Three tips for spotting “predators” that may stunt your startup

The number and type of accelerators and incubators populating Australia’s growing startup and entrepreneurial ecosystem is increasing.

Some offer formal programs that include support such as mentoring, training, corporate services, office space, marketing, recruitment, tech support, investor introductions, events, strategic partners, and international study tours. Some offer capital and have the appearance of a more traditional investor, but with ‘value-add’ benefits.

At a glance this sort of help appears to be beneficial, particularly for startups that feel like they are stalling. And for some, it just might be the right move.

But some investors or accelerators are predators that may stunt your startup, load it with debt, add to your stress, and provide little or no additional benefit.

Here are three tips to help you spot the predators:

1. Read the fine print

Like any contract or agreement, founders should undertake their own comprehensive due diligence before committing to an investor, incubator or accelerator program to understand thoroughly what’s on offer, the value proposition and terms and conditions.

Be focused and clear on the business outcomes you would like to achieve from their investment and consider alternative pathways. Can the same business outcomes be achieved through alternative means, at a lower cost, equity, or timeframe?

Ask diligent questions that explore how the investor or program can add value and help your startup. Where and how will the investor or program add value to your startup, will they provide access to specific industry expertise, and how will the relationship function post the investment or program?

While past performance isn’t always the best indicator of future performance, it’s worth exploring whether the investor or program have had success in the past and validate these claims. Are there any portfolio companies that can provide information about their experience?

2. Be wary of bundled services

Where marketing, technology and other services are bundled, founders should be particularly cautious and consider the impact if the quality of services provided is not satisfactory and how they would manage it.

What contractual agreements are in place and how easily could you move your startup to another provider or bring it in-house in the face of poor service or as you grow in the future? What is the agreement around intellectual property and could it result in potential conflicts or issues for other investors now and in the future?

3. Prepare for future investors

When exploring the terms of the investment or program, founders should be mindful of the needs or possible expectations of other potential investors in the current and future funding rounds.

Are there preferential or complex terms that would be unfriendly for other investors and could the bundled services add conflict and friction for other investors?

In particular, founders need to think carefully about future investors when discussing the valuation of their startup and the terms being offered.

Will there be enough equity for founders to dilute for future investors and still have a meaningful stake in the business to be motivated to grow the business?

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