The recent shutdown of a startup accelerator managed by On Deck reminds that while these programs offer fledgling companies access to investors, mentorship and hands-on support, they are also companies themselves.
Why is this important: Startup accelerators attract attention in large part because of the highly regarded companies they help along the way, the way they design (and promote) their programs, and the high-profile gurus who run them.
- Y Combinator, founded in 2005, has become the most recognized and respected accelerator in the world. Yet a number of others have since built successful programs.
Background: On Deck was originally founded in 2016 as a way to connect budding entrepreneurs with each other to explore possible business ideas. It expanded last year to a formal startup accelerator program called ODX.
- As part of the move, On Deck sought to raise a $100 million fund to support businesses; at one point, Tiger Global (which quietly led On Deck’s Series B round) pledged to invest $65 million in this fund.
- However, the company later said it could only invest $10 million, jeopardizing On Deck’s accelerator plans.
- On Deck had originally used some of its Series B funds to develop the accelerator, hoping its venture capital fund would soon provide more money, a source familiar with On Deck’s operations told Axios. .
Between the lines: “In the end, it was the money that unraveled everything,” the source explains.
- The hardest part of an accelerator is “how do you cover the management costs to hire more people to scale it?”
- While On Deck charges a fee to participate 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 company,” On Deck said in a statement. “The combination of a highly curated, non-dilutive Founder Program combined with On Deck’s funding option is a key differentiator for us. In fact, many of our Fellows are experienced, repeat Founders who have gone through traditional accelerators in the past and prefer our format because it gives them maximum options to explore further.
The big picture: Business models for startup accelerators vary from industry to industry.
- Some only use management fees from venture capital funds raised to support participating startups. This money, in turn, is used to hire program staff and pay for other resources.
- Others actually charge companies a fee, usually taken from the venture capital funding they receive through the program.
- And some look to sponsors and business partners to fund program operations.
What they say : “We’re here to help the founders,” Pear partner Ajay Kamat told Axios when asked if the company would ever charge a participation fee. “I don’t think that makes sense to us.”
- Notably, Pear is a small boutique operation and venture capital firm, so it is able to use management fees from its investment funds to pay the salaries of its staff, who also work on the accelerator. .
The plot: While charging fees to startups has always been considered predatory (or left maybe)this perception may be changing.
- “My view is that it’s totally transparent and fine,” said a former insider at 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 much higher management fees, which translates into the same savings for companies.”
The bottom line: “Everyone tries to be [Y Combinator] and they can’t do it,” the On Deck insider explains.
- “Anything that beats YC will be nothing like YC.”