UK startup accelerators take matched service charges on top of invested capital?

#1

Post by wolfer » Thu, Mar 12, 2015, 1:08 PM UTC

Recently myself and co-founders applied to a UK startup accelerator in the hopes of obtaining initial seed funding to kickstart our startup.

In the process of negotiating terms, it was slipped into conversation that the accelerator actually invests double the amount requested into the business (artificially inflating the business valuation and potentially creating some pretty big burnrate questions for future investors), which is paid directly to the accelerator on receipt of funds as a service charge.

This service charge is apparently there to facilitate the other "free" mentorship, office space and introductions that the accelerator offers.

It seems like this is a bit of a tax fiddle from an SEIS (Seed Enterprise Investment Fund) perspective, as all they are doing is draining the fund to essentially pay themselves, exposing very little risk, but obtaining a decent equity share in a new start up business. This also eats into the £150k of available SEIS funding, as a chunk of it is not invested at all, just leaving through the backdoor to pay the accelerator.

Is this commonplace and is anyone aware of other accelerators doing the same thing?

Re: UK startup accelerators take matched service charges on top of invested capital?

#2

Post by mrcold » Thu, Mar 12, 2015, 1:40 PM UTC

Congratulations. Today you figured out that startup accelerators, incubators, hubs, conferences and hackathons are just businesses trying to make money out of your enthusiasm and efforts. They don't do it out of the goodness of their hearts. They do it to turn a profit.

To answer your question, some of them take equity and others take cash. Either way, you're getting screwed. Unless, of course, you just keep finding investors to pour money into it. If that's your objective, the price is usually worth it.

Re: UK startup accelerators take matched service charges on top of invested capital?

#3

Post by cj » Thu, Mar 12, 2015, 1:41 PM UTC

500 Startups does this too. From their website:

"We invest $100k in exchange for 7%, and charge a $25K program fee for a net $75K investment."

Not quite sure why some accelerators do this.

Re: UK startup accelerators take matched service charges on top of invested capital?

#4

Post by solve » Thu, Mar 12, 2015, 1:43 PM UTC

Commonplace, but what's the amount? Often they ask you to set aside 5% to 25% for them.

The one we went through got most of their fees via "highly recommended" legal and accounting service kickbacks, which charged far higher than market rate monthly retainers, for doing absolutely nothing in some cases. Lawyers and accountants who stood to benefit were literally partners at the fund... We decided to stick with our own accountant, and the accelerator got extremely upset at us for doing so. Some shockingly unprofessional, threatening, vague emails and lots of criticism for not choosing their accountants.

You are correct that the people running these funds will get paid no matter what, and will have absolutely no financial incentive to make you succeed. Quite the opposite. Ours in particular has done a lot to minimize their work, drag out anything they're required to do over months, and get rid of companies as quick as possible after their investment.

These can still work out, just know that these aren't the tier #1 funds that we're used to hearing about. Founder beware.

Re: UK startup accelerators take matched service charges on top of invested capital?

#5

Post by cj » Thu, Mar 12, 2015, 1:44 PM UTC

mrcold wrote: post #2

Congratulations. Today you figured out that startup accelerators, incubators, hubs, conferences and hackathons are just businesses trying to make money out of your enthusiasm and efforts. They don't do it out of the goodness of their hearts. They do it to turn a profit. To answer your question, some of them take equity and others take cash. Either way, you're getting screwed. Unless, of course, you just keep finding…

I started 2 companies through YC and Techstars and strongly disagree with this. Both were incredibly valuable and well worth the equity for us.

Edit: I didn't mean to say that all accelerators are worth it, but I disagree with the sweeping generalization that all accelerators are screwing their companies.

Re: UK startup accelerators take matched service charges on top of invested capital?

#6

Post by wolfer » Thu, Mar 12, 2015, 1:51 PM UTC

solve wrote: post #4

Commonplace, but what's the amount? Often they ask you to set aside 5% to 25% for them. The one we went through got most of their fees via "highly recommended" legal and accounting service kickbacks, which charged far higher than market rate monthly retainers, for doing absolutely nothing in some cases. Lawyers and accountants who stood to benefit were literally partners at the fund... We decided to stick with our ow…

This particular one was £50k investment for 9% equity, plus they send an additional £50k to the company, which is transferred immediately as a "service charge".

