there and done that is going to. … Everyday should be packed with activities that the mentors are spearheading.
Don’t forget to grow the business
The process of applying to incubators and then interacting with them eats up a lot of time. It’s easy to get wrapped up in it, especially if the company has only one founder.
But it is paramount to continue to grow the business even as one applies to such programs. The three months will fly by and just doing the program is not enough. It’s still important to talk to customers and/or prospects. In Sourles’ case a cofounder will remain in Minneapolis to manage Qualtrx while Sourles goes to New York to join the incubator.
“An incubator will give you the pop, but you have got to grow the business,” he said.