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

• mrcold 12y ago
  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.
  • cj 12y ago
    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.
    • ilghiro 12y ago
      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.
    • solve 12y ago
      Don't do that. It's spreading the myth that these lower-tier accelerators are trying to do things the same way as the top-tier accelerators. That is extremely not the case, too often. Many times it's the equivalent of used car salesman / real estate broker type sales people - who are good at selling themselves to people with money and love to squeeze the most out of negotiations just for fun, with no clue or regard for the tech startups. Wish I was exaggerating.
    • pskittle 12y ago
      could you talk about your experiences with each and how different or similar they are?
• cj 12y ago
  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.
  • fsk 12y ago
    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.
    • pc86 12y ago
      > If your business is valued at a price/sales ratio of 20 How is that multiple even close to right? Everyone I've ever talked to says 5-10 is more realistic, and the push-back you get grows exponentially as you approach 10.
      • fsk 12y ago
        It depends on what kind of bubble you're in, and how negligent your investors are regarding due diligence. Obviously, if you invest $100k in a business in exchange for $25k services rendered, that isn't $25k of "real" revenue. During the 1999 .com bubble, Yahoo (iirc) and some other companies invested in startups, in exchange for an agreement to purchase their services. That let the corporation pad its revenue, inflate its earnings, and with an already-high P/E ratio, gullible investors bought.
  • patio11 12y ago
    My understanding is that it is largely an accounting optimization. Their explanation: http://www.quora.com/What-is-500-Startups-business-model http://www.quora.com/What-is-500-Startups-business-model Important to understand: they've got one brand but two entities, the investment fund and the accelerator. The accelerator is designed to take in $X per year in revenue and pay out $X in expenses, for a net profit of zero or slightly negative. (Having more than slightly negative is tax inefficient. You get to book the implicit tax value of the loss as a carryforward asset but you would have no way to ultimately realize it since the accelerator is designed in this model to never actually make significant amounts of money.) "But isn't it equivalent if you just give them $75k." No, not equivalent. This manages to teleport revenue through time from the eventual carry into the present, pays for present cash expenses, and gives that revenue favorable tax treatment. How exactly it's favorable tax treatment is a great question for a tax lawyer. Here's my layman's understanding: you can deduct expenses from capital gains prior to taxing them but they have to have a certain level of connection with the gains, and it is possible that "general administrative expenses of our operation" don't have that level of connection. Shuffling those expenses into the accelerator makes them clearly deductible against the accelerator's ordinary income, since the accelerator looks like any money-comes-in-money-goes-out IT business. The program fee is clearly revenue. Their rent is clearly an expense. If revenues equal expenses than their revenues are taxed at, effectively, 0%. "Tax optimization on $25k doesn't make sense" would be a sensible objection until you remember that 500 Startups operates at industrial scale and that this is suddenly $3 million in revenue a year. n.b. 500 Startups would, eventually, pay whatever the normal capital gains taxes are on the carry (and/or ordinary income tax if the law is ever changed to make it less favorable), in accordance with the standard treatment of investments under US tax law. It's not an avoidance strategy, it is a temporal optimization strategy. Edit to add: Above explanation is purely "My best understanding of the matter as someone who had no hand in putting this together." based on my inexpert understanding of standard US principles of taxation and their public statements about it.
• solve 12y ago
  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.
  • wolfer 12y ago
    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.
    • wolfer 12y ago
      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.
      • solve 12y ago
        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/ http://accelerat.io/). They seem to be tracking this.
• buro9 12y ago
  I think this is really bad. Specifically because of the way that it burns the SEIS allowance. I would be tempted to call HMRC and explain what the accelerator are doing, that they are using the investment incentive as a service charge for themselves, and to ask them to clarify whether or not this is allowed and the degree to which it creates an issue for your company.
• ukd1 12y ago
  YC does not do this.
• DanBC 12y ago
  You might want to let HMRC know about this. https://www.gov.uk/report-an-unregistered-trader-or-business https://www.gov.uk/report-an-unregistered-trader-or-business That page is aimed much more at the "cash in hand" trader, but they'll take reports on anything. You don't have to know that it's tax evasion to make a report.
• thom 12y ago
  This is commonplace. You may also find that you have to register for VAT and claim that back on the service charge to get the full amount you're expecting. It's pretty much a standard part of the Jon Bradford mentor-led accelerator startup kit, which has spread pretty far at this point. Only you know if it's a deal you can stomach.
• helen842000 12y ago
  Yes, I took part in a UK incubator programme. It was only seed stage investment but even still, a portion of the funding was taken by the operators for office space, mentors etc.
• brudgers 12y ago
  The only reason someone would take away potential runway from a startup that they are investing in is that they are running a lifestyle business rather than managing a portfolio of startups. One hit pays for all the overhead and then some. The experienced experts in startups play long not short.