Writes off £50k of your SEIS allowance as a business, which as I'm sure you know is like gold dust for the first £150k, as 50% of the investment can be written off against investors income tax, then a further 30% if the company fails.

If the company succeeds, the investors pay no capital gains on sale of shares.

Re: UK startup accelerators take matched service charges on top of invested capital?

#7

Post by ilghiro » Thu, Mar 12, 2015, 1:54 PM UTC

cj wrote: post #5

mrcold wrote: post #2

Congratulations. Today you figured out that startup accelerators, incubators, hubs, conferences and hackathons are just businesses trying to make money out of your enthusiasm and efforts. They don't do it out of the goodness of their hearts. They do it to turn a profit. To answer your question, some of them take equity and others take cash. Either way, you're getting screwed. Unless, of course, you just keep finding…

I started 2 companies through YC and Techstars and strongly disagree with this. Both were incredibly valuable and well worth the equity for us. Edit: I didn't mean to say that all accelerators are worth it, but I disagree with the sweeping generalization that all accelerators are screwing their companies.

Looks like you're based in the US. In the UK making sure you don't fritter away SEIS money is enormously important. Effectively you have an £150k allocation up to which investors can claim 50% relief in the form of income tax deductions (plus many other great things).

Whatever reason the accelerator is doing it for (whether good or bad for them) is bad for the company if it's losing some of it's allocation without seeing the money. A lot of early stage investors won't touch a non-SEIS deal.

Edit: Also for every YC/Techstars/500 there's a 100 "incubators" that overcharge and underdeliver.

Re: UK startup accelerators take matched service charges on top of invested capital?

#8

Post by wolfer » Thu, Mar 12, 2015, 1:55 PM UTC

wolfer wrote: post #6

solve wrote: post #4

Commonplace, but what's the amount? Often they ask you to set aside 5% to 25% for them. The one we went through got most of their fees via "highly recommended" legal and accounting service kickbacks, which charged far higher than market rate monthly retainers, for doing absolutely nothing in some cases. Lawyers and accountants who stood to benefit were literally partners at the fund... We decided to stick with our ow…

This particular one was £50k investment for 9% equity, plus they send an additional £50k to the company, which is transferred immediately as a "service charge". Writes off £50k of your SEIS allowance as a business, which as I'm sure you know is like gold dust for the first £150k, as 50% of the investment can be written off against investors income tax, then a further 30% if the company fails. If the company succeeds,…

To further add to this, it's not necessarily the fact that they take a service charge that I take issue with. It's the complete lack of transparency up-front and only once you're close to getting on the program that it's ever disclosed.

Re: UK startup accelerators take matched service charges on top of invested capital?

#9

Post by fsk » Thu, Mar 12, 2015, 1:57 PM UTC

cj wrote: post #3

500 Startups does this too. From their website: "We invest $100k in exchange for 7%, and charge a $25K program fee for a net $75K investment." Not quite sure why some accelerators do this.

If you invest $100k in exchange for $25k services purchased, you now have $25k revenue. If your business is valued at a price/sales ratio of 20, your business is now worth $500k.

Re: UK startup accelerators take matched service charges on top of invested capital?

#10

Post by solve » Thu, Mar 12, 2015, 2:09 PM UTC

wolfer wrote: post #8

wolfer wrote: post #6

Earlier quoted context omitted.

This particular one was £50k investment for 9% equity, plus they send an additional £50k to the company, which is transferred immediately as a "service charge". Writes off £50k of your SEIS allowance as a business, which as I'm sure you know is like gold dust for the first £150k, as 50% of the investment can be written off against investors income tax, then a further 30% if the company fails. If the company succeeds,…

To further add to this, it's not necessarily the fact that they take a service charge that I take issue with. It's the complete lack of transparency up-front and only once you're close to getting on the program that it's ever disclosed.

The transparency for accelerators is terrible now. Every founder presumes that the new accelerators are at least trying to follow the template of the best accelerators. Surprisingly often that's not the case whatsoever, down to the smallest meaningless details.

A good start might be submitting those details to (http://accelerat.io/). They seem to be tracking this.