We Got Accepted Into Techstars & Turned Them Down

Yes, we were accepted into one of the nation’s most prestigious accelerator programs and turned them down. So are we crazy?

 

I’m sure there are those of you out there that think we are nuts for turning this opportunity down. That’s fine and you may be right. My goal is not to convince anyone that we were right or wrong or if given the chance, what you should do. Instead, I want to bring you an alternative perspective and hopefully give you some points to consider.

 

I am emailed about this topic regularly and asked questions such as; “Should I apply to Techstars?” I cringe when I receive these emails, as I’m not qualified to provide an opinion since I don’t know anything about you or your startup. Techstars has a lot of merit and I respect the people behind the program. I don’t want to create the impression that I am against Techstars or accelerators in general. This is not the case at all. I think they are great for certain startups and situations.

When we decided to create this blog, I knew we would eventually come to this portion of our timeline. I want to take this opportunity to tell the story and include our reasoning for making the decision we did. My hope is that you will read this article and begin looking at all of these programs more critically, not just Techstars.

 

The Application:

After our initial product launch and acquiring our first customers, we began exploring our options and looked into funding opportunities. While speaking to several investors we were recommended to apply to Techstars Chicago. Eric and I knew very little about Techstars but we were aware that it was a highly celebrated program. That evening, we checked it out online and decided to put in an application.

 

Tip: I’m constantly asked about our application and what we did to get noticed. Honestly, we did not spend much time fine-tuning our application or using any special techniques to get picked. If you have a decent product, strong team, and demonstrate traction, you have a good shot.

 

On 03/21/2014, we received an email explaining that our application had been selected and we schedule our first interview for 03/26/2014. I remember being quite excited to learn more about Techstars and knew the interview would be a great experience.

 

Our First Interview:

On the day of our interview, Eric and I traveled to 1871 in Chicago. 1871 is a co-working space that also houses the Techstars’ Chicago offices. When we arrived, it was hard to say if this was an environment where great work was being accomplished or just an elite tech social club. You definitely get the young tech entrepreneur vibe from this place and my guess is that it falls somewhere in-between. I couldn’t help but wonder if the facilitators of the space were purposely trying to attract young founders that watched too many reruns of The Social Network. Regardless, we were here for Techstars and to see what they were all about.

During our interview we met with the Managing Director Troy Henikoff and Director Steve Farsht. Eric and I were immediately impressed by both of them and we felt that they could offer immense value to Talkroute. Looking back, if the opportunity would have been to bring Troy or Steve onto our board as advisors, we would have signed that agreement with no hesitation. These guys knew their stuff and they were passionate about what they did. Without going into to much detail, I would say the interview went very well and we left the Techstars’ offices feeling positive that, given the opportunity, we would participate in the program. 

 

So What Changed?

The period between the first and second interviews was not very long but there was enough time to do some research and speak to other founders/alumni who went through the program. As we did our research and due diligence on Techstars we discovered a few areas of concern that are worth noting:

 

No Large Exits: We were very surprised to find out, at the time of our application, that Techstars didn’t have any large exits (100m+). For a program that has been around for 8 years, at least one of their companies should have achieved this. Techstars are often compared to YCombinator but in this area, there is no comparison. YC crushes Techstars when it comes to large exits and dollars returned.

 

Progress Stats: The lack of large exits was definitely disappointing but I could live with it. I was really shocked to see that there were no stats regarding participating startup metrics. I was expecting to find validation such as; “Startup A began Techstars with 200 customers and $4000 per month in revenue. 3 months after Techstars, Startup A now has 2000 customers and $40,000 per month in revenue”. For a program that was supposed to accelerate your business, these types of stats were surprisingly absent. That doesn’t mean it didn’t happen. I simply couldn’t locate the data and when I asked about it down the road, I wasn’t given a response.

 

Raising Capital Does Not Equate to Success: The one figure Techstars does like to tout is the amount of funding their average startup receives. Techstars claims the average funding per company is $1,968,414. While this number is impressive it doesn’t necessarily translate to success. It’s not about dollars raised but about dollars returned. As I pointed out above, Techstars can’t claim that.

 

Equity: I find how Techstars positions their offer to be very misleading. Techstar states the following:

“Techstars provides $118,000 in seed funding, intensive mentorship, and an amazing network of mentors and alumni for 7-10% equity in your company.”

 

If this was true, this would result in an average pre-money valuation of $1,416,000 upon acceptance into the program. However, this is not the case.

