It looks like we have raised some controversy and questions around the funding model we have chosen for Oxygen Accelerator. So this blog post is in response to some of the questions/points raised:

Q. We could just go get a bank loan and not have to give up any equity?

A. It is true there are alternative sources of funding including bank loans through the government supported Small Firms Loan Guarantee scheme; this loan is only available to companies that can prove the ability to repay it, however these loans charge a facility fee, are interest bearing, have fixed payment terms, and the founders are required to give personal guarantees. The 70% guarantee made to banks by the government only kicks in once the personal guarantees from the founders have been exhausted. Our loan is interest free, has no fixed term, is secured only against the business, does not have any personal guarantees and is only repayable if and when the business can afford it without jeopardy to the business. If the business fails (which inevitably some will) the loan is written off. It is made at a time when in most cases the founders have an idea; they may not have incorporated, may not have a business plan or even a well thought out strategy.

Lots of people have understood what we are offering – here is a comment on HN from ‘lionhearted’ which sums it up well.

“I could see circumstances that I’d take this deal in a heartbeat – starting a brand new company with 94% equity, $33k cash in the bank, and a $33k loan with very flexible repayment terms seems like it’d have a much higher chance of success than starting with 100% equity, $0 cash, and $0 debt.”

Q. Isn’t 6% equity for a 20K loan a ridiculous interest rate?

A. The 6% of equity is not directly related to the £20k. The 6% equity is in return for the full programme, including aftercare. We are enabling companies to reach an entirely new level, through the provision of facilities, mentor guidance, accommodation, investors, an evergreen loan and office space for 6-months – plus we will keep a vested interest, providing an open-door policy to the team in Birmingham.
An important point is that it’s a loan of UP to £20k – purely to enable the teams to get onto and through the programme. It is not seen as an investment to last them post-bootcamp, but allows them to reach ‘investor day’. They don’t have to take this loan if they don’t require it.

Q. Why wouldn’t I just bootstrap rather than taking a loan?

A. Bootstrapping is a great way for a startup to get off the ground, but often requires the founders to take on debt via credit cards or loans from friends and family which also have to be paid back. The difference here is we are offering a programme (facilities, mentor guidance, accommodation, investors and office space for 6-months) that includes an interest free loan to your business with no personal guarantees.
Here is a HN comment from tptacek

“Loans and lines of credit often don’t require equity. They frequently do require you to put up your house. You cannot pull an interest-free loan, backed only by your corporation, off a tree. It is a real offering. It is not reasonable to call it a “mugging”.”

Q. I’m having a hard time understanding why they want the money back if they’re taking so much equity.

A. Typically it takes 3 years + to get a return on an equity deal so if you are running an accelerator at least once a year you need to be able to fund it for at least 3 years before getting (3 * £200k = £600k + running costs = £1million) any return. By using an evergreen loan model we stand a chance of returning some (not all) money to the programme quicker than 3 years and allowing us to sustain the programme and support more entrepreneurs which has to be a good thing for the entire community.

Q. If we make it big it’ll be 6% of a much larger amount (think $10,000,000+). $600,000 is a little more than the interest you’d pay on a $33,000 loan at 6%?

A. The type of high-growth tech businesses we are looking to support on the programme will need additional rounds of funding and therefore our 6% equity will be significantly diluted. It would be great to think that all businesses will exit for $10million + but the reality is very few will so the return is unlikely to be anything like that.

Q. Not all accelerators are equal

A. I agree and not all startups are equal and what works for one doesn’t always work for another. I don’t seek to compete with Tech Stars, Seedcamp, Y combinator or any other scheme. I applaud their efforts in what they do for aspiring entrepreneurs; any reference I make to them is around the fact that we are offering a 13-week bootcamp that is mentor intensive in order to assist companies in raising their next round of funding.

Q. This is a rip off for startup founders who don’t know any better.

A. I think this does the tech community a dis-service. The vast majority have a very good understanding of these matters and are more than capable of weighing up what is the best programme for their startup. The fact that this is not an identical offering to other accelerators does not make it a rip off, it makes it different.

Q. The loan information is buried in the FAQ’s

A. The FAQ’s are hardly buried they are very clearly displayed on the Accelerator page. All the accelerator sites use the FAQ’s to provide the detail around their programmes. However, to ensure its very clear we have added the words “soft loan” next to the £20k on the home page.

Q Why don’t we just get Angel or VC investment?

A. There are a lucky few startups that turn up and pitch an idea to an Angel or VC and get funding but there are more that are not that lucky and have to actually prove traction, have a credible business plan or be revenue generating. What accelerator programmes like ours do is help your startup get to that stage quickly (13-weeks), which means you are much more likely to then find the investment you need to grow the business to the next stage. Of course this is not the only way to become investment-ready; there are plenty of others and only you can make the best choice for your business.

Q. There are lots of accelerators why do we need one that offers loans

A. My experience is that there aren’t enough accelerators to support startups and many talented individuals with great ideas fail to get the support (financial and non-financial) to get their ideas off the ground. My programme is aimed to support those people that see the value of the programme; if they need neither the money or the support because they have all the skills and connections to go it alone then clearly they wouldn’t benefit from the programme. The fact that hundreds of people applying to Tech stars, Y Combinator and other accelerators aren’t successful suggests there is a need for more support to be provided (YC probably got 1000+ applications and selected 60 teams, so that’s 940 teams who will not receive support this year alone).

The rationale for it being an evergreen loan is so that the ones that do repay the loan, at a time when arguably they no longer need it, is to allow other entrepreneurs the same opportunity for the long term. Other schemes such as Difference Engine were funded by regional grant type funding which, as government cash ran out, were closed and therefore no longer open to budding entrepreneurs, despite the fact that many of the companies that benefited from the programme have gone on to successfully raise further rounds of funding with the assistance of the programme and arguably don’t need the original funding anymore. Our aim is to make the programme sustainable and not at the whim of investor sentiment. The evergreen loan model in theory returns money back to the programme quicker than an equity-only model and hence allows us to support more entrepreneurs.

Mark Hales
http://oxygenaccelerator.com/blog/2011/05/oh-no-its-a-loan/