At Startup Incubator Bootup Labs, a Scandal Brews

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

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