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Of 39 startups that have participated in the three-year-old TechStars seed investing program, six have been acquired, five have failed, and 28 are still active in some form. So far, it’s taken less than three years for the fund to make a return on each series of investments. If nothing else, you have to love that level of transparency.
TechStars may not get the attention the clubby Silicon Valley-based Y Combinator basks in, but that’s partly by design. The incubator only operates in four U.S. “second markets,” as founder and CEO David Cohen puts it — Boulder, Boston, Seattle and coming soon, New York City — chosen precisely because they aren’t overwhelmed with startup activity.
TechStars just got a firm vote of confidence from the New York startup community: signing up an incredibly solid list of mentors for its incoming class of companies, including Dennis Crowley, Chris Dixon, Alex Iskold, David Karp, Zach Klein, Ben Lerer, Sam Lessin, Howard Lindzon, Avner Ronen, Tim Shey, Rex Sorgatz and multiple VCs from First Round Capital and Union Square Ventures.
Where YC may have taken 36 startups in its largest class ever this summer, Cohen said would never do that in a phone interview. Here’s a lightly edited and condensed transcript of his philosophy of expanding while keeping things small:
GigaOM: What’s the TechStars expansion plan?
David Cohen: One hundred and fifty cities have inquired about having TechStars themselves: sometimes the governments and sometimes local angel investors and VCs. We’re really big believers in doing 10 in each city, four times a year. It allows us to maintain our quality. The fact that it happens just once a year means the mentors get riled up, and then they have nine months off.
GigaOM: So now you’re set; these are your four cities?
Cohen: That’s our plan for the moment. We also started this global affiliate program, where we are partnering with independent organizations outside the U.S. to share best practices. I’ve done a bunch of consulting; I’ve actually spent time in Singapore, England, Denmark, all over. We’ve started to write down our operations manual: what we actually do. You’re now seeing these programs pop up everywhere we want to be helpful to them. We think it’s good for entrepreneurship in general. I’d rather be friends with those programs and invest in some of the companies that come out of them.
GigaOM: It seems like there’s a ton of interest in starting and funding tech startups this year. Do you not want to take advantage of the timing to expand further?
Cohen: My attitude is there are at least hundreds of interesting startups that are going to get going in every year. We’re looking to find 40 of them. We filter 600 applications down to 10 companies. We’re fortunate in that lots of people are willing to come to the towns we’re operating in. Some people have called TechStars the “out-of-Valley” experience because we’re in all the second markets. Part of the thing that’s magic about TechStars is it’s about a community that wants to make itself better. San Francisco is already so great that it’s hard to get people’s attention.
GigaOM: How competitive is it between you and other startup incubators?
Cohen: I would say it’s not as competitive as people would assume. We surveyed our companies and more than half of them hadn’t applied to other popular programs.
GigaOM: Do many TechStars companies move for the program, and if so, do they stay in Boulder or wherever they do it?
Cohen: About 60 percent of the companies we fund are not from the communities where the program is. It’s probably getting more local, to where it might be 50-50 now. About half of the ones that are not from the community stay, and they tend to be the ones that get funded or have some level of success early on. The reason being that they probably get their angel investment and build networks in that community.
GigaOM: How successful have the companies that have graduated from the program been?
Cohen: We actually publish all this data; that’s probably something that’s unique to us. Roughly half of them are still out there as independent companies; probably 75 of those having raised money. From a working perspective, 2007 and 2008 have totally paid for themselves and more. That’s a pretty quick return for what is obviously a small venture fund. But the reason we do this is not for running the world’s smallest venture fund, but for the second-order effects that happen in the communities we’re in and the network effect of mentors. There are nice ecosystem effects that we see with the companies that get started by TechStars founders in those communities after they’ve succeeded or failed: SimpleGeo being a great example, having raised $10 million with one of the founders of [inaugural TechStars class member and AOL (s aol) acquisition] SocialThing.
The “why” for us is we wanted Boulder to be more interesting. We wanted to be in the middle of better deals. We wanted to attract smarter, more entrepreneurial people here — and that’s happened. These companies that are being acquired have contributed more than $100,000 back into the non-profit community here in Boulder. I don’t think the reason to do this is a financial reason; I think it’s a second-order effect.
GigaOM: Is the incubator model a bigger trend in terms of trying to foster young innovation across all sorts of industries?
Cohen: Yeah, I think it is happening. The easiest example is here in Boulder; it’s actually called The Unreasonable Institute and it’s modeled after TechStars and about global social entrepreneurship. They’re social businesses, but some of them are buying and selling cows. I’ve talked to people about [incubators for] water technologies, space technologies — this is a new thing in tech but I think we’re also the leaders in the thought processes.
GigaOM: What’s changed about the tech startup landscape since you started TechStars?
Cohen: Everything’s a cycle, and it seems to be fashionable again after the little downturn. It’s definitely a lot easier than it was a couple of years ago to raise a seed round. There’s the whole debate about “will follow-on funding be there?” and that’s an important discussion, but I think it’s good that more people are trying to innovate in general.