We have made some progress with our recent beta mhealth platform and have had offers from 3 of the new healthcare startup incubators, they are similiar in terms of equity and cash deals, how do we decide which one to work with?
I've worked with a couple of startups in your situation. Congratulations on receiving three offers. In this response I'll outline exactly how I coach entrepreneurs facing this decision. You can do it yourself but you might decide you want some help throughout the process. Feel free to reach out to me via Clarity for a free call.
When comparing a set of alternatives, start with your goals and work your way back. One exercise my clients find effective is thinking about what they ideally want their business to look like at the end of the incubator program and work their way backward.
Start by asking questions about your business goals. I challenge founders to think about what their balance sheet, income statements, and cash flow statements will look like at the end of incubation. Select the incubator that puts you in the best financial shape post-incubation.
Some people find it easiest to create these projections by looking at income statement first. Let's break it down:
Income - What are your revenue streams? How many customers do you have in each stream? What is the value of each transaction? How long do they stay with your company? Do customers come from the incubator's network?
(These are just some sample questions you'll want to answer. I invite other experts to add to the list. Feel free to reach out to me if you'd like mhealth specific questions.)
These questions allow you to come up with defensible projections about your income. The best way to answer these questions is to interview other clients at the incubator who are also in the mhealth space. Use their actuals to inform your forecasts.
By interviewing clients you collect evidence to inform your decision. Be cautious, though, about how much evidence you collect from each client base. If one incubator has two similar startups and another has twenty, have more confidence in the latter, since the sample size is larger.
Once you've got the data from other clients, think about how well it translates to your own business. For example, if your company earns $50 per month per customer and need 1,000 customers per month to succeed, and the clients you interview earn $200K per customer and need 3 customers to succeed, it is less certain that their results will translate to your business even though you'll bring in a similar amount after one year.
From these interviews you'll get a sense of what your income will look like. I recommend conducting these interviews over coffee or lunch. You'll get nonverbal cues about whether clients attribute their success to the incubator or to their own hard work.
Expenses - How much will it cost to build products? Access top talent? Acquire and maintain customer relationships? Retain professional fees? Overhead and administration?
Many incubators leverage its network to offer perks through partnerships to reduce expenses. Need project management software? You can probably find an incubator that offers a discount on Basecamp. Looking for a lawyer specializing in patent law in health? You might find an incubator with a partnership with Fasken Martineau.
Again, the best way to create your forecast is to ask about actuals. You probably already have a list of line items in the expenses section of your existing income statement. It's tough, and a little bit crass, to ask other clients to open their books to you, but the mentors at the incubator should be able to help you identify whether your estimates are high or low and help you adjust up or down accordingly. Interview as many mentors as you can to make the best possible decision.
Once you've collected the data, evaluate how relevant it is to your business and create forecasts from that information.
Now that you've got your income and expenses worked out, entrepreneurs tend to find the cash flow statement the next easiest part. You essentially want to make sure that you have cash when you need it to cover the bills.
Draw out M1, M2, …, Mn, where n is the number of months the incubation program lasts, in a spreadsheet. Write down when you think each infusion of cash will come and each bill will be paid. Do this for each incubator. Cash infusions might come from customer sales, equity investments, loans, or donations.
Are you in the red for any month? That's a warning sign that the incubator is a bad choice for you.
Take each document back to the mentors at each and ask if it passes the "sniff test". Ask them to adjust forward or back accordingly. Since they've already adjusted the dollar-values of each expense, at this point they should only be helping you identify if timing is accurate.
Still in the red in any month? Go back and negotiate better terms with more cash. Which one leaves you with the most cash at the end of the program? Is this the same one that gives you the most profit on your income statement? You might start to see a leading choice--at the very least, you should hopefully be able to rule one out.
With the income statement and cash flow statement you'll have an easy time preparing a balance sheet. Most of your assets will be cash and equipment (e.g. servers). Most of your liabilities will be accounts payable and any existing loans you have on your business.
Perform ratio analyses on each of the three hypothetical balance sheets. Ohio University has a great tutorial on the basics if this analysis is new to you.
Which balance sheet leaves you with the most favourable return ratios, with the most room for growth, at the lowest risk? Choose the incubator that is associated with that balance sheet.
I don't think you'll have a tie at the end of this process. But if you do, go with your gut. When meeting with clients and mentors, did you get a better "feel" from one incubator over another? Make your choice using qualitative criteria at that point.
An incubator's network tends to be its differentiating factor. The network that helps you reach your goals is the right one for your business. By thinking about how an incubator's network will impact your balance sheet, income statement, and cash flow statement, you'll be able to choose the right incubator for your business.
This approach has a second benefit: you're establishing relationships with clients and mentors at all of the incubators through this evaluation process. By doing so, you'll be able to identify potential partners who can help you succeed, even if you don't decide to work with their incubator.
I'm a big fan of paying it forward. In due time you might find yourself on the other side of the table, helping an entrepreneur decide on the right incubator, and you might decide one of the other ones is right for them. You'll be able to facilitate introductions to all of the people you meet through this process.
Nothing is more important to the success of your business than choosing the right investment partner. This decision is critical. Please call someone with the right expertise to coach you through your next couple of months. Every expert on here just wants to help people succeed. Take advantage of that. :)
Partner, Bansal & Power