 

Techstars takes 7-10% of your company and only provides $18,000 in seed funding. This gives your startup a pre-money valuation between $180,000 and $250,000.  If you are an early stage or established business, this is terrible. The other $100,000 is a convertible note that you may take advantage of at your discretion. If you decide to take the additional $100,000 note, this will convert to equity once you secure your first $1,000,000 in funding. Since most startups achieve nearly $2,000,000 in venture funding, the note will convert anywhere from 5-10% equity depending on the terms. This doesn’t include the equity that is given to secure the first-round funding. Depending on the size of the round and the value of your company, you could be looking at anywhere between 10-90% of additional equity. Obviously this will greatly vary from startup to startup but I’m sure you can see where I am going with this.

 

By the end of the program and your first round of funding, you will be lucky to still own 51% or more of your company. I understand that it is better to own a piece of a watermelon than a whole grape, but come on… For most businesses, this is a crazy amount of equity to give up this early, when the value is at it’s lowest. For some, this is exactly what is needed to scale and make your startup successful. However, I personally believe this is the exception and not the rule.

 

Update: I have received several emails from those stating that the above “math” is incorrect. The funny thing about those emails is that everyone is giving me a different result and conclusion based on different facts. I can only provide the numbers based on what we were told at the time of application and deciding to accept or decline the offer. It is my understanding that Techstars has made many deals with startups that are different from each other. So one offer may not be the same as another. Also, if my understanding of the equity and investment is incorrect, it is just another example of how the program doesn’t properly explain this portion of the agreement. This is an area that should have complete transparency and as you look into it, you find conflicting information from multiple sources. So please take the above as our personal understanding of what was specifically offered to us in April 2014. As it is clear that offers vary from startup to startup.

 

Mentorship Is Not The Primary Focus: Techstars has a lot to offer in terms of mentorship and their network. To be perfectly honest, this is the only reason Eric and I continued in the application process. However, the focus on raising capital is just too strong. I don’t blame Techstars for wanting to get you funded and achieve an exit. This is how they make money.

 

Unfortunately, VC is not the answer for every startup and Techstars doesn’t seem to care. The Letter of Intent that we received made it very clear that we would be participating in all areas of the program and that included “Demo Day”. So regardless of our startup’s position on raising VC, we were obligating ourselves to months of preparation for the pitch.

In case you were wondering, Demo Day is a rock concert-style production where each startup presents their company to a room full of investors. It seems like a great way to showcase your product and raise your first round of funding if that is your goal. Again, this may or may not be the best course of action for your startup but you have to participate and spend precious time preparing for it regardless.

 

Our Second Interview:

Even though we clearly had our concerns, we proceeded to the second interview. We were excited to be meeting with Techstars Chicago board, which included Match CEO, Sam Yagan. Eric and I felt this was an excellent opportunity to not only show our product but also ask some direct questions. We hoped by getting some good answers we could prove that the mentorship alone would be worth the equity and our concerns would be addressed.

 

On 04/10/2014, we traveled back to 1871 for the meeting. The focus of this interview was on our product and we provided a formal demonstration. After the demo concluded, we fielded numerous questions from the board. Most of these questions were expected and I feel we had good answers for them. Then it was our turn to ask the board a few questions.

I presented two very direct questions to Sam Yagan and Adam Koopersmith. The questions were specific to Talkroute’s growth and won’t necessarily apply to other startups, so I will not disclose them. The important part to understand is that neither Sam or Adam had answers for us. To their defense, these were tough questions but they were the areas we were struggling with and one of the reasons we were considering participating in Techstars. We needed to know if Techstars could help us or not. A simple answer of “we don’t know but we will help you figure it out” would have been sufficient. Unfortunately, nothing we heard during the question and answer portion of the interview gave us any indication that we would solve these issues by participating in the program.

 

Walking out of the interview Eric and I barely said a word to each other. We didn’t have to. We both knew at that moment we weren’t going to participate in this program. It was actually quite heartbreaking. We were hoping the mentorship alone would justify the equity and time but it was clear that this was not the primary value that Techstars provided. Further, we knew we wouldn’t have unrestricted access to Sam, Adam, Troy, or Steve over the course of the program as they would be splitting their time with 9 other startups. As a matter of fact, we hadn’t even met the mentors we would actually be working with.

 

The Offer:

That Saturday I received an unexpected email from Troy to schedule a phone call. Troy and I spoke and an offer to have Talkroute in the Techstars Chicago Summer Class was given. I was very appreciative of the offer but I think Troy could immediately detect the hesitation in my voice. Eric and I never “officially” decided on whether we were still considering this opportunity. Even though Eric and I both knew it wasn’t right for us, I still needed to hear him say it. So I politely excused myself from the call and explained that I needed to speak with Eric.

