18 Comments

Summary:

Startup incubator Bootup Labs has come under fire from startups after one of the entrepreneurs who was accepted into the group’s program said he and his co-founder had their dreams dashed and were left penniless as a result of promises Bootup Labs made and couldn’t keep.

Updated: Bootup Labs, a Vancouver, British Columbia-based startup incubator, has been caught in the middle of a firestorm in the last day, after one of the entrepreneurs who was accepted into the group’s Y Combinator-style program wrote a blog post saying that he and his co-founder had their dreams dashed and were left penniless as a result of promises that Bootup Labs made and couldn’t keep.

The blog post hit Y Combinator’s Hacker News discussion board and drew a ton of comments, including some from Bootup founders Danny Robinson and Boris Mann. They also commented on entrepreneur Jamie Martin’s original blog post, saying he had distorted the events and was making the incubator look worse than it was. Mann has also written a blog post in response to the allegations. Meanwhile, Bootup released a statement saying that it has brought in venture investor Boris Wertz as a board member, and had received funding from both Wertz and Growthworks, a Canadian venture fund.

According to Jamie Martin’s version of events, he and his partner were accepted into the Bootup Labs program and were promised funding for their service (known as Status.ly), only to be told after they had moved across the country that there was no money and they would have to leave the program. He says they were attracted by the favorable terms that Bootup Labs was offering, compared with other startup incubators such as Y Combinator. Bootup reportedly said that startups could receive C$100,000 ($99,950) over an eight-month period in return for a 5-10 percent equity stake in the company, while other incubators were only offering between C$5,000 and C$15,000 per founder over period of 3-6 months (there are more details on Bootup’s approach here, including several responses from Bootup Labs).

A few weeks ago, however, Bootup co-founder Danny Robinson told the company they had no money to offer them, Martin claims. Four of the seven other companies in the incubator were also told that they would not be funded. Martin says in his post that while there were some good aspects to the experience, it also “screwed me up pretty bad financially for the next year or so. I have thousands of dollars worth of receipts I’m just going to have to count as a loss now.” He also says that he has some advice for other startups in a similar situation, which is:

If you’re a Startup, and you’ve been accepted into one of these incubators, be sure to get some sort of paperwork done where money is provided, or proof of income is shown, or something. No matter how nice the people seem, and how badly your heart wants your business to succeed, don’t get yourself into a similar grey-area/possibly unethical situation.

In his post about the incident, Boris Mann says he was “disappointed” by Martin’s description of events, but admits that he is sorry that things worked out the way they did. “I can say that I know I broke a personal commitment and that I feel like [sh**] about it and have already said my ‘sorrys’ in person,” he writes. The Bootup Labs blog post, meanwhile, refers to “some hard choices” that the incubator had to make. In a nutshell, the group says it had to cut some of its member companies because funding did not come through as expected.

We had informed our 2010 cohort when they arrived that it was going to take a little while to close the fund because of some new canadian venture regulations that we had to abide by, and because one of our investors was unable to fund when we made a capital call. It was outside of our control, unintentional, and communicated immediately.

It took two months to recover but eventually realized that we were going to have a limited fund in the beginning of the year, and we had to make some hard choices. Either starve everyone with partial funding, or reduce the portfolio and fund them fully? We made the decision to cut the cohort to 3 companies, from 7.

It seems clear from both versions of events that Bootup Labs made promises to a number of the startups in its program — including signing term sheets with numbers attached, according to one source with knowledge of the program — even though it did not have the funds available. When it failed to get the funds in time, or to get as much as it required, it had to cut some of those companies. Bootup Labs obviously sees this as an unfortunate event, but one that was unavoidable and was communicated to the member companies as quickly as possible.

Some startups and entrepreneurs clearly think it goes a little further than that, however: They feel that Bootup should have been more forthcoming about its financing difficulties from the beginning, and not held out false hope to people like Jamie Martin. Either way, Bootup likely has some work to do to repair some of the damage from this affair. I’ve asked the founders for a comment and will update this post if I get one.

Update: One entrepreneur who has had dealings with Bootup Labs in the past, but who didn’t want his name used, said that the incubator has lost the confidence of the local startup community: “The market has clearly ascribed a confidence in Bootup Labs’ management expertise and that is factored at essentially $0,” this entrepreneur said. “And even now, Bootup will be forced to try to attract companies into its fold and only THEN can it try to raise money for them. It will be very risky for companies to get close to them as this is what happens when they fail at even that second-stage financing.”

Boris Mann responded via email, saying: “We communicated clearly internally, and Danny picked up the tab for Statusly’s living expenses, because they arrived with next to zero dollars in their pocket. Not going through with a signed term sheet is a pretty horrible thing to have happen (bad feelings, disappointment all around). You quoted my personal feelings on the matter already. Lots of people are speculating that somehow we’re still putting money in our pockets. Everything we have has gone into the companies that we’re working with and the space that we’re in.”

