Reading over a few important posts at Startup Lawyer, I came across a post on incubators with a very apt observation:

Startups don’t evaluate their participation in an accelerator by asking “Is the $20k worth the equity given up to the accelerator?” Rather, startups ask “Is the mentorship worth the equity given up to the accelerator?”

$20k is easy to come by, in Australia at least. Quality mentors, not so much.

I remember Mick Liubinskas asking me what I would pay to join an incubator like Startmate. It was his way of gauging the value it offers. At first, it sounds like an odd question. A startup usually considers the incubator to be the one paying, they’re forking out the money after-al.

But by selling 7.5% of the company for $20k, the startup may be paying through the opportunity cost. Often 7.5% of the company is worth more than $20k. Access to and ongoing involvement from experienced mentors on the other hand, makes up the difference for any undervaluation. An incubator sells access to its mentors just as much as a startup sells its equity.

I think this mutually beneficial exchange is one reason the model is so successful.