 

In the meantime, Troy sent over a Letter of Intent and explained that it needed to be signed and returned by Monday. I was very frustrated by this. You don’t send a legal document to someone over the weekend when there is no time for a lawyer to review it and demand it back by that same Monday. Whether it was the intention or not, this was a high-pressure sales technique and just one more red flag.

 

Eric and I spoke very briefly before making our decision. The next day I wrote Troy an email that politely expressed our concerns with the program and declined the offer. We never even received a response to this email. Silence really said it all.

 

So Why is Techstars So “Successful”?

Before I can even begin to answer this question, we must determine what is success. Is success getting funded? Maybe it is getting acquired? Only you can answer that question for yourself but consider this:

 
So let’s say it was a good year and Techstars Chicago received a 1000 applicants/startups to choose from. We know based on the national average that 750-900 of these companies will fail. That leaves 100-250 that will most likely “succeed”. Techstars is only taking 1% of applicants, which is 10 startups. Unless Techstars is picking poorly, they are selecting companies that are positioned for success from day one. These startups would most likely succeed with or without Techstars.

If you look at these figures from this perspective, their numbers are not very good. In fact, I would go as far as to say that more than a few companies probably failed as a result of the one-size-fits-all program. The emphasis and push for venture funding this early can easily kill young startups that need time to find product-market fit and gain traction before raising anything more than a Seed round:

• There are currently 333 active companies (77.62%)
• There are currently 50 acquired companies (11.66%)
• There are currently 46 failed companies (10.72%)

 

Over 10% of Techstars companies fail, 11.66% have been acquired or had an exit, and 77.62% are still active and their fate is not yet known. This means for every company that is acquired, there is a company that fails. For a program that is picking the best startups, this is not that impressive.

 

Should I Focus On Raising Capital?

There is no straight answer to this question. Raising capital, in general, is a good sign that a startup is healthy and moving in the right direction. My concern is that young entrepreneurs see getting funded as the end when it is truly the beginning. Raising capital should be looked at as nothing more than a milestone for your startup. You still need to come back on Monday and work harder than you did the week before.

 

The question you should be asking is, “do I need to raise capital, and if so, how much?” Every startup is different and if there was a secret receipt for success, everyone would be doing it. Chances are you don’t need venture funding. You may only need to find a few Angel Investors that get you to the next milestone. At that point, you may have enough revenue to grow organically or maybe decide to go for additional funding and you will give away less equity because your company has become more valuable. Talkroute was bootstrapped all of the way to revenue. We are growing 100% organically and at this time, we don’t plan to take on investment. This was not easy. Eric and I had to find part-time revenue streams to stay alive while we built this company. But if it was easy, everyone would be doing it.

 

Don’t Be Afraid to Ask Questions:

I can not stress this enough. Whether you are going through the Techstars application process or looking at outside investment, ask questions. I understand that it may be intimidating but remember that programs like Techstars are taking a portion of your company. 

 

One part of our story that I didn’t touch on was the meeting I had with Troy a few days after declining the offer. I had some questions regarding funding and he was kind enough to still make himself available. We talked about funding options for a few minutes and spent the remaining time discussing our choice to decline Techstars. I won’t go into too many details but there was a lot of back and forth regarding our decision. At the end of our meeting, Troy unintentionally gave me a great compliment. I was told that I was an “anomaly” and that no other applicant, in the history of Techstars Chicago, had cared to raise any of these concerns.

 

If you take anything away from this article, please take this; It is your responsibility as a leader to question anyone that is taking a portion of your company in exchange for what they deem valuable. This was not a simple matter of investment for an equity share. Techstars claims their true value is in everything else they offer. So asking questions or bringing up concerns should never offend or cause one to become defensive. If it does, then you may have identified an issue with the opportunity that you are considering. Just because someone tells you what they have is valuable, doesn’t mean it is.

 

Conclusion:

I hope those of you that sent me emails about this subject understand why I wanted to take the time to write this article before offering a detailed response. There is a lot to consider and the answer to apply to Techstars or not will be different for every startup. I can only offer you our experience and personal point of view. I believe that Techstars would be a good option to consider if your goal is to go BIG and secure a large round of venture funding. This is clearly the focus and primary goal of the program. Those of you that are still questioning whether or not funding is the right direction for your startup, I would recommend exploring other options. The key is to make sure your goals align with the goals of whatever program you are considering.