The recent closure of a startup accelerator The program, run by On Deck, is a reminder that while these programs provide emerging companies with access to investors, mentoring and hands-on support, they are companies themselves.
Why it matters: Startup accelerators mostly get attention because of the esteemed companies they help along the way, how they shape (and promote) their programs, and the high-profile gurus who guide them.
- Founded in 2005, Y Combinator has grown to become the most recognized and respected accelerator in the world. Nonetheless, a few others have since developed successful programs.
Background: On Deck was originally founded in 2016 to connect aspiring entrepreneurs to explore potential business opportunities. It was expanded last year into a formal startup accelerator program called ODX.
- As part of the move, On Deck attempted to raise a $100 million fund to support 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 company later said it could only invest $10 million, jeopardizing On Deck’s accelerator plans.
- On Deck had initially used some 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 activities told Axios.
Between the lines: “In the end, it was the money that cleared it all up,” the source explains.
- The hardest part of an accelerator is, “How do you cover the management fees to hire more people to grow it?”
- While On Deck charges for participation in its various other programs, it chose not to do the same 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 program for founders coupled with the ability to fund through 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 freedom to explore what’s next.”
The big picture: The business models for startup accelerators vary across the industry.
- Some only use management fees from venture funds raised to support participating startups. This money, in turn, is used to hire program staff and pay for other resources.
- Others actually collect fees from the companies, typically taken from the venture funding they receive under the program.
- And some are turning to sponsors and business partners to fund the operation of the program.
What you say: “We’re here to help the founders,” Pear partner Ajay Kamat told Axios when asked if the company would ever charge equity fees. “I don’t think that makes sense for us.”
- Specifically, Pear is a small boutique business and venture firm, allowing it to use management fees from its mutual funds to pay the salaries of its employees who also work on the accelerator.
The Intrigue: While charging startups has historically been considered predatory (or Gauke perhaps)this perception could change.
- “It’s completely transparent and fine in my opinion,” said a former insider of 500 Global, which is currently charging $37,500 for its flagship accelerator.
- “I think the way other accelerators that don’t have funds are doing this is a much higher management fee that impacts the same economics for the companies.”
The bottom line: “Everybody goes out and tries to be [Y Combinator] and they can’t,” says the On Deck insider.
- “What hits YC won’t look like YC.”