What Investors Look for in Startup Projects – with Techstars Founder David Cohen
This post will go over the benefits of joining an accelerator like Techstars as well as what investors & Techstars look for in startups. The article is based on the Codementor Office Hours hosted by renowned investor and the founder of Techstars, David Cohen.
The Benefits of Joining Techstars
Techstars is a three-month program. For context, we get an average of about 1,000 applications for 10 spots, so we accept about 1% of applicants. You can think about it like MIT or Harvard acceptance rates. We only work with the most promising companies that apply.
- They get about 120k USD on the way in. We become an investor in the company at that point.
- When Techstars’ three-month program starts, you will be highly engaged with the mentors, so you get a lot of feedback on what it is you’re doing.
- You’ll be challenged and pushed. Techstars forces you to gain conviction about the direction the arrow of your company is pointing before you step on the gas.
- You’ll build network and relationships. In the second and third month, you can focus on getting your product out there with the help of mentors and the Techstars network to find your growth customers, your partners, and your users.
- The big fan base around Techstars is great for consumer companies because people want to try stuff, and then there’s demo day that a lot of people sort of hear about. The demo day is your chance to present and pitch what you’re doing to investors. We typically get five hundred to a thousand investors who show up. On average, companies raise about two million dollars through this program using those methods from the venture angel community.
- Techstars is not just a three-month accelerator, Techstars is for life. It’s an extremely active alumni network.
The beautiful thing about all this is that Techstars has become a self-sustaining network where the exited-entrepreneurs are the new angel investors, they’re the new corp dev contacts inside the companies that bought them revenue now. We have a lot of that kind of virtuous cycle going on. It is a life-long experience, just very intense for those first three months.
Does Techstars Continue to Fund Companies Founded in the Accelerator?
We do. Our capital is targeted at the Techstars ecosystem, and we have about 280 million dollars under management. Every year we might target some of the 200 or so companies that have gone through the accelerator and that we’re following up on. We typically do three hundred thousand dollar investments post-accelerator and one to two million “series A” investments as a co-investor, so we’re not leading those rounds but following along with more capital. So we have the ability to go all the way through the A round.
More importantly we may fund companies founded by our alumni. Currently we have 1500 alumni who’ve been through Techstars 6~8 years ago, and some are now starting their next companies. That is part of our network and part of our target for our capital because we know those people.
We also invest in the companies by our 2000 mentors across the Techstars system. In fact, that was how Uber came to our attention. Ryan was mentoring his way from Boulder to California, and that is how we became aware of the company. We also do accelerator investment.
The Importance of Having Mentors
The first Techstars company that was SocialThing founded by Matt Galligan. He was in Techstars so obviously he had mentors. One of them was Brad Feld. Brad negotiated the exit of Socialthing to AOL. He got on the phone, and I think they sold it for twice as much as what Matt was willing to accept and what the first offer was. And Matt was like, “Oh. Got it. I’m out.” Brad got on the phone and thirty minutes later, a very significant multi-million dollar figure doubled. So what is the value of a mentor? Potentially that.
In our New York program that asked people in the program if they knew anyone, they could talk to at Victoria’s Secret. Promptly, the mentor took that entrepreneur, got them a private jet, flew them to a private lunch with the CEO of Victoria’s Secret. So the network is everything. It can be the difference between success or failure. You’ve felt that in many your interactions, whom you know, whom you can get a favor from here and there, get advice from. And it’s hugely important to surround yourself with people that have network and can open doors for you, can get you a meeting is important.
The Selection Criteria
On average, we only select about 1% of applicants, so it is quite a much work up front to filter the inbound interest. We look for six things in order. We think about them very much in order, and so all of our managing directors that are out around the geographies and all of our seventy-five people total look at it the same way.
Those 6 things are: Team, team, team, market, progress, idea.
- The team is all that important. We are mainly focused on that. We are just concerned with the talent of the team, the passion of the team, what’s motivating the team, how the team knows each other. The founders are going to set the culture of the company; they are going to set the future vision. The team is so important; that is why we say it three times.
- We are mainly interested in the market. It is one that is either growing rapidly, shrinking or going away or probably not stagnant. Innovation tends to happen in markets that are not already saturated with good technology. However, in markets like Uber where this market was imbalanced, inappropriate, and unequal, there were brokers taking fifty to seventy percent of the fees from the drivers. That is a broken market where the value is not going to provide you the service. The internet will not allow that to continue, and it is the great equalizer. So, all in all we are interested in the market.