Post and thumbnail photos courtesy of Flickr user Erica Marshall

  1. Rich Greenberg Thursday, April 15, 2010

    Wow, awful. Sounds like there may be legal ramifications of this as well, contract failed to be performed. At least Martin’s expenses should be reimbursed rather than simply given a “sorry”.

    Share
    1. I think there has to be more than what meets the eye. My view is that we are going to see more such behavior surface as incubator/startup school madness spreads.

      Share
  2. Seems some entrepreneurs as well as technology veterans forget that similiar incubator behavior emerged in the late 1990′s as well. Old adage, those who didn’t learn from the past are doomed to repeat it.

    I feel for the startups involved, but not the least surprised.

    My $.02,

    Best.

    Share
    1. Thanks for the comment, Curtis — I recall many incubators of the kind you describe in the late 1990s. That adage is definitely appropriate.

      Share
  3. “It seems clear from both versions of events that Bootup Labs made promises to a number of the startups in its program — including signing term sheets with numbers attached, according to one source with knowledge of the program — even though it did not have the funds available.”

    This is a bit misconstrued. I’m a co-founder who joined Jamie here and went through this next to him, and we signed the same docs. I remain in Bootup. I moved my life from Chicago to Vancouver knowing full well the money was completely contingent on the fund closing. I say this in the context of the fact that I consider Jamie a friend and don’t mean to discount his perspective or opinion…just that the unfortunate events were purely that; unfortunate. No more, no less.

    Share
    1. Thanks for the comment, Derek, and for the perspective. Good luck with your venture.

      Share
      1. My pleasure, Matthew. I think the idea that a tangible hiccup like this would undermine the role that a firm like Bootup plays in the local community is overstated, and I know the value they offer young entrepreneurs is intact.

        Share
  4. Here in Montreal, I’ve had some dealings with 3 incubators in 1998-1999 before deciding that none of them knew what thy were doing.

    Their basic strategy was to have you sign off 10% of your company to them, then let you raise the money alone (because, like it’s so hard you know…) and cash out if you succeeded despite their scam.

    Detecting scammers is the first test in being an entrepreneur. If you fall for them, you’ll fall for all the other scammers that are likely to follow.

    Share
  5. By the way, Canada is the international capital of investment fraud (boiler rooms, telemarketing, pump & dump, etc.). This is because we have very lax laws and almost no enforcement.

    When someone in caught, they are given a small fine and let go with no criminal record.

    This is why people like Conrad Black are prosecuted in the US, not Canada where they are headquartered.

    Share
  6. [...] here at the accelerator.  I won’t recount that; you can find the story at Techcrunch, gigaOM, ReadWriteWeb, and others.  You can read the Bootup Labs piece [...]

    Share
  7. Brian McConnell Thursday, April 15, 2010

    I’ve never liked incubators as a category. Their basic business model is to glom onto a 10% stake in your company for mostly in kind “investment” (office space, “access” to mentors, etc). I put them in the same category as “finders”, who expect a similar cut for introducing you to someone who might at some future point invest in your company (you do all of the work to close the deal, of course).

    I have a simple rule of thumb for dealing with these people. While it is hard to precisely gauge the dollar value of an early stage company, it is very easy to measure the amount of time people have invested in building the company, its products, and IP, etc.

    So let’s say you have a few person-years sunk into your product, and someone wants a 10% stake. They better be prepared to put a half year into the project (real work, not just making introductions), or the hard cash equivalent. Otherwise they are a net drain on your business. This is an effective way to get rid of them, because at that point, the prospect of actually having to show up and work like you’ve been doing is less interesting than shopping for a Tesla Roadster, or whatever middle aged man-toy they’re fantasizing about.

    People who are really in a position to help you with introductions, and are made men (they’re almost always men), don’t need or want to own part of your company for a small favor. If someone expects ownership for “access” to people, that right there is a signal telling you to head for the exit. People who operate on this premise are almost always parasites, and if they entangle themselves in your business will create all sorts of headaches, such as inserting themselves into a deal they have nothing to do with, while delivering zero value.

    Share
  8. The idea of Canadian incubators is a massive joke. The bulk of their funding was probably through government incentives, r&d tax credits and TeleFilm’s media fund. It’s the typical retarded Canadian mentality where government funding is a primary source rather than looking for individual investment.

    Share
  9. [...] apologized publicly for the failure of the company’s Y Combinator-style startup camp, which fell apart last week after the fund failed to raise enough money to back all of the startups it had accepted into the [...]

    Share
  10. [...] apologized publicly for the failure of the company’s Y Combinator-style startup camp, which fell apart last week after the fund failed to raise enough money to back all of the startups it had accepted into the [...]

    Share

Comments have been disabled for this post