Accelerating the Future of Startups

I’ve gotten a few notes over the last week with the news of Techstars announcing Techstars 2.0. The true headline, however, was that Techstars was shutting down most of their city programs, including Seattle, Boulder, Austin, Chicago, Toronto, as well as many others. The specific list of shut-down programs wasn’t announced but piecing together posts from various managing directors there appears to be 25 remaining programs with a few major cities including Tokyo, London and NYC currently listed on the founder application site without a director.?

According to TechCrunch, the company lost millions this year, making a departure from many cities necessary. David Cohen, the founder of Techstars, and Nicole Glaros, one of the early directors, shared thoughtful posts summarizing their views that, as times have changed, a new direction was both healthy and necessary. I agree.

I really love the vision of Techstars, to empower entrepreneurs and #GiveFirst, and I enjoyed directing two cohorts in the Boston program a few years back. I’m thankful to David for starting Techstars and helping thousands of founders. I’m hopeful that Techstars can pivot to help thousands more.?

In digesting the news, there are a number of signs that there was trouble in the water. My own view is that Techstars, like many of the startups it supports, is struggling with the key elements of growing a business. This boils down to three essential elements every company must master:

• Finding product-market-fit with a core customer base
• Ensuring strong financials to scale
• Building a resilient and thriving company culture

Core target customer

Techstars identifies three core customer groups. In “startupland” we call this a two, or three-sided marketplace. This is a rather unusual structure for an investor, and the economics can lead to misaligned incentives.?

Most investors operate in a two-sided market. Traditional venture capital firms take money from Limited Partners and give that money to startups in exchange for equity.? The investor makes money by managing the investments and is paid a bonus if their investments do well. Even in this simpler two-sided market there can be mis-aligned incentives but Techstars has a third player.?

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Although Techstars writes that it has 50 accelerators, this actually comprises 25 programs that are run twice a year. Of the 25 current programs around 14 of those programs are sponsored and funded by corporations, economic development offices, or governments.? Examples include Cox Communications, J.P. Morgan, eBay, San Diego State University and others. The corporate interests in an accelerator program vary but it’s not always to generate the best financial return for investors.?

FounderScoop has a deep analysis that is fairly sharp with its observations of how the dependency on corporate money can cause problems and Chris Heivly points out how these programs don’t tend to create the economic development that they aspire to in smaller markets.?

So, who is the ideal customer? It has to be the founder.

The most crucial aspect of being a world-class startup accelerator is having exceptional founders.? The best founders refer new founders; they provide a network, and the best founders end up being LPs and Angels in future cohorts and classes. This flywheel is critical for long-term success. Very few startup programs have this flywheel, but without it, the accelerator won’t provide long-term value.?

The current investment structure of Techstars makes the classic flywheel impossible. Several investors expressed frustration that they couldn’t invest into a specific city program as was done in the early years of Techstars. The prior model incentivized individual directors to both fundraise and deploy capital. This incentivized local LPs to be more active with cohorts of companies and help them succeed. While a centralized fundraising approach can be appealing to institutional investors, institutional investors are less likely to help founders.?

Techstars CEO, Ma?lle, defended the decision to centralize in a TechCrunch article, stating, “Over the past six months, we tried again in three markets to have local fundraising to see if it was going to take off again. But it confirmed that it’s not working as well as it used to.”? It’s difficult to tell if this experiment was a centralized attempt to fundraise in local markets or local managing directors committing to raise and execute a traditional fund under the Techstars flag.? The incentives and corresponding results could certainly be different.

The issue is keeping the customer happy. Because corporate customers, founders and limited partners are all customers it’s becoming difficult to attract and retain future customers.??

Unit Economics & Scalability?

Every company must balance the profitability of individual unit economics with scalability. Techstars is no different and scaling before these financials are aligned can create problems.? Techstars started to put its foot on the gas in 2022/2023 to scale the company. The intent was to correct the financial model while scaling.? Perhaps the cash position of the company allowed for some experimentation, but the reliance on corporate accelerators to fund the underlying business became a liability as a number of these corporate programs didn’t renew.? Last year the company lost $7 million taking into account recent structural changes.?

There are typically only a few ways to correct for unit economic issues with a fundamental model.? Unfortunately you can’t scale if the numbers don’t work. You need to contract or secure external funding. The contraction has started but my estimation is that the next 18 months are going to be particularly challenging.??

My rough estimation is that Techstars requires a venture fund of approximately 1.5-2 billion AUM (assets under management) to support their current staff of over 300 people. According to a recent Techcrunch interview the last fund was $150M. A typical venture firm is run on 2% of invested capital so there is a wide delta from the AUM needed to operate the firm without dependance on corporate programs.

Company Culture

In my research on successful companies, it's often about the people. Great people are the life of a company, they breathe energy and passion into their work and they attract more of the same.? Great company culture is predictive of success. According to CB Insights about 26% of company failure is caused by company culture issues. On the other hand, a positive culture can lead to 20% lift in productivity, 59% lower turnover, and 21% increase in profitability, according to Gallup.??

The challenge that Techstars had when it came to culture wasn’t that anyone was a bad person. Most of the people I worked with were fantastic, but the company had an identity crisis between multiple customers, and business models.? Part of the company wanted to optimize and streamline corporate programs, others wanted to run it as a franchise, yet others wanted to focus on founders exclusively like a more traditional venture investor. These are fairly divergent directions for a company.

Over the years this has led to some exceptional people, leaving to start their own venture capital firms. Over, and Over, and over, and over again, and these are just the ones I know personally in Boston and NYC.?

I believe a new strategy focused on doubling down on core cities could potentially align the company culture, provided that the new strategy is also able to attract and incentivise the best people to stay and build the longer-term culture, career progression, and succession of the firm.?

;tldr

I hope Techstars can continue to support thousands of founders going forward. I think it’ll require some difficult changes. There are lots of founders that need early funding and help, and I can’t fund them all myself. :)?