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Hi, I’m Brad Feld, a managing director at the Foundry Group who lives in Boulder, Colorado. I invest in software and Internet companies around the US, run marathons and read a lot.

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Is TechStars Worth 5%?

Comments (13)

I’ve been pleased to see that the reaction to TechStars has generally been very positive. We’ve been pleasantly overwhelmed with quality applications for the program – over 75 to date for the 10 spots.  There are still 52 days to apply, so if you are thinking about it, I encourage you to give it a shot.

Of course, there has been some debate about whether or not TechStars is “worth” giving up 5% of your equity. I thought I’d take a crack at addressing this and further explaining what we are trying to do with TechStars.

The answer to this question depends on your situation. If your company is funded, or clearly worth millions today, then TechStars is probably not for you.  Perhaps some people might think that their idea alone is worth millions, and so they won’t apply. I can tell you from first hand experience that your idea is not worth much until you execute in such a way that you create real value. On their own, ideas are usually not worth the napkin they’re scribbled on.  I am exposed to thousands of ideas every year (and often have several each morning while I’m in the shower) – only a handful of entrepreneurs will successfully build something around their idea and create meaningful value.

Perhaps when you consider the opportunity presented by TechStars, you will calculate that the initial valuation of your company is between $100,000 and $300,000 (based on the share of equity TechStars gets for the cash it puts up.)  Some entrepreneurs will naturally argue that this is a low valuation. Conversely, many investors will argue that it is quite high. In time, one will be proven right and the other proven wrong. But if you’re looking at TechStars and the only value you see is the seed funding, then you’re missing the point of what we are trying to do.

You can’t easily assign a value to what TechStars provides, but we believe it goes well beyond the value of the seed funding. The educational opportunities alone are potentially life changing. What’s the value you’d place on access to the mentors who are involved? How long will it take you to assemble the large investor audience that we’ve lined up for you to pitch to at the end of the summer? What’s the benefit of an experience like this really worth?  Hopefully, the answer to each of these questions is “much more than the seed funding alone.”

The value of TechStars is even more compelling if your company will need to raise more money. You’ll be in a great position to pitch to investors at the end of the summer, due to the coaching, advice, and mentoring provided by TechStars. Investor day brings active angel investors and venture capitalists right to you, and maximizes your chances of getting further funding.  Because TechStars is vested in your success, it’s in our best interest to help you obtain more funding. Our initial 5% equity will be diluted by this further financing because we don’t ask for any dilution protection, rights of first refusal, or special controlling provisions (we will have common stock, just like you.)  But we’re ok with this dilution because it’s fair, equitable, and further increases your chance of success, which again, is what it’s all about for both parties. 

Think of TechStars not as a source of capital, but as a co-founder that brings a little money to the table.  TechStars will be successful if your startup becomes a huge success, adds value and meaning to the world, and creates wealth.  In the end, your company will likely either be worth something or nothing. Once you start thinking about this in binary, you should quickly realize that the whole game is really all about improving your odds, especially early on.  We think TechStars can greatly improve your chance of success.

  • http://wantsy.blogspot.com Robert Dewey

    A web-based startup is pretty cheap these days. I will personally wait until I see traction before trying to get any sort of funding – and even then, only when I need it. I am FAR more interested in the “network capital” that a startup gains from VC’s – the knowledge, experience, and the network of cool new people.

    Too bad there isn’t a VC firm that dealt specifically with that aspect. I would definitely give up 15% to gain “network capital” without cash.

  • http://davidduey.typepad.com/ David Duey

    I’m a TechStars applicant, along with my co-founder wife, and I have to say that the small amount of seed capital that we’d receive, if accepted into TechStars, is a very minor consideration in our particular case.

    Not quite a week before the announcement of TechStars, my wife had a great idea, but it was obvious to us that we’d require funding, and more importantly, expertise to help us build a business. When I saw TechStars, all I could think was “Holy Shit, what a great idea!”

    I have to say that the bootstrap model appeals to a certain part of the introvert in me, but we understand that we can’t build this thing alone. We need the experience and expertise of other people not only to help us build the business but to help us refine the idea. How much is the idea worth to me right now? Answer: About $0. However, with the kind of mentoring and guidance we’d receive from TechStars, I think the idea could grow into something very valuable.

    In our particular situation, I think TechStars is worth every bit of 5% equity and probably a whole lot more. Of course, the fact the idea makes my wife shake is an added bonus (http://www.heatherontech.com/heather_on_tech/2007/01/excitement_lead.html).

  • http://www.referralunion.com Wyatt

    Brad,

    I fully concur with your thoughts on TechStar and its value. As a budding entrepreneur taking in the business like a fire hose through a straw, I can’t begin to place a value on how much a summer of adult supervision and help might be worth.
    5% seemed like a lot to me at first too, but that only enters the picture if you succeed. Then, I would much rather own 95% of something great than 100% of something mediocre (or nothing).
    Further, even if applicants (one of whom is me) aren’t selected, I think the process of filling out the questionnaire might serve as a jumping off point for a focussed business plan or at least force entrepreneurs to answer some questions they may have avoided or neglected.