- Progress? We have this theory – we are pretty sure it is right – that entrepreneurs do stuff. They do not wait around to get permission to do stuff. So we look for people who run through walls and do stuff. They do not say, “Well I need to hire a programmer.” They start programming. Everlater is a great example. Two Wall Street guys create a travel blogging company. They just started created it. It was an awful company, and they knew it, but it had to come out of their hands. We look for people who are doing stuff, not just people saying they want to be entrepreneurs (we call these people want-repreneurs.)
- Idea. I put the idea there only because I like to show that it is last. It is important. It does give you bonus points. However, the idea is also going to change a lot. We want to make sure that the founders are in love with the problem and not the solution. So your idea is one example of attacking the problem that will probably change over time.
What do you look for in a team?
“People, people, people, team, team, team.”
On the team specifically, we ask many questions about why you are doing this, what’s motivating you, why did you not do the other thing? Like when I talked in the beginning, I had all these startup ideas like, “I want to do this. Well, what’s my passion, motivator – where’s it coming from?” Also, I genuinely just wanted to help entrepreneurs. That was the most fun for me.
I love the beginning of each of the other three startups I was involved in, but I did not like the scale they later took on. I was the creator, the force that made it happen, but I was not the operator that made it scale. I knew that about myself. I am looking for that in entrepreneurs we find.
For example, in the angel round of Uber, it was not a cab app. It was an idea. So it was not started by some famous founder from Silicon Valley as the story goes today. Travis and Garret were not active yet. It was just Ryan, who was also the only guy in the company – the first employee and the only guy fully active in the business. However, I could feel that Ryan had a vision of how the world would be different. He was purpose-driven and mission-driven. He was going to make that thing happen, and he cared about it. He hadn’t done a spreadsheet to determine if this was the biggest opportunity. Nobody knew Uber would be this big. He genuinely envisioned a future. Everyone else who joined later were amazing and involved and had the technical skills, but I’m looking for what’s driving the fact that you want to do this particular business.
Advice for Solo-preneurs
There’s much mythology around the idea that accelerators do not like single founder companies. I think Y Combinator has talked about this, we’ve talked about it. I think there’s a misunderstanding, a misinterpretation of that data by many people. I believe – and I think most people believe – plenty of successful companies have been started by single founders. I can point to examples like RIM’s BlackBerry. In addition, plenty of companies have not one but multiple CEOs and have been successful. That is the beauty of entrepreneurship─there are no rules.
That said, we’ve only funded companies with a single founder two or three times, and those have worked out fine because they had a good team that they were outsourcing to. They just happened to be a single founder. My overall advice is to build a great team around you. Whether or not the team members are founders does not matter so much. The whole idea of Techstars is that you are building a great community around you. Do the same internally and you’ll find it is great for the emotional support.
However, in general a single founder in the context of Techstars is a very difficult proposition. You only have three months to work with investors on your pitch, go to market, and meet with all of these mentors. You do not have the bandwidth to do it all. Techstars is extremely demanding, so having the emotional support inside startups is quite important. When you want to go outside and punch something or kick something, when you need someone to talk you off a ledge, and more. So having the support from a co-founder matters a lot in the context of Techstars, since you are asked to do a lot in those 3 months.
Most startups that are successful have multiple founders. That is a fact. It is certainly possible to do it as a single founder, and we are not anti-single founder in any way, but solo-entrepreneurship generally doesn’t work for Techstars.
Techstars’ Favorite Interview Question
Startups fail for two main reasons: either the team falls apart, or nobody wanted the thing the startups were building.
If your startup failed because nobody wanted the thing you are building, you are just stupid, right? You were not listening to the market, or perhaps you are just not a good entrepreneur. As long as you can stay alive and listen, you should be able to evolve what you hear into something and know somebody somewhere needs a particular product. The team is what makes that concept happen, so that is why we are so focused on it.
Therefore, we love to get companies in a room or maybe two different rooms and just ask, “What sucks about the other person? What drives you crazy about your co-founder? What are they not good at?” This is a really powerful question to ask when both founders are in the same room. I’ve found that the best entrepreneurs have a strong enough relationship where they can just talk about things they’ve already discussed before.
