TechStars’ founder predicts accelerator implosion

November 18, 2010

Less than two months from launching its New York program, TechStars co-founder David Cohen is already anticipating a critical mass being achieved in the startup-mentoring space within the next five years.

Cohen said that when he and two friends first launched TechStars in Boulder, Colorado four years ago there were just a handful of these accelerator programs. Now he said there are upwards of 60 across the country and he expects that to triple before the bubble bursts.

“There will be a run up to a couple hundred and then we’ll probably see a run down to 10 would be my guess over the next five years,” said Cohen, who has expanded TechStars to Boston and Seattle in recent years and has invested in more than 70 startups since launching the program. “There will certainly be a little mini accelerator bubble.”

Cohen likened the current craze to the late-90’s trend of venture capital firms launching in-house incubator programs, essentially aimed at producing more companies for them to invest in. He added a key difference is that the current wave is being propelled less by VCs and more by organized angel investors, which he believes is better for entrepreneurs.

“We’re going to collect people that are strong entrepreneurs to mentor these companies,” he said. “So it’s really a kind of a new phenomenon.”

Each TechStars’ city selects 10 startups a year. Over a three-month span the companies receive mentoring from successful entrepreneurs, in addition to an investment of $6,000 per founder up to a maximum of $18,000. In return TechStars receives a 6-percent equity stake.

“The pitch to entrepreneurs is: could you find a co-founder with this sort of network and access to capital for 6 percent?,” said Cohen, who added they do not receive any preferred stock or board seats. “We actually like to present it as we’re just co-founding the company with the entrepreneur.”

Cohen said no one involved in TechStars gets a salary and claims the 6-percent stake helps the venture survive and stay in the black. So far the program has had five successful exits. Last spring, 2008 grad Daily Burn, a personal Web-based diet and nutrition planner, was bought by media conglomerate IAC for an undisclosed sum. That followed AOL’s purchase of 2007 entrant Socialthing.

Cohen, 41, first moved to Boulder from Florida when he was 25 to start his first software company, Pinpoint Technologies. He sold it in 1999 to ZOLL Medical Corp. He then started earFeeder, which he also sold prior to launching TechStars in 2006.

After the exits, Cohen dabbled at angel investing, but was disenchanted by the process.

“I had done six or eight traditional angel investments and basically just thought it sucked,” he said. “I thought there must be a better way to do angel investing.”

Cohen also wanted Boulder to be known as “a legitimate place for Internet startups,” so he launched TechStars with Pinpoint co-founder and current CEO David Brown.

At the time the only similar program going was Boston-based Y Combinator, run by angel investor Paul Graham, who has since set up shop in San Francisco.

Despite pressure to open TechStars programs in every major urban center across the U.S., Cohen said he wants to keep the pool of startups small in order to keep the quality high and see more startups get funded.

“I think just calling up a VC and saying ‘I want to pitch you’ is an enormous waste of time,” said Cohen, who receives about 1,000 applicants every year among the various sites. “So this program, or programs like it, is a way to really prove yourself to an influential group of people who can then get you meetings.”

Photo caption: David G. Cohen, founder and CEO of TechStars (L) and Nicole Glaros, managing director of TechStars at the company’s office in Boulder, Colorado on October 18, 2010. REUTERS/Natalie Armstrong

One comment

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I’m not so sure that this model is prone to bubbles. While is is certain that some groups will fail the definition of a bubble implies a large centralized bet, Gold would fit that description at the moment.

Spending small amounts to test business models has been going on in Pittsburgh for a couple decades, and is gaining momentum. Four years ago was not a new start for this except in Cohen’s mind where of course he is the center of his universe.

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