    Wyatt
    -www.referralunion.com

  • Tom C.

    I think if one is a seasoned serial entrepreneur, then maybe the value that I perceive in TechStars is not for them. I appreciate TechStars for the intangibles that it will bring to the table for a budding entrepreneur who is starting out on their first or second startup. I think if one is fixated on the seed funding and the equity, then they are probably not serious about launching a successful startup company because there is more to it than those two. Being in the process of launching a startup, I am definitely learning fast there are a lot of things that my MBA classes did not prepare me for. First, I definitely think the advice from seasoned investors and entrepreneurs is really a HUGE benefit that a budding entrepreneur with get from attending TechStars. I have received better quality advice from the comments and feedback that investors have made about my startup than I have from any other research. There is no substitute for getting advice from someone been through the trenches. Second, having some of the names that are involved in TechStars involved in your startup is of a great indirect benefit because the value of network of contacts that they bring with them is immesurable. Their seats on various boards of various companies will definitely come in handy when the original business plan for your startup does not work or when your startup is looking to grow and is looking for synergies with other companies. For someone who is not an experienced serial entrepreneur, look beyond the seed funding and equity, there are so many other intangibles, in my view, that are of great benefit. :) If you don

  • JB

    Correct me if I’m wrong, but is this not the old Garage.com model with a summer camp twist?

  • http://www.derekscruggs.com Derek Scruggs

    If this opportunity had been available to me 10 years ago when I was starting my first company, I would’ve jumped all over it. There is huge value in having the focused attention of experienced investors and managers involved in your budding obession, especially if you don’t have much of a personal network (which was me 10 years ago).

  • Kyle S

    Brad, somehow I missed the announcement that you left Mobius to form the Foundry Group. How long ago did that happen?

  • Jerry Lewis

    One look at the mentors on the TechStars site should be enough to convince any young entrepreneur that 5% equity is probably a pretty good deal. And that does not count the “bar hopping” factor of a summer in Boulder.

  • http://www.feld.com Brad Feld

    Kyle – I’m still a managing director at Mobius Venture Capital. I’m also a co-founder and managing director of Foundry Group.

  • http://www.ctek.biz Gary Held

    Brad,

    As you know I am fully behind TechStars and what you guys are doing. For so many entrepreneurs there is a huge misunderstanding of the three M’s (Market, Management and Money). Very often it is interpretted by them as being Money, Money and Money. In fact, or at least I believe, it is Management, Management and Management. Good management will find the market (or create it), and thus find (and deserve) the money. TechStars aims to enable entrepreneurs to become better at management. As a TechStars mentor, and as president of CTEK (a strong supporter of TechStars), the benefits that can be derived from participation in such programs are huge. 5%? Cheap in my book. The lessons learned can serve the lucky particpants for a lifetime, and hopefully create the next generation of truly great serial entrepreneurs.

    Many of those reading this blog may not know the TechStars founders personally. I know all of you, and I think I know the reasons all of you have created TechStars. It is certainly not greed, nor to take advantage of anyone. All of you are and have been successful. Enough so that you do not need to waste your time by taking advantage of early stage entreprenuers.

    I, and CTEK, applaud your efforts. It is a service to the entrepreneur, and benefit to us all.

  • http://www.konfushus.com/2007/02/08/techstars/ Gary Ma

    Great thing you developed here with TechStars Brad. Congratulations and thank you.

  • Damon

    I briefly considered applying to TechStars, as it seems like a neat idea. And as a CU graduate, it’d be fun to get back to colorado for a bit. But the equity requirement stopped me.

    A $5000 investment is simply not worth 10% of a $50,000 investment. $5,000 is just too easy to come by.

    Also, I’ve seen up close other incubation programs (such as the Austin Technology Incubator at the University of Texas) who take much less in equity (closer to 1%) and they are long term engagements. Is a summer at TechStars worth 5X a couple years at ATI? Possibly, but you’ve got to show me why.

    …which brings up the question of how good TechStars will be. What is the recourse if you attend only to find out that it was a waste of your time? Would you give the equity back? Don’t laugh – a similar system is practiced by the Acton MBA program in Austin.

    I hope you have tons of success with TechStars. I think it has the potential to be a great program. Just a couple of sticking points to work out…

  • http://techstars.org David Cohen

    Damon, thanks for your comment. As Brad pointed out – If you’re focused on the equity and you don’t see the value of the guidance, credability, mentorship, and connections, then TechStars is probably not for you.

    If you can look at TechStars as a “co-founder” who brings tremendous value, I think that will help you understand.

    As for the quality of the program, I’ll commit to asking each and every founder who goes through the program this summer (follow on funding or not) and see if they felt it was a “good deal”, and will post my results. That way, we’ll have some data for you to consider in the future, good or bad.

    Finally, we’d love to see your application in any case. You don’t have to accept if we make an offer. ;-)

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