Posted on January 27, 2008
Filed Under Web 2.0 Kool Aid |
TechStars offers up to $15,000 in seed funding ($5,000 per founder, max $15,000) to broke entrepreneurs with a good startup idea. Ten winners will be selected, and winners will need to spend most of their time in Boulder over the Northern summer building out their ideas. In return, TechStars takes 5% of the equity in each startup. Winners have full use of TechStar’s offices, access to legal advice, and are able to tap into a strong list of startup mentors to help them build their idea (list here). Non-US companies can apply, although must be able to legally spend most of summer in Colorado.
But I thought it’d be worthwhile to briefly explore TechStars from the investor perspective. I think the analysis is quite simple.
On one hand, there are certainly young geeks out there with ideas for web applications, the skills to implement them and a desire to implement them. All that they think they lack is capital and access. TechStars provides a small amount of capital ($5,000 per founder up to $15,000) and some resources (legal assistance, mentoring, etc.) that ideally gives these young geeks all they need to get their ideas out of their head and onto the web in the form of a working product. In a sense, TechStars tries to leverage Gordon Gecko’s advice: “give me guys that are poor, smart, hungry.”
I like Gordon Gecko and I think a lot of the things his character promoted make sense. But on the other hand, I still think TechStars is a poor deal for investors for a number of reasons:
- Guys who are poor, smart and hungry are typically clever enough to find a way to get what they need on their own. Thus, a geek who’s truly poor, smart and hungry doesn’t need TechStars. He’s going to find a way get his idea off the ground himself. Whether he does his coding after work or whether he finds a way to round up some cheap money, he’s certainly not going to be waiting for TechStars to start accepting a new round of applications in the hopes that his will be accepted. Thus, in general, I think TechStars is most likely to attract less-hungry, less-creative youngsters - oftentimes the type who think it’s “cool” to have an Internet startup and who lacked the initiative (and/or cojones) to “just do it.” The combination of inexperience and lack of hustle is something I wouldn’t touch with a ten-foot pole. I’d rather throw $100,000 at inexperienced founders who managed to use their own resources to build a working product than to throw $15,000 at inexperienced founders who have nothing more than an idea and an open hand.
- A $300,000 valuation (5% for $15,000) is actually a bit rich for where most of the TechStars applicants are at: the idea stage. It’s almost impossible to place a value on an idea and thus the valuations given to early-stage, pre-revenues companies reflect guesswork (and negotiation) more than they reflect science. Typically, pre-revenue early-stage startups without much progress receive valuations in the $100,000 - $1 million range from angels, so TechStars technically isn’t out of line with its standard $300,000 valuation. However, primarily for the reasons above, I think TechStars is not exactly getting the cream of the crop and therefore should be getting a hefty discount. I personally wouldn’t invest $15,000 in the fashion TechStars does at a valuation over $100,000.
- $15,000 really doesn’t give TechStars founders a whole lot to work with but I understand the logic: hopefully with $15,000, the company can get enough accomplished to attract interest from others angels or VCs. If it can’t, the loss is minimal. I believe, however, that the minimal funding is part of the reason that things coming out of TechStars and YCombinator look more features than they do products. And with the economy turning to shit, I think it’s going to be a lot harder to make features work.
There probably is some opportunity in the “microfunding” world, but I’m not convinced that TechStars (and YCombinator) have a viable long-term model for exploiting it. From both the investor and entrepreneur perspectives, I just don’t see how the model is going to work over the long haul, especially in a down-cycle.Print This Post