TechStars CEO David Cohen On Giving Startups A $100,000 Shot In The Arm (Or A Kick In The Pants)

In our Fast Talk series, innovators and entrepreneurs answer questions about making good products and breaking bad news. David Cohen, founder and CEO of the prestigious accelerator TechStars, discusses his approach to telling entrepreneurs they didn't make the cut, or worse...

The pioneering technology accelerator TechStars did something for its own business rather than the fledgling companies in its program last week, raising $24 million in venture funding (bringing their total to $34 million) from some 75 venture funds and angel investors. Of course, TechStars plans to use that money to give $100,000 of additional seed finance to every single startup admitted to one of its programs in 2012 and beyond.

The funding could make the accelerator even more competitive than it is today from an admissions perspective. The pool of entrepreneurs vying for one of 60 spots in this prestigious franchise--currently operating in Boulder, Boston, New York, and Seattle--faces a 99% likelihood of rejection, reports David Cohen, CEO and founder of TechStars (in image above, left with David Tisch, right).

But it’s a small world, after all, especially in the tech startup scene. Here, collaboration is the new competition; survivors can only attract talent with a positive rep; and venture investors and angels do deals in syndicates, increasingly.

So how does TechStars break bad news--either to applicants, enrolled entrepreneurs in trouble, or even investors angling for a piece of the action--without making rejections feel like a slight?

Here’s what works, according to David Cohen…

FAST COMPANY: Can you explain how TechStars measure its progress as an incubator? What are you aiming to achieve?

DAVID COHEN: Ultimately, we measure ourselves on the success of our investments. We've already returned our 2007 and 2008 vintage funds in full to our investors, and have strong remaining upside. So we know the model works, and we think it's getting better every year. In the end, we're investors, and we should be measured that way.

Success is really hard to measure in a one-year timeframe. But there have been plenty of companies that have come out of TechStars [recently] that have raised large venture rounds, or become really interesting businesses.

We don't like to measure success by raising money though, and some of our most interesting companies have been heavily bootstrapped. It's an indication of interesting stuff, though.

Occipital [which creates real time panoramic views of the world] bootstrapped for a while, became very profitable, and then raised $7 million. SendGrid raised $5.75 million [for its email infrastructure in the cloud business and technology] and is doing fantastically well. OnSwipe [which helps publishers optimize and distribute their content to tablet device users] raised $6 million after completing the NYC program earlier this year. They also have a deal to power all Wordpress.com tablet views, now. CrowdTwist [a social media loyalty and rewards venture] raised $7.5 million from our early 2011 class.

In terms of stats, the average TechStars company now raises more than $1 million post-program. Seven of the first 20 and eight of the first 30 companies have now been acquired by the likes of Jive, Wordpress, and AOL, too.

Why--when it's getting more economical to start and run a business--do TechStars companies need a $100,000 convertible note up front?

Sure, it's economical... but living on $18,000 for three months, then surviving for another two or three months while you wait for a financing event to come together can be pretty rough, especially when you factor in a temporary move. The companies can't hire at all [given these circumstances].

We noticed that most of them were running around trying to raise a small amount of money during the program, causing them to become less focused. We think $100,000 seed financing is exactly the right amount to offer companies going through TechStars.

What makes entrepreneurs want to get into TechStars above other programs?

Geography is certainly part of it--we're [operating] in fantastic markets. But I think it's the community approach; we're supported by more than 75 venture funds and angels. As you can see, our new funding round comes from a wide national syndicate. That's unique--and it means you have many high quality people and funds vested in your success if you get into TechStars.

It's also the mentorship--our mentors are the best of the best, and they engage deeply with our companies. I also think our alumni are spreading the word--they've loved their experiences.

Lots of incubators or accelerators are trying to do what you do.How can you stay dominant in this crowded space? Is it all about offering more money to businesses that make the cut?

Like anything, I think it's having a quality product. Our product is helping our companies. We're giving them unfair advantages. We're building their network. We're providing the best access to funding as efficiently as possible. We're also focused on quality over quantity.

We fund about 10 companies at a time, and put all of our energy into them. Quality and a great product matters, in startups, and in accelerators…

How does a CEO get into TechStars, now? Are there new tests to pass with this funding?

Nothing changes with the funding. We will continue to vet companies on the big five things [we always have]-- team, team, team, market, idea in that order.

How do you deal with breaking bad news to people within the tight-knit community of startups, investors, and tech talent?

We try to be direct and explain the reasons behind such decisions. Ninety-nine percent of applicants don't make it in. We point them towards other opportunities, and try to answer each and every email. We sort of pride ourselves on this.

Our goal is to be honest and direct with them. Often it's not that they suck, it's that we had other stuff we were more interested in--but when they have issues, we just try to point those out directly. We may, of course, be wrong.

As for investors, they're used to competition for great opportunities. We tell them that they have to add value--it's really simple. Companies typically select investors that they think add the most value.

What do you tell an entrepreneur whose team, tech, or business model isn't really working?

Again, we can be direct with them. If you watch the six-part reality series about TechStars that’s now airing on Bloomberg TV, you'll see these "pivots," and you'll see us being direct about them. We stress that it's their company, and we're behind any decision they make. But we're direct and even aggressive with our feedback.

We encourage [TechStars] mentors to be the same. They have to take a Socratic approach. We encourage them to share their opinions very directly. Patterns emerge quickly.

Who do you think is really good at breaking bad news in business?

I don’t know. But it's never as bad as you envision it. It's like ripping off a Band-Aid. I think entrepreneurs really appreciate directness and honesty, coupled with empathy. That's the approach that I try to take, and that I encourage our team to take generally.

What do you personally do to prepare to “rip off the Band-Aid,” as you say?

I don't prepare much--I just go in and deliver the news. I've found that when I'm direct people almost always appreciate it. I've had to deal with entrepreneurs who did something really wrong, and I had to disassociate with them. In those rare cases, most of them have learned from it.

Basically, I don't tolerate dishonesty or things that are clearly immoral. Life is too short, and I have enough stuff to do with straightforward people. In the rare cases where I've had to cut a company loose, I just tell them why and wish them luck, and hope they learn something from it. I don't spend more mental energy on it than I have to, and I try very hard not to hold a grudge or try to negatively affect them either. It's just done for me.

[Image courtesy of: Bloomberg TV TechStars]

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