The trouble with startup accelerators
The recent shuttering of a startup accelerator run by On Deck is a reminder that while these programs provide nascent companies access to investors, mentorship and practical support, they are also businesses themselves.
Why it matters: Startup accelerators largely get attention because of the highly valued companies they help along the way, how they design (and promote) their programs, and the high-profile gurus who lead them.
- Y Combinator, founded in 2005, has become the best recognized and respected accelerator in the world. Still, a number of others have since built successful programs.
Background: On Deck was initially founded in 2016 as a way to connect aspiring entrepreneurs with each other to explore possible business ideas. It expanded last year into a formal startup accelerator program called ODX.
- As part of the move, On Deck sought to raise a $100 million fund to back the companies; at one point, Tiger Global (which quietly led On Deck’s Series B round) committed to investing $65 million in that fund.
- However, the firm later said it could only invest $10 million, jeopardizing On Deck’s accelerator plans.
- On Deck had initially used a portion of its Series B funds to expand the accelerator, with the expectation that its venture fund would soon provide more money, a source familiar with On Deck’s operations tells Axios.
Between the lines: “The money in the end was what unraveled it all,” explains the source.
- The hardest part of an accelerator is, “how do you cover the management fees to hire more people to scale it up?”
- While On Deck charges fees for participating in its various other programs, it didn’t want to do that for its accelerator.
- “Tiger Global is a valued investor in our fund and in our corporation,” On Deck said in a statement. “The combination of a highly curated, non-dilutive program for founders combined with the option for funding from On Deck is a key differentiator for us. In fact, many of our fellows are experienced and repeat founders who have gone through traditional accelerators in the past and prefer our format because it gives them maximum optionality to explore what’s next.”
The big picture: Startup accelerator business models vary across the industry.
- Some use only management fees from the venture funds raised to back participating startups. In turn, that money goes to hiring program staff and paying for other resources.
- Others actually charge fees to the companies, typically taken out of the venture funding they receive as part of the program.
- And some turn to sponsors and business partners to finance the program’s operations.
What they’re saying: “We’re here to help the founders,” Pear partner Ajay Kamat tells Axios when asked if the firm would ever charge any participation fees. “I don’t think that makes any sense for us.”
- Notably, Pear is a small boutique operation and a venture firm, so it’s able to use the management fees from its investment funds to pay the salaries of its staff, who also work on the accelerator.
The intrigue: While charging fees to startups has historically been seen as predatory (or gauche perhaps), that perception might be changing.
- “My take is it’s totally transparent and fine,” said a former insider of 500 Global, which currently charges $37,500 for its flagship accelerator.
- “I think the way other accelerators that don’t have funds do it is a way bigger management fee, which nets out to the same economics for the companies.”
The bottom line: “Everyone is going out trying to be [Y Combinator] and they can’t do it,” says the On Deck insider.
- “Whatever beats YC is not going to look anything like YC.”