Healthy dynamics with the team is incredibly important to the point where it’s the key to whether a startup would work. Having talent and a great concept are table stakes, and you can have all that with the right team. Thus, we love probing for insecurities or misunderstandings in the team because we want them to stay together and be committed to their startup.
For example, if you asked me, “Hey David, what do you not like about Marc?” I’d reply, “I think that his beard is not optimal,” or whatever. It is something more substantive. If you’ve never heard me say that before, it is awkward, but if I say it all the time, then we have an open, honest dialog. I am looking for proof that this team is willing to criticize each other, willing to understand each others’ strengths and weaknesses. We all have our weaknesses, right? And you want to sort of get through that at a team level.
Many times, we ask companies: “In ten years, what does the world look like because of your company?” It is that vision that they can articulate, that very precise result. They should not care at all about the product, but they care about the impact of the product. If you talk to MakerBot, for example, they would tell you, “Well in ten years everybody can print whatever at home.” They will not say that there will be a MakerBot 3 that’s this big and whatever. They’ll accomplish their vision in whatever way they need to accomplish it. They are not tied to the product or the solution; they are tied to the vision and the problem. So we look for that.
Getting Funding for a Long-term Goal
If you think about companies like even a SpaceX or Tesla or any pharmaceutical drug – the cure for cancer – certainly people invest in these things. I think it’s a potentially huge payoff with a much longer horizon, and so you’re maybe looking for an investor with that mindset. However, a lot of the things we work on at Techstars are software that can get to the market pretty quickly.
Some people say, “Hey, the accelerator is only funding small ideas, so you need to find big ideas.”
I call absolute BS on that, and the reason is that everything starts small. Very few companies start off wanting to land on the moon. Take Microsoft for example, it started off with: “We’re going to measure traffic going across the road.” Then it evolved to: “We’re going to have a little box that measures traffic. And we’re going to have this idea for a visual basic. Then we’re going to make sure there’s a computer at every desktop.”
All in all I’d say two things about companies with long-term goals where the current technology is not enough to make it happen soon. Yes, Techstars has funded such companies before, but it’s probably harder to find. People have to have the conviction. And at the same time, you have to be in love with the problem and with solving it using the solution with that technology. Can make that thing better now with a different solution on the road, or do you have to wait for the rest of the technology in the world to catch up to you?
How Techstars Came to Be
When I started Techstars eight years ago, I sat down like a lot of people do, and I had ten different startup ideas. I was an entrepreneur previously and I had three companies, in which I sold two of them. I was sort of dabbling in angel investing and I probably made a dozen angel investments.
I had all these different ideas, and one day I just said, “You know what? For the next phase of your life, you’re lucky enough that you can kind of go do whatever you want. Just do what’s fun and you’ll figure out the rest later. Do what you love.”
And that’s why we started Techstars. The way we think about it is helping entrepreneurs be successful by building a global ecosystem. That’s what’s different about Techstars─we have two thousand mentors located in fifteen different communities around the world. We run 18 accelerator programs a year, and we surround that with about 300 million dollars in venture capital for those companies the best ecosystem. We’re trying to build the best ecosystem in the world for entrepreneurs to bring new technologies to the market.
What does that mean? You get the expertise, mentorship, network, capital, and the partners. We’re able to partner with great organizations like Disney and Ford, so we have a huge network to bring to the table. We started this high-growth, internet focused startup so you would think about Techstars no matter where you are within that your startup journey.
To professionalize the notion of angel investing
There were two specific reasons I started techstars, but from my perspective, as I’ve made a dozen angel investments, I thought, “This is a great way to turn a large fortune into a small fortune.” That’s about all it is. What you’re doing is you’re meeting people in a coffee shop. They’re pitching you a great idea; you’re investing. And you have nothing to do with the company, and you’re just hoping it works.
I wanted to professionalize the notion of angel investing. I wanted to get more time with these companies and contribute time and energy, not just money.
Get the Experience and the Network
The other side to founding Techstars is to have the dream itself. I thought that a little bit of capital’s pretty easy to come by. It’s not hard to save, say fifty grand to a hundred grand and start running that business. Hosting is cheap. A lot of us now have a write-around code these days.
However, what is hard is getting the experience and the network. It’s difficult to surround yourself with people who understand what you’re trying to do, and having the connections can help you with pitfalls. So, while we scale up Techstars, we try to give anybody out there with a dream, a vision, a purpose and an idea the leverage to tap into a network that can help them make that a reality.