This accelerator charges its companies $25,000. That's just wrong -- right?

By Erin Griffith , written on April 25, 2013

From The News Desk

At face value, it seems totally shady for accelerators to charge their companies a fee of $25,000 just to participate in the program. To understand why, it's best to understand the typical structure for an accelerator. There are plenty of variations on the model, but the standard is as such: Startups get a variety of services including office space, access to mentors, and discounts on nuts and bolts services like legal fees and servers. In exchange, the accelerator takes a 6 to 10 percent stake in each company, often alongside a tiny seed investment ranging from $20,000 to $40,000.

The people behind every program I've encountered try to give as much as they possibly can to the companies. That's because no one in any close-knit startup ecosystem wants to be viewed as taking advantage of founders. It's why articles like this one, which merely raises the question over whether accelerators help or hurt companies, ignite such passionate responses.

And it's why it's surprising that REach, the just-launched accelerator program from the National Association of Realtors, charges its companies as much as $25,000 to participate in the program. The fact was conveniently left out of my briefing on the program for this story, and since I learned about the fee, I've asked several accelerators if they've ever heard of such a practice.

The answer was a universal "no," with the only other comparable example being 500 Startups. That accelerator charges companies a program fee of $6000 per founder and $3000 per non-founder (the average cost for companies is $12,000 to $15,000, I'm told), but 500 Startups also invests $50,000 in each startup for a five percent equity stake, meaning the companies alway net positive. The consensus among industry people I talked to was that an arrangement that charges companies and takes equity with zero capital invested seemed shady and predatory. Some even equated it to the much-maligned pay-to-pitch events that take advantage of desperate startups' need to get in front of investors.

The startups are already "paying" the program when they give up equity. And many have argued that even that isn't worth it in exchange for the services provided by the accelerator. So why would a startup essentially pay its investor, while giving up equity at the same time?

NAR's answer is that its accelerator is not your typical program. As discussed in this initial article on the program, NAR picks companies that are more mature than your average accelerator batch, ranging from idea-stage to half-built. REach companies are later-stage, often with revenue. NAR also takes a smaller equity stake than most accelerators -- two percent to five percent.

Constance Freedman, Managing Director and designer of the program, called it a "nominal marketing fee," explaining that it is there to ensure the companies in her program are fully dedicated to making it in the real estate industry by having "skin in the game," she wrote in an email.

The companies in the program joined REach because it gives them access to one million real estate professionals through NAR, something most other accelerators can't offer. NAR doesn't want to endorse a product from a young startup that's simply going to pivot away from real estate two months in.

"History shows us that the most successful companies are those that dedicate their own efforts into being successful in the industry alongside ours, and we found that this model (a nominal fee) ends up being a better incentive to have them do so, ultimately resulting in higher success rates," Freedman says.

She noted that REach does not make money from the six companies in the program-- everything, including the fee, goes towards the program. And the fee is not necessarily a set amount: "We have conversations with them first and if it is the right fit there will be no road blocks to them getting into the program."

That explanation seems reasonable enough, but my concern is what the startups are told to expect in exchange for that investment. Accelerator programs in general are in danger of over-promising on what they can deliver to startups, which breeds a culture where companies arrive expecting success to just happen automatically. If they've paid a hefty fee for the program, I can imagine the founders feel even more entitled. They've essentially joined a paid marketing program.

So what do the startups get for $25,000? REach offers a nine-month program which includes monthly mentorship sessions and education on the industry, as well as a 500-person beta tester group and heavy promotion to the NAR's one million members. The end goal is not to get investors, but to get customers.

David Greenberg, founder and CEO of REach company, says he had no qualms about paying the fee for the REach program, because it is "far more likely to result in measurable business gains compared to other accelerators." The access to NAR members is "hugely valuable," because now his company's moving-related service has been vetted by NAR, he wrote in an email. "Realtors can therefore trust that we will deliver an excellent product."

Since this is the first program I'm aware of to use such a model, it's hard to tell whether it will work. If REach succeeds, it'll be because the program is not another Y Combinator wannabe. But even if that's the case, I can't imagine this model catching on in the wider ecosystem.

[Image courtesy recombiner]